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
