"Comfort Clauses" Hobble an Irrevocable Trust for Medicaid Planning

When I counsel clients regarding irrevocable trusts, clients often discuss the possibility of provisions giving them more control over the trust. Many have attended seminars where they are told that a "safety valve" can permit the irrevocable trust to be no more cumbersome or limiting than a revocable trust. There is no "safety" valve. These provisions are usually for the purpose of comforting the owner that they are not really turning ownership and control of assets over to another. These "comfort clauses" can make the owner more comfortable, but they can also threaten the integrity of the plan.

There is little question that provisions permitting trust protectors, and changes to the trust resulting from changing circumstances should be considered, but an irrevocable trust should be somewhat uncomfortable.   An irrevocable trust can protect assets only if there is a marked change in the owner's relationship with the assets; the owner must no longer have ownership or control of the assets, or the trust will not work for its intended purpose.  If a client is not, at least initially, uncomfortable with an irrevocable trust used for asset protection, the client probably does not understand the trust.

A recent New Hampshire case demonstrates the risk of diluting an irrevocable trust with "comfort clauses." New Hampshire's highest court recently ruled that a Medicaid applicant's irrevocable trust is an available asset even though the applicant was not a beneficiary of the trust because the applicant retained a degree of discretionary authority over the trust assets. Petition of Estate of Thea Braiterman (N.H., No. 2015-0395, July 12, 2016).

Thea Braiterman created an irrevocable trust in 1994, naming herself and her son as trustees and her children as beneficiaries. In 2008, Ms. Braiterman resigned as trustee, but the trust authorized her to appoint additional and successor trustees, including the power to appoint herself. The trust also gave Ms. Braiterman the ability to appoint any part of the income of the trust to any of the trust beneficiaries. The trust also did not limit her ability to impose conditions on the appointment of principal to the beneficiaries.

Ms. Braiterman entered a nursing home and applied for Medicaid. The state determined that the trust, which was valued at $156,000, was an available asset and denied her benefits. After a hearing, Ms. Braiterman appealed the state's decision to court.

The New Hampshire Supreme Court affirms the denial of benefits, holding that the trust is an available asset due to the degree of her discretionary authority over the trust. According to the court, an irrevocable trust is a countable asset even when the applicant is not a beneficiary if there are any circumstances in which payment can be made to the applicant. The court rules that there was nothing in the trust "to preclude [Ms. Braiterman] from requiring her children, as a condition of their receipt of the Trust principal, to use those funds for her benefit."

The question is whether comfort clauses are worth the cost and expense of the trust failing to accomplish its intended purpose.