"Comfort clauses" in an irrevocable trust are dangerous, and can undermine the objectives of the trust. A New York appeals court provides another object lesson in the dangers of such planning, ruling that a Medicaid applicant's irrevocable trust is an available asset because the trust instrument gave the trustee too much discretion in the distribution of the trust principal after the trustee had used a home equity line secured by a trust asset to pay for the applicant's expenses. In the Matter of Pugliese v. Zucker (N.Y. Sup. Ct., App. Div., 4th Dept., No. 784 TP 19-00440, Oct. 4, 2019). Anthony Pugliese was the beneficiary of a trust for which his son was the trustee. His son used a home equity line secured by a trust asset to pay Mr. Pugliese's living and caregiving expenses, which depleted much of the trust's value. Mr. Pugliese applied for Medicaid, but the state found that the trust was an available asset and denied him benefits.
Mr. Pugliese appealed, arguing that his son no longer wished to use his discretion as trustee to make distributions to Mr. Pugliese. The state affirmed the decision, and Mr. Pugliese appealed to court.
The New York Supreme Court, Appellate Division, affirmed, holding that the trust was an available asset because "the trust instrument gave the trustees broad discretion in the distribution of the trust principal, including for [Mr. Pugliese's] benefit."
An irrevocable trust for the purpose of Medicaid planning MUST provide all of the following in order to ensure that its assets are, subject to the applicable look-back, unavailable for determining Medicaid eligibility:
- You cannot own the assets;
- You cannot control the assets;
- The assets may not be used for your needs, and in particularly, your health needs.
These trusts can be fashioned as "income-only trusts," where you have no ownership, control, or privilege to the principal of the trust, but the income from the principal is distributed to you. This way, the funds in the trust are protected and you can use the income for your living expenses. For Medicaid purposes, the principal in such trusts is not counted as a resource, provided the trustee cannot pay it to you or your spouse for either of your benefits. If you do move to a nursing home, however, the trust income is countable, and will have to go to the nursing home.
Even if the trust is crafted properly, the conduct of the parties may undermine the trust. This may, in fact, have been part of the problem in the Zucker case. Even a wholly discretionary trust, like that in Zucker, can be subject to a determination that you have a right the conduct of the parties show the beneficiary has been able to freely access trust funds by simply asking. In the Massachusetts case of Caruso v. Caruso, which considered a trust for the purpose of property division in a divorce, the court found the beneficiary’s accountant, acting as trustee, amounted to a “yes man” for the beneficiary and was, therefore, in too close a relationship to exercise independent judgment. The court held that even though a trust is purely discretionary, when the beneficiary appears to hold de facto control of the trust, its property becomes subject to invasion.
You should also be aware of the drawbacks to such an arrangement. An irrevocable trust cannot be changed, at least by you. Changes in circumstances and changes to the law may impact your plan so adversely that you may regret the plan.
These trusts are also very rigid, so you cannot gain access to the trust funds even if you need them for some other purpose. For this reason, you should always leave an ample cushion of ready funds outside the trust.
These trusts may also increase the risk of institutional care. When your Medicare hospital benefit runs out (often within a few days of your hospitalization, and very frequently before you are able to medically return home), you are left only the option of institutional care paid for by Medicaid. This is, after all, the purpose of such planning, to make you eligible for Medicaid earlier. If you want to age in place, you need to consider whether an irrevocable trust wholly frustrates your plan. You may not direct payments from the trust for alternatives to institutional care, such as private nurses, home health care aids, or, in most cases, out -patient rehabilitation.
