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How Mom’s Estate Plan Did More Harm than Good (Part 2)

Last week we were discussing Sue’s call to our office.  Her brother, John, is 65 and disabled, living in senior housing.  He now needs aides to assist him and she told me his income is $1900.  But, then she told me about the trust that Mom had set up for him in her will.

Sue provided me with a copy of Mom’s will that contained the trust language.  The income from the trust is to be provided to John for his health, support and maintenance but none of the principal can be distributed to him.  The trust also provided that only 80% of the income goes to John.  The other 20% goes to a grandson, Joe, the son of Sue’s other brother, Jim.

I asked Sue if she knew why Mom set it up that way.  She didn’t, other than to tell me that John didn’t have a particularly close relationship with their mother.  She surmised that Mom wanted to do something for John because of his disability and inability to earn income but didn’t really give it too much thought – or at least she never told Sue her reasoning.

Sue told me that John’s share of the trust income varies from month to month but generally amounts to about $10,000 per year, $833 per month.  Here was the problem.  John’s income now was over the Medicaid income cap of $2130 per month, making him ineligible for Medicaid, except for New Jersey’s institutional Medicaid program, that pays for care in a nursing home.

Sue was distraught.  “Can we break the trust”, she asked.  I told her that in some cases a trust can be reformed or modified by a court.  But, one problem is that changing the terms will affect Joe’s rights.  He has a right to 20% of the income so any change could have a negative impact on him and wouldn’t likely be approved.

I also explained to Sue that her mom clearly established that no principal could be distributed but would be left – when John and Joe die – to the other living grandchildren.  So, Sue’s solution to empty the trust was a problem.  Even if giving up the income could be in John’s best interest, what about Joe?  Why is it in his best interest to give up the income?  Since he isn’t a remainder beneficiary when the trust terminates, he wouldn’t get any of principal and would lose the income.

Unfortunately, I had no good answers for Sue.  I told her John was pretty much stuck with the income.  He could qualify for nursing home Medicaid because New Jersey has a second program for recipients who have more than $2130 per month of income.  But I know she doesn’t want to move John to a nursing home right now.  She’d just have to come up with the funds to pay for the aides some other way.  She told me the only other way is for her to pay for she can’t really afford it.

The lesson to be learned here is that setting up an estate plan without careful thought as to how it will impact those you are providing for – especially the elderly and disabled – can have drastic consequences.  If you set up a trust or leave assets to a loved one, you’ve got to consult with someone knowledgeable about how the various government benefit programs work.  Otherwise, you could be left with a dilemma similar to the one Sue faces in looking after her brother, John – whether to pay for his care out of her own pocket or move him to a nursing home so he can qualify for Medicaid.