Quarterly Newsletters

June 2013: The Drawbacks of a Trust

What is a trust? Most of us have heard the word "trust" and most of us have a basic understanding of what a trust is, but few people seem to really understand what a trust is and how a trust functions.

A trust is a contract. It is a contract between the parties to the trust agreement-the grantor, the trustee, and the beneficiary. The grantor is the person who creates the trust, and typically, the person who deposits money into the trust. The trustee is the person who handles the money in the trust, the person who invests the money in the trust. The beneficiary is the person for whom the trust benefits.

There are several different types of trusts. There are revocable and irrevocable trusts. There are testamentary and living trusts. A revocable trust is a trust the terms of which can be changed. An irrevocable trust is a trust the terms of which cannot be changed. A testamentary trust is a trust found in a last will and testament. A living trust is a trust that can exist while the grantor is still living and, therefore, not in the last will and testament of the grantor.

A testamentary trust is revocable while the grantor is living and becomes irrevocable when the grantor dies, because once the grantor dies, his Will cannot be changed and, therefore, the trust in the Will cannot be changed. A living trust can be revocable or irrevocable, depending upon the purpose the grantor is attempting to achieve.

There are multitudes of reasons why a person may create a trust. A person might create a trust for a minor beneficiary, for a disabled beneficiary, for a beneficiary with a drug or alcohol problem, or for a beneficiary with a spending problem.

A trust can be drafted to address any of these issues. The terms of the trust are up to the grantor. The grantor can draft the trust with any terms he wants to put into the trust. For instance, if the grantor wants to say that the trustee can only give the beneficiary money on October 1st of any given year if the moon is full, he can say that. It's the grantor's trust, so the grantor is entitled to put any terms he wishes into the trust agreement.

The biggest problem with a trust is that trusts scare people. Because people don't understand trusts, they typically heap all types of misconceptions onto trusts.

For one thing, people don't understand how trusts own and can invest assets. A trust, I always tell people, is just like a person when it comes to owning and investing assets. A trust can own any asset that a person can own and can invest any place a person can invest. A person can own bank accounts, stocks, bonds, mutual funds, annuities, and real estate. So can a trust. A person can have multiple bank and brokerage accounts. So can a trust.

But people don't understand this, even after you tell them. People think a trust is a place, and that once you put money in a trust the money goes to some particular place, trust-land. People think of a trust as a type of investment instead of simply being a vehicle for investing.

The other problem with trusts is that beneficiaries of trusts typically come to resent the trust. For instance, if mom dies and leave her estate equally to her four children but leaves one child's share in a trust because the child has problems spending money, the spendthrift child will come to resent the trust. Why can't I have my money when my brother and sisters get to have their money?

Worse yet, if mom named one of her other children to be the trustee of the trust for the spendthrift child, the spendthrift child may grow to resent his sibling trustee. Years after mom's death, the spendthrift child certainly won't understand why his siblings got their money, but he has to wait to get his money.

So, a trust can serve very important purposes, but there are also drawbacks to trusts that should be taken into consideration. No one should create a trust without an important purpose to accomplish and without understanding the drawbacks of the trust.

RUNNING AWAY WITH MOM

Most of us probably don't like to admit it, but we aren't as unique as we think. If we thought of something, chances are, someone else thought of the same thing before us. And so it is with legal issues.

A significant number of elderly individuals require the assistance of a legal guardian. A guardian is a person whom the court appoints to manage the financial, healthcare, and residential affairs of an incapacitated person, called a ward.

A person is incapacitated and requires the assistance of a guardian if she is unable to handle her affairs as the result of physical or mental infirmity. So, a person could be completely mentally capable yet physically incapable and require the assistance of a guardian. Or, she could be physically capable yet mentally incapable and require the assistance of a guardian. Or, as in most cases, the ward could be both physically and mentally incapable of handling her affairs and require the assistance of a guardian.

An older person may, for instance, be suffering from some level of dementia and other physical ailments to the extent that the cumulative effect of all her disabilities makes her incapable of handling her affairs without the assistance of another person. Many people think of a person who needs a guardian as being mentally incompetent, but that is not necessarily the case.

When a person needs a guardian, a person, typically a family member, retains the services of an attorney to file a guardianship action on his behalf in superior court. The prospective guardian's attorney will prepare a complaint to be filed with the court.

A complaint must identify the prospective guardian, the prospective ward, and the ward's family members. The complaint should give a brief explanation of why the ward needs a guardian and of the ward's known assets and income.

In some cases, a family member removes a ward from the state of New Jersey in order to stave off a guardianship action. For instance, a son might believe that his mother requires the assistance of a guardian and might wish to serve as her guardian. Meanwhile, a daughter who lives in another state might not want a guardian appointed for her mother. Perhaps the daughter wants the mother to draft a last will and testament through which the mother leaves the entirety of her estate to her daughter to the exclusion of the son.

The daughter, essentially, absconds with the mother, who is suffering from dementia, to another state. In the other state, the daughter cares for the mother, and the mother comes to depend upon the daughter for her everyday needs. Removed from her home, the mother believes she cannot survive without the assistance of the daughter.

After awhile, the daughter takes the mother to a lawyer in the foreign state and has a Will drafted for the mother through which the mother disinherits the son.

If you think this doesn't happen, you'd be wrong. Things like this happen more frequently than you would imagine. Furthermore, by removing the mother from the state of New Jersey, the daughter, in my hypothetical, places the son in a difficult situation.

This country is called the United States of America because we are fifty states united as one country, but each state is its own sovereign governmental entity with, to a large degree, its own laws. If mom is living in the other state of her own accord, then the first state doesn't have jurisdiction over the mother; however, if the mother were removed from her home state and is being held in the other state effectively against her will, then the first state should retain jurisdiction over the mother because the mother is not living in the second state of her own free will.

It's impossible to wholly eliminate this type of problem. Families with this level of discord, and there are many, are going to cause problems for one another no matter what, but having a well-drafted estate plan could help stave off problems such as these.

CHOOSING OTHERS TO DECIDE FOR YOU

No one wants to think of a day when someone else will have to make decisions for them, but for many people, particularly those lucky enough to grow old, that day may come. A fairly common attribute of aging is some form of dementia. Even for those who do not develop dementia, aging can bring physical infirmities that prevent a person from fully carrying out their daily tasks.

And it's not just the old who are incapable of handling their own affairs. Any one of us can suffer a debilitating injury at any time. A car accident, a heart attack, a stroke-any of these types of events can cause the strongest among us to require the assistance of others.

Legally, if you are over the age of eighteen and if you cannot make decisions for yourself, no one else can make decisions for you, not your spouse, not your children, not your parents. Many people think their spouse or children can simply step in and make decisions for them, but this is not the case. No one else can make decisions for you, no one.

If you have failed to plan ahead by putting in place financial powers of attorney and advanced healthcare directives, then someone will have to become your legal guardian. To become a person's legal guardian, the proposed guardian must retain the services of two doctors who must opine that the proposed ward cannot handle his affairs. Once the guardianship action is filed in the court, the court appoints a lawyer to represent the ward's interest. In all, the guardianship will probably take three months to accomplish and will cost the ward's estate around $5,000.

To have an elder law attorney draft a financial power of attorney and advanced healthcare directive drafted for you would cost you about $350. The difference between $5,000 and $350 is obvious. Furthermore, with a well-drafted financial power of attorney and advanced healthcare directive, the person you name to make decisions for you, called your agent, can make broader decisions for you than your guardian can.

A guardian may have to go back to court to ask the court's permission to engage in certain types of transactions, such as selling the ward's real estate or gifting the ward's assets for purposes of Medicaid planning.

So, there is little doubt that having a well-drafted financial power of attorney and advanced healthcare directive is important. In short, you should have these documents somewhere in your house. The question is, who should you name to make financial or healthcare decisions for you in the event that you cannot?

Most people name a family member. In the absence of family members, a trusted friend may be a good choice. In the absence of family and friends, a professional, such as an attorney or an accountant, may be appropriate.

With a healthcare directive, you cannot name your physician as your agent for obvious reasons. You cannot have the person performing the medical procedure making decisions about whether or not the medical procedure should be performed in the first place. You also cannot name the people who witnessed the healthcare directive act as the agent.

You also can only name one agent to serve at a time. In other words, you cannot name co-agents, for instance, "my two children." You would have to name one child then the other child to serve if the first child cannot serve.

With a financial power of attorney, you can name co-agents. You can name co-agents that have to make decisions together or you can name co-agents who can act separate and apart from one another. Either co-agent plan has its own potential problems. For instance, what if the agents have to agree and don't agree? Or what if the co-agents do not have to agree and they make opposite decisions on the same issue? For this reason, I typically recommend that clients name one agent to serve at a time, just as they must with the healthcare directive.

The most important thing is that you have a power of attorney and advanced healthcare directive. Once you've made the wise decision to have these documents, an experienced elder law attorney can ensure that the documents are drafted properly.

DON'T BOTHER ASKING FOR HELP

A recent decision of the New Jersey Superior Court, Appellate Division, highlights the difficulty of dealing with the Medicaid program from a practical standpoint. Medicaid is a health insurance program for needy individuals. In order to qualify for Medicaid, an individual must have very limited assets and income that is insufficient to pay for his care.

Unlike private health insurance plans, the Medicaid program will pay for long-term care, such as care in a nursing home or assisted living residence. For this reason, many individuals who need long-term care and who never thought they would need Medicaid find themselves looking to qualify for the Medicaid program.

Because Medicaid is only available to needy individuals, the Medicaid program punishes individuals who dispose of their assets for less than fair market value. In other words, if an applicant has gifted his assets away, perhaps to friends or family, Medicaid will make the applicant ineligible for Medicaid benefits for a period of time. The more money that an individual gives away, the longer the period of time during which he will be ineligible for Medicaid.

Only gifts made within a certain period of time prior to applying for Medicaid benefits are punished. Currently, that time period is five years. This period of time is commonly known as the "lookback period."

In New Jersey, the Division of Medical Assistance and Health Services or DMAHS administers the Medicaid program. DMAHS contracts out the work of processing Medicaid applications to the local county boards of social services located in each county. So, each county's board of social services processes applications for that county.

DMAHS and the county boards have a significant amount of leeway in the way they administer the Medicaid program. Moreover, from a practical standpoint, it is difficult to quantify if these entities are fairly administering the program on a systemic basis.

In my practice, I have helped clients with hundreds, if not thousands, of Medicaid applications. Yet, when a client asks me what is going to happen with their application before we have even applied for the client, I tell them that I treat every application as a first-time experience. I simply have no idea how their application will be handled, for instance, will it be processed quickly, what questions will the caseworker in charge of that client's application ask or not ask, etc.

In the recent appellate divisions case of In the Matter of A.N., a minor, the trustee of a special needs trust asked a court's guidance on certain expenditures that the trustee had made and would continue to make from a special needs trust for the benefit of a disabled child who was receiving Medicaid benefits. A trustee asking a court if certain expenditures are proper is a fairly common event. There is a court rule that permits a trustee to ask for the court's guidance when a trustee is concerned about the propriety of distributions he is making. By asking the court's guidance on an issue, the trustee can feel safe that what he is doing is correct.

In the A.N. case, the court gave the trustee guidance, and DMAHS appealed the decision of the trial court, contending that a court's decision on issues of Medicaid eligibility is not binding. In other words, DMAHS argued that a court cannot tell it what to do as far as A.N.'s eligibility for Medicaid benefits is concerned.

Well, the appellate division agreed with DMAHS and reversed the decision of the trial court. According to the appellate division, DMAHS is the only entity with authority to make eligibility determinations in the first instance, not a court.

The problem with this rationale, from a practical standpoint, is, any trustee of a special needs trust must make all distributions without any guidance, even if the trustee is seeking guidance. So, if the trustee makes an incorrect decision, some disabled trust beneficiary is going to pay the price by losing his Medicaid benefits and his healthcare. Situations such as this make it scary when you are dealing with the Medicaid program.

DISCRIMINATING AGAINST MEDICAID RECIPIENTS

"Won't the nursing home treat my mother differently when she goes on Medicaid?" I hear this question quite frequently. A different variant of the question that I also often hear is, "I don't want my mom to have to go to a Medicaid nursing home."

People have this notion that there are two different types of long-term care facilities, those for privately-paying patients and those for Medicaid beneficiaries. If it weren't for federal and state laws, I'm sure there would be two types of facilities, but thankfully for nursing home residents, there are laws against nursing facilities discriminating against Medicaid beneficiaries.

Most nursing homes in New Jersey are privately-owned facilities. In Monmouth County, for instance, there are only two county-run facilities, and quite frankly, if you visited these facilities, you wouldn't know that they are owned by a governmental entity.

Because nursing homes are most often private facilities, the people who own those facilities want to turn a profit. Even non-profit facilities like to make money to pay the salaries of those who work at the facility, often paying those in upper management very generous salaries. In my opinion, companies are "non-profit" because upper management makes sure that they suck all the money out of the company in the form of salaries.

About two-thirds of all patients in nursing homes are also Medicaid beneficiaries. Nursing homes derive approximately 50% of their revenues from the Medicaid program.

In New Jersey, nursing homes charge private-pay residents anywhere from $8,000 a month to $12,000 a month. The average cost of a nursing home in our state is $9,000 a month. The Medicaid program will pay these nursing homes somewhere in the range of $6,500 a month for a Medicaid beneficiary.

Given the above, it is easy to see why the owners of nursing homes prefer private-paying residents; they make about 33% more from a private-paying resident than they do from a Medicaid beneficiary. But, given the above, it is also easy to see that nursing homes could not survive without the Medicaid program.

With two-thirds of their residents receiving Medicaid and with 50% of their revenues being derived from the Medicaid program, nursing homes need the Medicaid program. Moreover, although they receive less from Medicaid than they do from private-paying residents, another benefit of Medicaid is that the Medicaid program pays every month, on time. If you own a nursing home, you don't have to worry about the state of New Jersey running out of Medicaid money and not being able to pay you. You can count on receiving payment for each of your Medicaid residents.

I have never seen or heard of an incident in which a nursing home discriminated against a nursing home resident because the resident was a Medicaid beneficiary. No client has ever raised this as an actual and factual issue to me. As I tell my clients, "Since most people who live in nursing homes receive Medicaid benefits, if the nursing home treated Medicaid residents differently, they'd be treating everyone one who lived in the facility the same."

If, however, you have a concern about a family member being discriminated against because he is a Medicaid beneficiary, rest assured that there are laws against that discrimination. Since 1987 when the Nursing Home Reform Act was signed into law, nursing homes are prohibited from discriminating against residents because of the method with which they pay the facility. In short, a nursing home cannot discriminate against Medicaid beneficiaries.

A nursing home that does discriminate against Medicaid beneficiaries runs the risk of losing its Medicaid certification. The nursing home would not be eligible to receive payment from the Medicaid program. The nursing home would not receive monthly payment for two-thirds of its residents and would lose 50% of its revenue. In short, the nursing home would go out of business, in a hurry.