An increasingly common estate planning practice is the establishment of a revocable living trust in which the creator (settlor) is also both the trustee and the beneficiary during his or her lifetime. After the settlor’s death the trust, which was revocable during the settlor’s life, becomes irrevocable, and a successor trustee takes over, distributing or managing the trust for the benefit of one or more beneficiaries. What happens when one of those beneficiaries is disabled? More and more, we are receiving questions about changing a trust for the benefit of disabled beneficiaries.
The potential problem is that the trust may include language dictating that the disabled beneficiary’s share of the trust be held in trust for his or her lifetime, and that distributions be made according to a particular standard, such as for “health, maintenance, education, and support.” If, like many disabled individuals in Ohio, the beneficiary needs Medicaid benefits, will the trust interfere with his or her ability to qualify for benefits?
Medicaid in Ohio is administered by county offices of the Ohio Department of Jobs and Family Services (ODJFS). ODJFS is likely to find that a trust like the one described above is a “countable resource” for determining Medicaid eligibility. That is why the trust may need to be modified, if possible, to allow the beneficiary to receive the needed benefits.
A trust that is “irrevocable,” as the name indicates, cannot generally be revoked except under very limited circumstances, but it may be able to be modified.
There are a number of options for converting an irrevocable trust from a countable asset to one that will allow the disabled beneficiary to receive Medicaid, housing assistance, or other means-tested benefits. We are sometimes asked about “decanting,” which involves moving trust assets from an old trust to a new one as wine is moved from a bottle into a different vessel for serving. Unfortunately, decanting is not effective for the purposes of the disabled beneficiary, as the distribution terms of the new trust would have to be the same as that of the old for the decanting to be permissible. The result is that the decanted trust assets would still be considered countable.
It may be possible for all beneficiaries to enter into a private agreement to modify the trust, but it is not certain that doing so would be effective to allow the disabled beneficiary to receive government benefits. If the agreement is made under Ohio Revised Code 5801.10 does not permit a private agreement to change the beneficial interests of the beneficiaries, which changing distribution standards could be interpreted as doing. The agreement might not be enforceable under the statute for this reason.
A common-law private agreement would not be subject to these restrictions, but it only binds parties to the agreement. Depending on the nature of the disabled beneficiary’s disability, they might not be competent to represent themselves in the agreement. Also, if the beneficiary is able to participate, either themselves or through an agent, it would be necessary to make sure that the agreement was not viewed by ODJFS as an attempt to do an end-run around eligibility requirements.
If the competency of a disabled beneficiary is unclear, a court might be asked to modify, under Ohio Revised Code 5804.11(B). This statute allows a court to approve modification of a non-charitable irrevocable trust if all the beneficiaries consent to the modification. Under ORC 5804.11(D), the court can approve the private agreement to modify even without consent of all beneficiaries, so long as the court believes the trust could have been modified if all the beneficiaries had consented, and that the interests of all beneficiaries are protected.
Seeking court approval for a private agreement for modification might calm the worries of those who worry about the appropriateness of proceeding without court involvement. The risk, of course, is that the court will choose not to approve the agreement.
ORC 5804.12 permits a court to modify a trust’s dispositive or administrative terms in the event that there are circumstances the settlor did not anticipate, so long as doing so will advance the trust’s purposes. A petitioner might argue that the settlor did not anticipate that being a trust beneficiary would impair the disabled person’s access to government benefits.
Lastly, ORC 5804.15 authorizes a court to modify even unambiguous trust terms if doing so would bring the terms in conformity with the settlor’s intentions. However, a petitioner must prove by clear and convincing evidence that the settlor’s intention and the trust terms as written were affected by a legal or factual mistake. This is a difficult legal hurdle.
The best course of action would be for a settlor to look down the vista of years to create a special needs trust for a disabled beneficiary, but not everyone has the foresight or ability to do that. If you are reading this article from the perspective of someone who is interested in providing for a loved one with disabilities in the future, contact an experienced estate planning attorney to discuss special needs trusts.
If, however, you are in the position of needing to modify a now-irrevocable trust for the benefit of a disabled beneficiary, you should still contact an experienced attorney to discuss your specific circumstances and the best way to proceed.
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