Typically, Medicaid trusts are irrevocable.[1] The reason these trusts are irrevocable is that they are often used to separate the applicant from specific property rights, the ownership of which might preclude Medicaid eligibility.[2] Where tax planning is involved, care should be taken that a desirable tax attribute does not render the trust countable.[3] For this reason, it is imperative that powers to modify the trust be closely scrutinized because an unrestricted (or inadequately restricted) power to modify is deemed to include a power to revoke.[4] Revocations and modifications must be in writing and signed by the settlor,[5] and may not enlarge a trustee’s duties or liabilities without the trustee’s express consent.[6] It is worth noting that a trust is not revocable simply because a life beneficiary holds a power of appointment.[7] A power of revocation should never be given to the beneficiary of a third party Medicaid trust.[9]
The trust instrument may confer upon a trustee or another person the power to terminate the trust. A Court also has the power to terminate a trust and order distribution of the trust property if:
- the cost of administration impairs the purpose of the trust;
- the purpose of the trust has been fulfilled or become illegal or impossible;
- or continuation of the trust would defeat or substantially impair accomplishment of the trust purposes.[10]
A petition to terminate a trust may be filed by the trustee or any beneficiary, any holder of a power of appointment over trust property, or by such other persons as the court may direct.[11]
Frequently, a special needs trust gives someone else, known as the Trust Protector, authority to make changes to the trust. That prevents the Settlor or the beneficiary from having a power that will cause problems with Medicaid. Trust Protectors are described in more detail elsewhere.
Cooper v. Trust Company Bank, 257 Ga. 272 (1987)
The POMS provision regarding early termination of trusts is found at POMS SI 01120.199
Notes:
1. The UTC indicates that a revocable trust is one revocable by the settlor without the consent of the trustee or a person holding an adverse interest. UTC, § 103(14). All Georgia trusts are now irrevocable unless the settlor expressly reserves a power of revocation. See O.C.G.A. § 53-12-40(a). This issue should not, however, be left to chance and should be “nailed down.” See J. Pennell, Special Needs Trusts: Reflections on Common Boilerplate Provisions, 6 NAELA Journal 89, 91 n.4 (2010). There are at least two exceptions to the general rule that Medicaid trusts are irrevocable. First, a settlor might create a revocable trust for himself or herself which would become irrevocable at death and which would include special needs provisions for the residual beneficiary. Second, in States where the Community Spouse Resource Allowance is one-half of the countable assets on the snapshot date provided for in 42 U.S.C. § 1396r-5(c)(1), exempt assets are sometimes placed within a revocable trust prior to the snapshot date, making them countable, and are then transferred to the Community Spouse after the snapshot date.
2. For Medicaid and other creditor protection purposes, a revocable trust gives the settlor no protection. O.C.G.A. § 53-12-82(1); 42 U.S.C. § 1396p(d)(3)(A); POMS SI 01120.201.D.1.a.
3. Reversionary powers retained under Section 673 for the purpose of creating a defective grantor trust would likely cause the trust to be countable under the Medicaid rules.
4. “A power to revoke shall be deemed to include a power to modify, and an unrestricted power to modify shall be deemed to include a power to revoke.” O.C.G.A. § 53-12-40(b).
5. O.C.G.A. § 53-12-40(c). Notwithstanding the language of subsection 40(c), persons other than the settlor may take action from time to time. For example, surrogates have authority to act for the settlor to revoke, amend or modify the trust if the trust instrument so provides and if source of the surrogate’s power, e.g., a power of attorney, also bestow such power. See O.C.G.A. § 53-12-43. Further, the trust instrument may give other persons, such as a trust protector, separate power to modify the trust. O.C.G.A. § 53-12-61. Courts also have power to modify a trust, O.C.G.A. § 53-12-62, and to divide or consolidate trusts. O.C.G.A. § 53-12-63.
6. O.C.G.A. § 53-12-41. Further, a trustee is not liable for failing to act in accordance with terms and conditions of an amendment or revocation if the trustee did not receive notice. O.C.G.A. § 53-12-42.
7. No trust shall be considered revocable merely because the life beneficiary has a reversion in or a power of appointment over assets of the trust or because the life beneficiary’s heirs or estate have a remainder interest therein. O.C.G.A. § 53-12-44. There are, however, other dangers associated with powers of appointment (or the lack thereof), so they should be carefully reviewed. For example, if a trust is the payee of an inherited IRA, then an unrestricted power of appointment may result in the IRS determining that the designated beneficiary is someone other than the person intended and the applicable distribution period may be shorter than anticipated.
8. If the beneficiary has power to revoke the trust and obtain the assets for himself or herself, then the trust is countable. POMS SI 01120.200.B.19.
9. O.C.G.A. § 53-12-64(a). A trustee has separate authority to terminate a non-productive trust under O.C.G.A. § 53-12-65(a) if the trustee concludes that the value of the trust property is insufficient to justify the cost of administration and (1) the trust corpus is valued under $50,000 or (2) the trustee’s fee is 5 percent or more of the market value of the principal assets of the trust. In the case of a special needs trust, this power should be eliminated or, alternatively, the trust instrument should direct distribution to a pooled trust created pursuant to 42 U.S.C. § 1396p(d)(4)(C) since O.C.G.A. § 53-12-65(c) requires distribution in a manner consistent with the purposes of the trust. A first-party special needs trust which includes an early termination provision is not an exempt trust unless it complies with POMS SI 01120.199.F. That means the trust must provide that, upon termination, all remaining assets are paid to the State up to an amount equal to the medical assistance paid on behalf of the beneficiary, no entity other than the beneficiary may benefit from early termination, and the power to terminate the trust is vested in someone other than the trust beneficiary.
10. O.C.G.A. § 53-12-64(b); O.C.G.A. § 53-12-65(b) (also giving the Court power to remove and replace a trustee in these circumstances).
11. O.C.G.A. § 53-12-64(c). One might question how a court would direct “such other persons” to file a petition for termination prior to the filing of the petition; apparently that language is designed as part of a remedy empowering courts to end litigation arising in some other manner by terminating the trust.
