Distributions of Inter Vivos Trusts Under the Deficit Reduction Act

The Federal Statute treats payments from an inter-vivos trust as assets disposed of by the individual and subject to the transfer rules - 42 U.S.C. 1396p(d)(3)(A)(iii), 42 U.S.C. 1396p(d)(3)(B)(i). Distributions to someone other than the Grantor from a revocable or irrevocable trust are subject to the transfer rules.

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.

Therefore, the period of ineligibility will be in excess of eight months commencing the date of application.

Many attorneys are drafting trusts with "trigger" provisions (i.e. income or principal distributed to or for the benefit of grantor until entry into a nursing home, then principal distributed to children.) That is, payment to the individual is "foreclosed" upon entry into the nursing home with the result that a 60-month look-back is activated. This technique will not work for the above reasons.


Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© August 2010, Post 115