Adapting Asset Protection Trusts to Changes in Circumstances

By Melissa Negrin-Wiener, Partner and Marcus O’Toole Gelo, Sr. Associate

An Irrevocable Trust used for asset protection may have a different name depending on who you ask (Irrevocable Income Only Trust, Asset Protection Trust, Medicaid Qualifying Trust, etc.), but its primary purpose remains the same. This type of trust, after the passing of the applicable lookback period, exempts the assets contained within from being counted as an available resource for qualifying for homecare or institutional Medicaid.

As long-term care needs and financial circumstances can change, the key to drafting these trusts is maintaining flexibility. For senior clients in particular, having a trust with maximum flexibility is essential.

As an example, an attorney prepares an Irrevocable Trust for a couple in their early 70s, and their home and some liquid assets are transferred to the Trust.

The following are two possible circumstances that may occur in the future that would require flexibility in the drafting of this document:

(1) One or both clients require homecare or institutional care before the expiration of the applicable lookback period.

(2) There is a falling out with one or more beneficiaries or trustees.

A properly drafted trust should address both of these potential situations.

Revocation

If the grantor of the Trust requires care before the expiration of the applicable lookback period, an asset protection trust may need to be revoked (in favor of spousal refusal or a promissory note plan, for example). While this type of trust is explicitly stated to be irrevocable, EPTL § 7-1.9 permits revocation in certain circumstances. To allow this procedure to be used, the trust should not have any specific directions as to revocation. It should merely state that the trust is irrevocable. Then, the interested parties can revoke the otherwise irrevocable trust by following the statutory procedures of EPTL § 7-1.9.

Revoking an irrevocable trust requires the consent of all of the living beneficiaries, contingent or otherwise. The statute specifically excludes dispositions to “heirs, next of kin or distributees (or by any term of like import)”. Id. Absent from this list is a disposition to issue, which is not considered to be a term of like import. Matter of Dodge, 25 N.Y.2d 273, 283 (1969). As such, practitioners should take care when naming issue per stirpes as remainder beneficiaries. This may create an expansive list of contingent beneficiaries including minors (grandchildren or great-grandchildren), who cannot consent to revocation, even if a guardian is appointed. Smith v. Title Guarantee & Trust Co., 287 N.Y. 500, 504 (1942).

The best way to manage this issue is to have the grantor reserve a limited power of appointment over the remainder of the trust. EPTL 10-3.2. The power of appointment should be limited by excluding the grantor, creditors, the grantor’s estate, or creditors of the grantor’s estate. The limited power of appointment can be exercised by will or written instrument. From there, there are two options. First, the trust can be limited to beneficiaries who can consent (children, for example), and the grantor simultaneously executes a last will and testament exercising the limited power of appointment to designate their issue per stirpes as beneficiaries.

Second, the trust could instead have full beneficiary dispositions, but if the need ever arose to revoke it, the grantor (or their agent under a power of attorney) can exercise that power of appointment by written instrument and delete the non-consenting beneficiaries. The first method is preferable to some practitioners, as it does not rely on an agent under a power of attorney (if the grantor is incapacitated, as is often the case) being asked to change beneficiaries, which can lead to estate litigation. See Matter of Ferrara, 7 N.Y.3d 244, 254-55 (2006). One should also be aware that if the Trust has two grantors, it cannot be revoked after the death of one of the grantors. Culver v. Title Guarantee & Trust Co., 296 N.Y. 74, 77-78 (1946).

Changing Trustees and Beneficiaries

Medicaid planning aside, estate plans should be malleable. Clients’ wishes and desires change over time, principally with regard to fiduciaries and beneficiaries. An Asset Protection Trust should be drafted so that changes can be made as the grantor desires.

First, the trust should include a provision that allows the grantor to add or remove Trustees, with the caveat that they cannot appoint themselves or their spouse. This can be helpful if there are disagreements among the trustees or if they are not cooperating with respect to the grantor’s wishes (for instance, to sell or buy a residence). The grantor can simply remove the offending trustee and appoint a more cooperative one.

Second, using the tools discussed above, the grantor can reserve a limited power of appointment to change beneficiaries of both the principal and the remainder beneficiaries upon the grantor’s death. The grantor can make changes to the inheritance arrangements, as well as removing any uncooperative beneficiaries.

Amendment

Elder law practitioners will on occasion encounter a trust drafted by another attorney which does not have the necessary flexibility. Thankfully, EPTL § 7-1.9 not only allows revocation, but also allows amendment of irrevocable trusts. This is an important tool, when available (assuming the beneficiaries can and will consent), to make changes to a Trust that was drafted without appropriate flexibility. For instance, a trust amendment could be used to grant the grantor the necessary limited power of appointment to make changes to beneficiaries as they wish.

Utilizing Powers of Attorney

Many times, when needing to make changes or take advantage of flexibility in a trust, one or more of the grantors will be incapacitated. It is thus essential that the grantor has an expansive power of attorney with explicit trust powers and a statutory gifts rider with unlimited gift making authority, including to the agent. An agent under a properly drafted power of attorney can exercise the grantor’s power to change trustees or beneficiaries, consent to revocation, or even create a trust in the first place.

Agents and their attorneys should be mindful that an agent must always act in the best interest of the principal. Prudent Medicaid planning is, of course, in the principal’s best interest. Caution, however, should be taken if an agent is being asked to change beneficiaries or make transfers, and there is discord in the family. The power of attorney gifting statute (GOL § 5-1514(5)) requires any gift to be in the best interest of the principal, and courts take this requirement very seriously, as seen in Matter of Ferrara.

While the General Obligations Law is not specific as to the power to amend or revoke a trust, courts have held that an agent can do so as long as the powers include “estate transactions” and “all other matters” as defined by the statute. Matter of Perosi, 98 AD3d 230, 238 (App. Div. 2nd Dept. 2012). This can be especially helpful if the client first comes to you when the grantor is already incapacitated, and you must rely on an older power of attorney drafted by someone else. If you are the attorney creating the plan in the first place, make sure that the modification section of the power of attorney and the gifts rider specifically includes the authority to create, amend, and revoke trusts.

With the escalating costs of long-term care, seniors are increasingly recognizing the importance of protecting their assets. A Trust is a core part of an asset protection plan, but one that requires precision in drafting. The goal of the drafting attorney should be to maximize flexibility while complying with eligibility rules for Medicaid. By providing tools to adapt to changes in circumstances, practitioners can best protect their senior clients.