In April 2011, Don and Marjorie Peterson (the Petersons) established the Peterson Family Irrevocable Trust (the trust). The Petersons’ daughter was the trustee, and their grandchildren were the beneficiaries. The Petersons’ personal residence was the only asset held in the trust.
The intent in creating the trust was to shield their personal residence from being considered in determining Medicaid eligibility and claims arising from long-term care. The trust had a common "comfort clause:"
It is the specific intention of [the Petersons] to create the power in the Trustee and in said Trustee’s sole discretion under this Trust to provide income and support for [the Petersons] and Subsequent Beneficiaries and to protect the assets of the Trust pursuant to the conditions set forth in this Trust Agreement. Said income and support may include, but is not limited to, expenditures for [the Petersons’] and Subsequent Beneficiaries’ health, education, real estate purchases[,] and/or promising business opportunities. In order to protect the Trust assets, the Trustee in her sole discretion, may withhold distribution under circumstances in which [the Petersons] or Subsequent Beneficiaries will not personally enjoy said distribution; said circumstances, including but not limited to, insolvency, pending divorce[,] or other civil litigation and bankruptcy.
While in the control of the Trustee and until actually paid over to [the Petersons] thereof, the interest of [the Petersons] in the income or principal of the Trust shall not be subject to assignment or pledge by [Appellants], the claims of creditors of [the Petersons], or attachment by any legal or equitable procedure.
In re Peterson Family Irrevocable Trust, quoting the underlying court's opinion (brackets included, "Appellants" replaced with 'the Petersons").
A "comfort clause" is a trust provision comforting the owner that they are not really turning ownership and control of assets over to third party, and that, if absolutely necessary, the trust assets can be used to support the owner. In the best cases these are requested by clients and adopted after careful advice and counsel. In the worst cases these are deployed by drafters to make the document more "attractive" (read "sellable"), without advising the client of the risks. "Comfort clauses" can make the owner more comfortable, but they can also threaten the integrity of the plan. Consider the foregoing language against a more rigorous clause which follows:
The Trustee may, in its sole and absolute discretion, distribute such sums from the trust income and principal that the Trustee deems necessary or advisable to meet the health, education, and/or support needs of the death/subsequent beneficiaries [in the case of the Petersons, the grandchildren], but shall make no distributions to or for the benefit of the Petersons. Other than the lifetime privilege to reside in any home owned by the trust while the Petersons are able to avail themselves of that privilege, under no circumstances shall the Petersons benefit directly or indirectly from the income or principal of the trust.
The latter is a much harsher statement, but it better comports with the requirements of most state Medicaid rules.
Complicating matters, when the home was transferred to the trust, there were actual distributions made from the trust to the Petersons' estate. According to the court, as a result of these transfers, the residence became a countable asset for Medicaid purposes. Interestingly, neither court decision (lower court or appellate) explains what these transfers were, or how these transfers were possible given that both courts clearly state that the only asset of the trust was the Petersons' home. The courts also don't explain whether the transfers were forbidden under Pennsylvania law in place at the time the trust was settled, or whether they were made forbidden by subsequent changes to the law.
In January 2024, the Petersons filed a petition to terminate the trust, but their granddaughter, a named beneficiary, contested termination. The Petersons based termination on two grounds. First, the Petersons argued that the relationship between the Petersons and their daughter, the trustee, had dramatically changed thereby “rendering [the Trust’s] ongoing administration impracticable and wasteful.” Second, the Petersons argued that the trust’s purpose could not be fulfilled because, under the trust’s terms, their residence was a countable asset impacting their eligibility for Medicaid and subject to future healthcare claims under Medicaid.
After a hearing, the court denied the Petersons’ petition to terminate the trust. On appeal, the Peterson's abandoned their first argument. It is intriguing to consider, though, whether the first argument, which clearly does not constitute grounds to terminate the trust, might be the actual basis of the Petersons' dispute. Unfortunately, disagreement with a trustee does not constitute grounds to terminate a trust; an inherent risk with irrevocable trust planning is that circumstances may change. Seeking removal of a trustee for breach of fiduciary duty or other infirmity would accomplish the same goal without necessitating termination of the trust. I will also note for the interested that the simple drafting solution to this type of scenario is a trust protector- an independent third party that can remove a trustee without cause. See, e.g., Unpacking Trustees- Primary, Successor, and Special Trustees, Trust Protectors and More. Even a decanting provision might have provided an alternate solution making "termination" unnecessary (let me know if you want me to write an article explaining "decanting"). The bottom line is that changes in circumstances won't always justify termination or reformation of a trust instrument.
The Pennsylvania Superior Court addressed the sole remaining legal basis for termination: whether the Petersons’ mistaken belief that their trust worked for its intended purpose was an “unanticipated circumstance” under Pennsylvania’s Uniform Trust Act, 20 Pa. Stat. and Cons. Stat. Ann § 7740.2(a), which would permit the court to terminate the trust. The Petersons contend that when they created the trust, their mistaken belief that it would preclude their residence from being considered for Medicaid eligibility and used to satisfy Medicaid healthcare claims was an unanticipated circumstance.
The Court mostly agreed with the Petersons arguments. In its review, the court stated that a plain reading of section 7740.2(a) revealed that a trust may be terminated if, due to unanticipated circumstances, termination would further the purposes of the trust. The court noted substantial precedent establishing that the intent of a trust’s settlor, as set forth in the language of the trust instrument, must prevail. The court also found that the plain language of the trust agreement demonstrated the Petersons’ intention to create a trust that would provide income and support for their healthcare needs and protect their assets from creditors. Although the trust’s language did not explicitly provide that it was intended to shield the trust assets from Medicaid claims, it did specifically state that it was intended to protect the trust assets from claims arising from the Petersons’ debts or obligations, which would include claims for healthcare services provided by Medicaid.
The court agreed with the Petersons’ assertion that their personal residence may have been exempt from claims asserted under Medicaid if it had remained titled in their names instead of being held by the trust, and that due to the transfer of ownership to the trust, the residence was a countable asset if one or both of them applied for Medicaid. The court agreed that the trust "no longer" protected the home from healthcare claims made under Medicaid. The court determined, however, that the Petersons’ misunderstanding of the legal consequences of the trust at the time of its creation was a "mistake of law" rather than an “unanticipated circumstance”—i.e., unforeseen facts about the future—that would permit the court to terminate the trust under section 7740.2(a). Accordingly, the court affirmed the lower court order denying the Petersons’ petition to terminate the trust.
IF either the husband or wife ends up in a nursing home, and is forced to apply for Medicaid, the community (healthy) spouse could lose his or her home, or be forced to spend down its value. This is a tragic result given that Medicaid protects the home for the community spouse when owned by both spouses. In other words, if the Petersons had done nothing, the community spouse would have been able to rely upon the home being there for him or her for as long as they could enjoy it.
More, the trust may have encouraged, rather than discouraged, family discord. Rather than representing a unifying plan for the best interest of the Petersons and their family, the planning may have played a role in fracturing familial relationships. The evidence is that a grandchild contested termination of the trust, in essence opposing their grandparents' wishes. This is always a possibility with or without any estate plan, but family discord should always be a consideration, and granting grandchildren interests, rights, and privileges should always be considered carefully. Without knowing the circumstances, it is difficult to make hard assessments, but one has to wonder why a daughter was made a fiduciary of the parent's assets, but not a beneficiary. This anomaly might be well justified, or a warning sign of future problems, which might have been resolved with reconsideration of the plan or alternate drafting.
Bottom line: irrevocable trusts have advantages and disadvantages, costs, expenses, and risks. My experience is that these are rarely discussed thoroughly or considered carefully. Extra care must be taken when planning while both spouses are alive and healthy, especially given the protections built into Medicaid to protect spouses. Any planning to avoid Medicaid spend down puts assets at risk of losing the already existing protections.
It was not clear whether the subject trust was drafted by an attorney. If it was drafted by an attorney, it may have been crafted or drafted poorly, or it may have been thoroughly misunderstood by the clients. Even when provided clear written explanations of the limitations, risks, and costs of plans, sometimes clients misunderstand.
If the Petersons drafted the trust themselves, or utilized a drafting service such as those available on the internet, they received the product they paid for. Irrevocable trusts, like any complex legal document, should only be crafted and drafted by a competent lawyer representing YOU after s/he understands YOUR goals, circumstances and needs. YOU deserve legal representation. YOU deserve to have YOUR rights and interests protected. IF these rights and property interests are so valuable that you choose a complex plan to protect them, retain a lawyer to protect you. A computer, some software, a nameless, faceless representative behind a website, or an "estate planning professional" at a seminar do not, and cannot serve this role. Read the disclaimers!
For more about the case: In re Peterson Family Irrevocable Trust, No. 772 WDA 2024, 2025 Pa. Super. 60 (Pa. Super. Ct. Mar. 13, 2025)(last accessed 4/3/2025).
For more about the dangers of comfort clauses:
