Drafting Tips for Your Medicaid Income Only Trust to Help Withstand Increased State Scrutiny and an Operational Guide as To Their Use

Todd E. Lutsky, Esq., LL.M, Cushing & Dolan, P.C.

Important Language Your Irrevocable Trust Must Have

Surviving spouse, Mrs. Public, established an income only irrevocable Medicaid trust in 2007, naming herself and her oldest child as trustees. (Note very similar terms would apply for a married couple with the only difference being that income would be payable to both the donor and the donor’s spouse).  The trust provides as follows:

(1)        For so long as Mrs. Public is alive, income from the trust is payable to Mrs. Public.

(2)        Under no circumstances is the Trustee permitted to pay to or use principal for Mrs. Public’s benefit.

(3)        The Trustee, in its discretion, may pay principal to or for the benefit of the class consisting of Mrs. Public’s children of all generations.

(4)        Mrs. Public reserved, in the trust instrument, the right to appoint principal or income to or for the benefit of charities of her choosing during her life.  This is known as a limited power of appointment and is what makes the trust a grantor trust for income tax purposes.

(5)        Upon Mrs. Public’s death, the property in the trust will be paid over to those persons selected from the class consisting of her issue and or charities, in equal or unequal amounts, as designated in a Last Will and Testament referring to this power executed after the execution of the trust.  This is known as a testamentary power of appointment and really gives Mrs. Public a great deal of control.

(6)        In the event the power is not exercised, the property shall be sold and the proceeds added to the balance of the trust assets and all trust assets to be divided into as many equal shares as there are children then living or children then deceased leaving children then living.  In the case of a share allocated to a child such share will be paid out and distributed free of all trusts.  In the event a child died then that child’s share would be held in trust for that child’s children rather than that child’s spouse and such share will be held in trust for the benefit of those grandchildren until no such grandchild is under 30 years of age.

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