What If You Want Gifted Assets Back From An Irrevocable Trust?

The Medicaid Asset Protection Trust is one of the building block documents you are likely to use if you want to properly protect assets from being lost to high nursing home costs.  Click on the following link to get more information about a special type of Irrevocable Trust clients are using to help insure their children receive the inheritance they deserve:  Click Here.   Once you elect to create an Asset Protection Trust, you will re-title some of your assets into the trust name.  By doing so, you are making a gift to the trust and are relinquishing ownership and control over those assets so that the Five (5) Year Medicaid Ineligibility period can begin.  

Preserving your assets for your children is very important, but you also have to create a mechanism that would allow assets to be distributed from the Medicaid Asset Protection Trust during your lifetime.  If you ever need the assets gifted to the trust to be returned, your children should have an option to gift them back to you.  Frequently, our clients allow for the Trustee of their Asset Protection Trust to make a distributions to one or more of their children at any time during the client’s lifetime.  The expectation is that the child would deposit the distribution into their personal account and then, of their own accord, decide to use the assets as necessary for their parent.  Obviously, there is still a high level of trust involved, but at least the parent can reasonably expect that the gifted assets could be returned in the case of an emergency.

Below is an interesting case where the Court maintained the protected nature of the Trust created by a nursing home resident even though they had given overt direction that the Trust beneficiaries were to use Trust assets for the resident’s benefit.

 THE CASE:  A Massachusetts trial court rules that an irrevocable trust that contains a provision allowing the trustee to distribute the principal to others for the benefit of the beneficiary is not a countable resource for purposes of Medicaid eligibility. O’Leary v. Thorn (Mass. Super. Ct., No. WOCV2013-02013A, Sept. 18, 2014).

Alice O’Leary transferred assets to an irrevocable trust. The trust provided that she would receive income, but not the principal of the trust. The trust also contained a provision that allowed the trustee to apply any or all income or principal for the benefit of any beneficiary through agencies that the trustee deemed advisable. Mrs. O’Leary applied for Medicaid, and the state denied her benefits because it determined that the provision meant the trustee could make distributions to Mrs. O’Leary.

Mrs. O’Leary appealed, arguing the provision only permitted distributions to others on behalf of the beneficiaries. The state denied the appeal, ruling that the trust was a countable resource, and Mrs. O’Leary appealed to court.

The Massachusetts Superior Court holds that the trust is not a countable resource. According to the court, while the provision at question is ambiguous, reading the trust as a whole, the actual language of the trust clearly establishes that the trustee did not have discretion to distribute the principal to Mrs. O’Leary.

For the full text of this decision, go to: http://irrevocabletrust.files.wordpress.com/2014/09/wsc-decision-dtd-9-18-14-allowed-01574222.pdf

For assistance dealing with developing a comprehensive nursing home asset protection plan in Pennsylvania, please contact Douglas L. Kaune, esquire at 610 933 8069 or email him at dkaune@utbf.com. Doug’s entire practice is focused on elder law, Medicaid Application, estate planning, trust planning, estate administration and protection of clients’ assets from nursing home spending and estate and inheritance taxation. Unruh, Turner, Burke & Frees, P.C. is a full service law firm which has three convenient office locations in Phoenixville, West Chester and Paoli, Pennsylvania. The firm primarily services clients in Chester, Montgomery, Delaware, Philadelphia, Bucks and Berks Counties, but can represent clients throughout Pennsylvania.