Difference Between Transfers from Inter-Vivos Trusts and Testamentary Trusts

As indicated in Blog 115, distributions from inter-vivos trusts can be a transfer. The example given is as follows:

Example: Trust provides for discretionary distributions of income and principal for children. Ten years after trust established by individual, $60,000 principal distribution made to a child. One year after this distribution, individual applies for Medicaid. Medicaid will be denied. Distribution from trust subject to 60-month look-back. Under current law, the penalty will begin only after the individual is institutionalized and assets are reduced to $2,000.

Statutory provisions against "trigger trusts" apply only to inter-vivos trusts under the federal statute - 42 U.S.C. 1396p(d)(3)(B)(ii). As indicated in Blog 85, distributions from testamentary trusts are not transfers. However, such trusts should not have mandatory "kickout" provisions which refer to Medicaid eligibility.

Notwithstanding, if the distributions from the testamentary trusts, do not satisfy the elective share, such trusts may be deemed to transfer if the elective share is not satisfied (see Blog 183). That is, even though distributions from testamentary trusts are not transfers, if the elective share is not satisfied, the state takes the approach that disinheritance of a spouse results in a transfer. This position is incorrect, and this is discussed in Blog 169.

As discussed in many blogs, it is the obligation of the attorney to inform the client of the possibility, while warning them that a solution to one problem can create another problem.

Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.

© February 2012, Post 184