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Being a Beneficiary
of your Spouse's Testamentary "Title 19 Protection" Trust
(if you're not already in a nursing home, that is)
(in CONNECTICUT)
(last updated 7/21/20
Lisa
Nachmias Davis
Davis O'Sullivan & Priest LLC
59 Elm Street, Suite 540
New Haven, CT 06510
Phone: 203-776-4400 / Fax 203-774-1060
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 ineligibility for Medicaid, which would
normally be the case if an 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 cliché! 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.
IN CONNECTICUT, 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
assets passing under the will of the first spouse to die. (That's
because in Connecticut a spouse is entitled to "elect against" the
will, that is, get the "statutory share" no matter what the will says
-- and that is only income from one-third of what goes through
probate. If the will left everything to the kids, DSS would say
that if the surviving spouse failed to "elect," this was a transfer of
assets if the surviving spouse applies for Medicaid during the next 5
years. See my article .) Say your
spouse's probate estate is $600,000. The trust would say that you
get the
income off of $200,000, which might be only $4,000 per year or less.
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 create 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
beneficiaries, you must CHOOSE to own assets separately, to have them
listed in an inventory and disposition approved by the 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. OR by picking who will
die first and putting assets into that person's name. (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. (Occasional exceptions, but this is the safe way to
go.) Probate law requires that the Trustee file an "account" or
"financial report" in the probate court every three years and pay a
fee. The account will
disclose the assets at the beginning, describe the expenditures, and
detail what is left. If this isn't filed, the Probate Court may
remove the trustee and appoint someone else. (3) If the trust has
$1,000 or more of income, it 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) Perhaps most importantly, at a practical
level, it may be difficult
to take out a loan, refinance a mortgage, 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 government benefits, described in this article.
Any control that you, the surviving spouse and beneficiary, may want to
retain over the testamentary trust, will be a reason that the State of
CT Department of Social Services may seize upon to claim that the trust
does not meet the federal exception and that it 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 report); must file any required 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 recourse from the probate
court. In 2019 Connecticut law was tightened up to clarify a
beneficiary's rights.
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. THE BASIC CONCEPT
IS A FEDERAL AND SHOULD APPLY IN 50 STATES, BUT (A) STATES DIFFER IN
THEIR INTERPRETATION AND (B) I AM LICENSED ONLY IN CONNECTICUT. 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!
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