Keeping Your Affairs a "Secret" From Your Children is Likely a Big Mistake

Some people freely share their financial information with their adult children, and often will invite them to participate in meetings with their estate planning attorneys and financial advisers. When the inevitable occurs and the parents become incapacitated or die, the children are able to step in and handle the parents' financial affairs. They will have at least a reasonable idea as to the nature and location of the parents' assets, and will typically be designated as the parents' attorneys-in-fact under a Power of Attorney, and successor Trustees under the parents' revocable and irrevocable trusts, as applicable. The designated children will then be able to step into the parents' shoes and handle their personal affairs with the least disruption and confusion possible.

Other parents, however, prefer to maintain a cloak of secrecy regarding their personal and financial affairs. Just yesterday I was contacted by a woman whose mother recently died.  Despite being in poor health, the mother repeatedly told her children that her affairs were in order, and that her attorney (who she did not name) had all of her papers. With the mother's passing, her children have been left with chaos. A thorough search of their mother's home turned up disorganized bank account records, and no copy of a Will. Her daughter found some keys that may be to a safe-deposit box, but the bank where the mother had her checking account will not divulge any information to the children without a court order.

Even worse, perhaps, is the children's discovery that their mother -- who of course had her "affairs in order" -- owned real estate and was on title to bank accounts with another relative, with title being held as joint tenants with rights of survivorship. Since the other relative is living, that relative now takes complete ownership of all the jointly-owned assets, including the real estate.

The decedent's children are certainly frustrated by the state of affairs left behind by their mother.  As her daughter said to me, "I'd like to be able to grieve for my mother -- but right now I'm just angry at the mess she left behind."

The fact is that the cost to untangle the mother's affairs after her death will likely far exceed the cost she would have incurred to truly put her affairs in order. Just as critical, an estate planning attorney would have identified the problem inherent with the mother's joint ownership of property, and could have helped the woman take affirmative steps to re-title the assets to ensure that her children received their mother's share of the jointly-owned assets.

‘Irrevocable’ Medicaid Asset Protection Trusts Offer the Best of Both Worlds

An Irrevocable “Medicaid Asset Protection Trust” is one of the best planning tools in the elder law attorney’s toolbox. Assets transferred to a properly structured Medicaid Asset Protection Trust will be rendered “unavailable” for nursing home Medicaid eligibility purposes so long as the person creating the trust (the “Trustmaker”) does not apply for nursing home Medicaid coverage for at least five years after funding the trust. The trust must provide that the Trustmaker relinquishes access and control over the trust principal, but can retain rights to the trust income. While the Trustmaker is prohibited from receiving distributions of trust principal, other beneficiaries – typically children and grandchildren -- are permitted beneficiaries of trust principal.

Medicaid Asset Protection Trusts have become especially popular with clients at or near retirement who have a reliable income from Social Security, pensions, IRAs and other retirement vehicles. Clients are often concerned about exposing their assets to the accelerating costs of long-term care, and they are happy to gain the protection afforded by the Medicaid Asset Protection Trust for certain assets, often including their primary residence.

NYS Law Permits Termination of ‘Irrevocable’ Trusts

For all the benefits afforded by the Medicaid Asset Protection Trust, however, clients are often understandably hesitant to do something “irrevocably.” No matter how much income they have, they often ask, “but what if I really need to get at the principal in the trust?” Or, there always remains the concern regarding a possible need for nursing home care within five years of funding the assets to the trust, which results in the trust assets being deemed “countable resources” for Medicaid purposes.

Fortunately, New York law provides a simple method of revoking even an irrevocable trust. To revoke a trust created pursuant to New York law, Section 7-1.9(a) of the Estates, Powers & Trusts Law (EPTL §7-1.9) simply requires the written consent of the Trustmaker and all the trust beneficiaries. Once the trust is revoked, the trust assets can be returned to the Trustmaker, thereby effectively “undoing” the property transfers. There may be gift tax consequences for a revocation,but this is rarely an issue, as very few estates in which a Medicaid Asset Protection Trust are used are large enough to require the payment of gift taxes.

Possible Hurdles & How to Handle Them

A practical problem arises, however, when the trust includes minor beneficiaries (typically grandchildren). Revocation under EPTL §7-1.9 cannot be utilized with minor beneficiaries, since they are legally incapable of consenting to a revocation. Fortunately, there is an easy fix for this problem. The Trustmaker may retain a lifetime “power of appointment” to remove or add additional principal beneficiaries during the Trustmaker’s lifetime. Should the need arise to terminate a trust, the Trustmaker can simply exercise the power of appointment to eliminate the minor beneficiaries from the trust, after which the trust can be revoked by the Trustmaker and the adult beneficiaries.

Another possible hurdle is the circumstance in whiche a trust revocation is necessary because the Trustmaker has a sudden health crisis, such as a stroke, but the Trustmaker is incapable of consenting to the revocation. This problem is easily solved by including in both the trust and in the Trustmaker’s Durable Power of Attorney a provision authorizing the agent under the Power of Attorney to terminate any trusts created by the Trustmaker. This technique was recently sanctioned by the Appellate Division for the Second Department in Matter of Perosi v. Legreci. In that 2012 case, the court held that a Trustmaker may authorize an attorney-in-fact designated under the Trustmaker’s power of attorney to act under EPTL §7-1.9. This attorney-in-fact may amend or revoke the Trustmaker’s irrevocable trust, so long as the power of attorney grants the attorney-in-fact power broad enough, as well as the general authority, to act.

By virtue of New York’s powerful revocation powers, the use of a Medicaid Asset Protection Trust provides seniors with a wonderful vehicle of protecting selected assets while retaining the right to income from the assets, as well as significant control over the disposition of the trust principal. The ability to retain such benefits, however, requires coordinated planning that is best provided by an elder law attorney well versed in this planning technique. The Estate Planning, Probate and Elder Law department at the law firm of Blustein, Shapiro, Rich & Barone, LLP  is fully prepared to aid you in all areas of your elder law and estate planning needs.