Grandson's Trust

Grandson’s Trust Not Countable Asset Even After Modification

Too often, people fail to adequately plan for their children (or grandchildren) who have disabilities. This week we read a Nebraska case about a grandson’s trust that put his public benefits at risk. His grandmother had created a trust for him, but it was not a “special needs” trust. The courts fixed the problem, but only after months of litigation (and, presumably, thousands of dollars).

The grandson’s trust

Lois Branting left her entire estate to her four grandchildren. All four were minors. Her will established a trust for each grandchild until he or she reached age thirty. In the meantime, each grandchild’s share was available for the “support, care, maintenance, medical expense, educational expense and general welfare” of that grandchild, “in such amounts and proportions as my trustee, in the sole and uncontrolled discretion of my trustee, shall deem advisable”.

One grandson, Eric, has physical and mental disabilities. He receives government benefits. His parents did not want his trust to interfere with those benefits, and the other family members agreed. They all got together and proposed that Eric’s trust share be split off from the others, and held as a separate “special needs” trust.

The personal representative of Ms. Branting’s estate acknowledged that the change was a good idea, and asked the probate court for approval of the family’s agreement. The judge approved the change.

Ultimately, the grandson’s trust for Eric received over $500,000 from Ms. Branting’s estate. The Nebraska Medicaid program almost immediately terminated Eric’s benefits, insisting that the grandson’s trust was an available resource.

Medicaid eligibility rules

Under Nebraska’s Medicaid rules, Eric would lose his eligibility if he had assets of more than $4,000 (in Arizona and most other states, the number is even smaller — just $2,000). The Medicaid agency counted the entire grandson’s trust as available, because it was not a “testamentary” trust. That is, it was no longer the trust created by Ms. Branting’s will. It had become an irrevocable, non-testamentary trust when the probate judge allowed it to be modified. If any dollar of the trust could be used for Eric’s benefit would be counted as if it actually had been used for him, ruled the agency.

It’s important to note that the Nebraska Medicaid agency was really arguing that the court’s modification of the grandson’s trust share for Eric had changed it from a “third-party” trust into a “self-settled” trust. Their claim: the grandson’s trust had become a trust established by Eric himself (through his mother’s actions). In other words, the probate court would have to add a “pay-back” provision to the trust in order for Eric to continue receiving benefits.

The Medicaid agency also quarreled about the language of Ms. Branting’s original trust. Because it allowed distributions for Eric’s “support, care, maintenance” and similar terms, Medicaid argued that Eric could compel a distribution from the trust for those purposes. If he could, then Medicaid could count it as an available resource.

Eric’s mother appealed to the courts, but the Nebraska trial judge agreed with Medicaid. Eric would lose his Medicaid eligibility under that interpretation. Eric’s mother appealed again, this time to the Nebraska Supreme Court.

The grandson’s trust for Eric is not a countable resource

Nebraska’s highest court disagreed with Medicaid (and the trial judge). First, it was clear that Eric’s trust is a testamentary trust, established by Ms. Branting’s will. The fact that the probate judge allowed a modification of the trust arrangement did not change that reality.

The Supreme Court then turned to a discussion about “support” and “discretionary” trusts. The former type of trust requires the trustee to use trust assets to support the beneficiary. The latter gives the trustee discretion to use money for the beneficiary, or hold it in the trust. In the former case, the Medicaid agency might reasonably count the trust as an available resource — but not if the trustee’s power is discretionary.

Here, ruled the court, the grandson’s trust is a hybrid. It is for (among other things) Eric’s support, but the decision about distributions is entrusted to the trustee. That is true because it uses language giving the trustee pure discretion in deciding whether to make support payments. Both the trial judge and the Supreme Court agreed that, in this case, the grandson’s trust is a “discretionary support” trust. The trial judge decided that the “support” part was paramount; the Supreme Court ruled that the “discretionary” language prevailed.

Since the modified grandson’s trust for Eric is still a “testamentary” trust, and a “discretionary” trust as well, it is not an available resource for Medicaid purposes. Nebraska’s high court reversed the trial judge’s determination and remanded the case for a new order — presumably in Eric’s favor. Eric S. v. Nebraska Department of Health and Human Services, December 14, 2018.

Would a grandson’s trust like Eric’s be treated the same way in Arizona?

It’s hard to be sure what would happen in a similar case in Arizona, but the logic of the Nebraska case (though not controlling) would certainly be powerful in Arizona courts. Much more to the point, though, is the real lesson to be taken from Eric’s experience.

If Ms. Branting had prepared a thoughtful special needs trust for her grandson, there would have been no opportunity for the legal challenges which arose. A third-party trust with clear special-needs language should carry the day every time. Leaving out language about “support, care and maintenance”, and including explicit language about consideration of the beneficiary’s special needs, would seal the deal with Medicaid and other government benefits programs.

Is it all about good trust drafting? Not entirely. Even if Ms. Branting’s will included a perfect special needs trust for Eric, there’s still the matter of administration of the trust. Even though Medicaid might not count the trust as an available resource, some types of expenditures by the trustee might reduce or eliminate public benefits. Good legal advice is helpful even after the trust is (expertly) drafted.

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