Being a Beneficiary
of your Spouse's Testamentary "Title 19 Protection" Trust
(if you're not already in a nursing home, that is)

Lisa Nachmias Davis
Davis O'Sullivan & Priest LLC
129 Church Street, Suite 805
New Haven, CT 06510
Phone:  203-776-4400 / Fax 203-774-1060
davis@sharinglaw.net

     One of the few legitimate ways one spouse can "protect assets" from being consumed on the surviving spouse's expenses of long-term care (or put another way, one of the few ways to keep assets as available for the extras but NOT so available as to require that they be spent down before the surviving spouse qualifies for Medicaid) is to leave assets that would otherwise pass outright to the surviving spouse at death in a TESTAMENTARY TRUST for the benefit of the surviving spouse -- a trust that does not give the surviving spouse the right to require that the assets be used for his or her general or medical support. This exception is enshrined in federal law.  Even if less than five years has passed after the first spouse dies, the fact that the assets of the first spouse went into a trust, rather than outright to the surviving spouse, does not create a penalty period of ineldigiblity for Medicaid, which would normally be the case if aan applicant or spouse has made a gift within 5 years of application. See my article on the "transfer rules" for more on this topic!  You can also read more about the ways people sometimes choose to risk this and make gifts anyway, in my article "protecting assets."

      So -- isn't that a no-brainer? Wouldn't everyone want to do that, protect one-half the couple's assets against the possible long-term care expenses of the survivor? It's well known that a single person (widow or widower) is more likely to require institutional care than one of a couple -- that's why long-term care insurance is cheaper for married couples.  And SURE -- if you are the healthy one and your spouse is already in a nursing home, it would be crazy not to do this, not to protect what you have from going to the nursing home if you go first. 

      It's another story if you are both, for now, more or less OK, living at home, no nursing home in sight.  You could do this, just in case one of you gets sick later on.  But as with everything in life, there are trade-offs. There are no magic bullets. You pay now or pay later. Pick your cliche! If one of you winds up as the beneficiary of such a trust, it may be a lot less fun that just inheriting the money and doing whatever you want with it.

      What is a trust anyway? 
TECHNICALLY, a trust is an arrangement between a grantor or settlor, who sets it up (or in this case, since it is in a will, a testator), and a Trustee, who runs it, to manage and distribute property, a "res" for the benefit of others, the "beneficiaries."  That's what we learn in law school.  The key point here is that if you are the beneficiary of this type of trust, you won't be the Trustee -- someone else will have title to the property and will call the shots. 

     
The testamentary trust language (that is, the Article of your late spouse's Last Will and Testament, setting forth the terms of the trust) will say, at most, that the surviving spouse is entitled to receive all the income from one-third of the assts passing under the will of the first spouse to die.  Say your spouse leaves $600,000.  The trust would say that you get the income off of $200,000, which might be only $4,000 per year. The trust will not give you ANY right to access that $200,000, but will leave the access issue up to the "sole, absolute and uncontrolled discretion' of the Trustees, your children.   Suppose you want to relocate to be near your daughter in South Carolina and need that $200,000 to do it. Or suppose you need the money to buy into that nice retirement community your children think is a waste of money but that has nightly events and good company.  Whether you can or not will no longer be up to you -- it will be up to your Trustee.

      Suppose you and the children have a relationship of complete harmony. In fact, your children are likely to insist that you get whatever you need or want in life, and in fact, will sacrifice their own needs for yours.  With children like this for Trustees, what could go wrong? 

      Well, if you have multiple children, maybe not so much will go wrong. Then again, if If Jane lives next door but Mike has a new girlfriend and lives in Hawaii, it could be more complicated.  New girlfriend may become new wife and new wife may point out that it would be very useful to inherit the family assets in order to make sure that Jr. (your future grandchild) can attend the private school he really needs.  Or when Jane moves to South Carolina and you want to go there too, Mike may or may not agree to the expense involved.  Less cynically, something could happen to prevent either Jane or Michael from attending promptly to your wants and needs when you ask them.  They might even stop being your Trustees.  

       Even if these dark clouds do not arise on your horizon, there are still some practical headaches that you should recognize before pursuing this useful technique. 
(1)  To creat the trust in the first place, assets must pass by will -- in other words, through probate.  For those who have spent a lifetime hearing about "avoiding probate," this goes against the grain. What - instead of owning accounts, the house, etc. jointly, or naming each other as beneficairies, you must CHOOSE to own assets separately, to have them listed in an inventory and disposition approved by teh court?  To be sure, in Connecticut a tax return must be filed in probate court for every decedent, even a decedent who avoided probate successfully.  But this takes it one step further. You have to actually make sure that assets pass through probate, by splitting the joint accounts, titling the house as "tenants in common" or all in one person's name, etc. (2) This type of trust is contained in a will -- it must be in a will, a living trust document won't satisfy federal law.  Probate law requires that the Trustee file an "account" of the trust in the probate court every three years. The account will disclose the assets at the begining, describe the expenditures, and detail what is left.  Failure to file the accounting may be the basis for removal, by the Probate Court, of the designated trustee.  (3) This type of trust must file its own special tax return every year, known as Form 1041.  The accountant will charge more to do this one than to do your own 1040, and most people who do their own tax preparation will quake before Form 1041.  (4) At a practical level, it may be difficult to take out a loan, refinance a mortage, on real estate held in a trust.

      If you've read my other articles, understand that this is not like a Bypass Trust.  No -- it is a lot more like being beneficiary of a trust for a disabled individual on goverment benefits, described in this article.  Any control you, the surviving spouse and beneficiary, may want to retain over the testmeantry trust, will be a reason that the State of CT Department of Social Services may seize upon to claim that the trust does not meed the federal exception and is a counted asset that must be spent down before you qualify for Title 19.

      As with any trust, the Trustee of a testamentary trust of this type is supposed to act with reasonable care and prudence, investing sensibly, balancing the interests of the beneficiaries; may be required to account for what is done with the trust property (show the books, do a financial statement); must file tax returns; may be hauled into probate court and fired by the judge if accused of stealing or neglect.  As with any trust, the trust assets are managed for the benefit of you during your lifetime and the other beneficiaries who will take after your death. And a trust has a duty to act " in good faith." Refusing requests out of malice or spite, ignoring your requests for distribution or for information, would not constitute good faith, and in a pinch, you could seek recourae from the probate court.

      So -- being a beneficiary of a testamentary trust that meets the Title 19 exemption may involve extra complications, paperwork, tax returns, and PROBATE, but primarily, will deprive you, the beneficiary and surviving spouse, of total control of the assets.  The primary benefit of this arrangement will not come to you, but to your eventual beneficiaries, the children. If you wish passionately for your children to inherit at least 50% of your combined estate, no matter what, even if this means a slight curtailment on your freedom of choice -- that is fine. It is your choice and being a selfless parent is your right!  But it is not your obligation.  You can always do this later on if/when one of you actually needs institutional care and won't need or want to inherit assets outright.

CAUTION:  EVERYTHING I JUST WROTE HAS EXCEPTIONS AND FINE POINTS AND MAY CHANGE AT THE WHIM OF CONGRESS, THE STATE LEGISLATURE, ETC.  THIS IS A VERY GENERALIZED EXPLANATION. IT IS ABSOLUTELY ESSENTIAL THAT YOU MEET WITH YOUR OWN ATTORNEY AND PROVIDE YOUR ATTORNEY WITH FULL INFORMATION ABOUT WHAT YOU OWN AND THE WAY IT IS TITLED -- AND THAT YOU FOLLOW YOUR ATTORNEY'S INSTRUCTIONS!

DISCLAIMER: THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND CREATES NO ATTORNEY-CLIENT RELATIONSHIP.
NO ENDORSEMENT IS INTENDED BY ANY REFERENCES HEREIN. PLEASE CONSULT YOUR OWN LEGAL AND FINANCIAL ADVISORS BEFORE TAKING ANY ACTION

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