The Importance of Flexible Trust Provisions to Accommodate a Beneficiary’s Uncertain Future

SCENARIO:

A grandparent’s trust for a grandchild contains a discretionary distribution provision as to the principal of the trust, but also contains a compulsory distribution provision of a fixed sum each month, to be distributed directly to the beneficiary.

PROBLEM:

As it turns out, the grandchild reached young adulthood with a disability that hinders the grandchild from being gainfully employed or obtaining additional education.  The grandchild is able to qualify for Social Security Disability benefits (based upon a deceased parents’ work record) and receives Medicaid benefits.  However, as a result of the grandparent’s death and implementation of the funding of the disabled grandchild’s trust, due to a combination of the Social Security payments when added to the compulsory trust distribution each month, the disabled person will now lose valuable Medicaid benefits due to too much income being received by the disabled grandchild.  Although receipt of Social Security Disability payments are not affected by the compulsory cash payments from a Trust, Supplemental Security Income (SSI), as well as Medicaid, are impacted by the compulsory distributions and would likely be lost if the compulsory payments from the trust were large enough to affect those benefit programs.  While some courts might entertain a request that the trust be reformed or modified so as to remove the compulsory distribution requirement, other judges may be philosophically opposed to doing so, seeing such efforts by lawyers as “Medicaid planning at the taxpayers’ expense.”

SOLUTION:

Thus, now more than ever, because a beneficiary may become disabled after a trust was drafted, which may have contained compulsory distribution provisions, and if the creator of the trust is deceased and cannot modify his/her trust document, trusts should be written with flexible provisions, preferably with no compulsory distribution provisions at all but only discretionary distribution provisions.  This will protect the beneficiary from loss due to creditors (in many or most cases) as well as avoid causing the loss of currently received, or future receipt of, public benefits, such as SSI (Supplemental Security Income) and/or Medicaid, or other forms of public benefits.

 

Sometimes a trust may contain provisions for internal modifications or amendment to be performed by the trustee, or someone such as a trust protector.  Such after-the-fact power to modify is becoming increasingly important to enable a trust document to be adjusted to meet a change of circumstances among beneficiaries or simply to correct an oversight or unwise provision.  It is impossible to foresee every beneficiary’s circumstance, so document flexibility is ever more critical to avoid expensive judicial reformation--which might not always be achieved, even if sought.

 

Curtis J. Shacklett, Esq.

Barber & Bartz, P.C.
525 S. Main St., Ste. 800
Tulsa, OK 74103-4511
Telephone: (918) 599-7755
Facsimile: (918) 599-7756
Email: cshacklett@barberbartz.com
Website: www.barberbartz.com