New York Medicaid Trusts: The Devil Is in the Details

Irrevocable Medicaid trusts can be a powerful tool for families seeking to protect assets from the costs of long-term care, if drafted and administered properly. A failure of either can create bad blood within the tightest of families, with resulting financial repercussions, so the Suffolk County Surrogate’s Court reminds us in its September 7, 2017, decision in Matter of The Schweiger Family 2013 Irrevocable Trust.[1]

In 2013, William Schweiger created an irrevocable trust with the aim of enabling him to financially qualify for Medicaid benefits. He funded it with a single bank account and monies he received from the sale of his home in Jericho, New York, and, like many widowers, he provided that upon his death, the trust assets would pass equally to his five children. Two of his daughters were appointed as co-trustees, to administer the trust.

Shortly thereafter, two major problems arose. First, the co-trustees used trust funds to pay for their father’s medical and personal care, even though he wasn’t an authorized discretionary beneficiary of the trust. Second, they followed their father’s advice, and made distributions to themselves and to their children, without making any equalizing gifts to their siblings, even though the trust terms provided that all of the children were to be treated equally.

Mr. Schweiger passed about a year later. When his other three children got wind of the trust and the distributions made to their siblings, the result was entirely predictable: They sued. And they obtained a judgment of over $130,000 against the two daughter-trustees, all without having to go to trial.

In his decision, Surrogate John M. Czygier, Jr. held that the daughters’ explanations that (a) they were simply doing what their father told them to do, and (b) they weren’t properly advised by the attorney who assisted in drafting the Medicaid trust, were unavailing. As co-trustees, the Surrogate held, they were obligated under New York law to adhere to the terms of the trust, and making distributions to themselves, but not to the others, breached their duty of undivided loyalty to the five beneficiaries and constituted self-dealing.

The takeaways are straightforward

First, Medicaid trusts are serious business. They must be respected by both the person who creates it and those responsible for its administration. In Mr. Schweiger’s situation, once he implemented his Medicaid plan, he forfeited control over the monies placed in the trust. From that point forward, his daughters (as the co-trustees) controlled those assets, not him, putting the three of them in a potential position of conflict.

From a planning standpoint, what was Mr. Schweiger’s Plan B if he needed money, and the co-trustees couldn’t or wouldn’t make a distribution to him? While waiting to qualify for Medicaid, did he have any other resources from which to pay future personal and medical needs, or was it understood by all that the trust would cover these expenses? If the latter, could that have been accomplished without jeopardizing the trust’s purpose or placing the co-trustees in harm’s way? Recognizing these issues and creating a roadmap before opting for a Medicaid trust is a must.

Second, trustees are fiduciaries, and are held to the highest standards of conduct under New York law. While it is perfectly acceptable for a trustee to also be a beneficiary, the trustee cannot place his or her own interests ahead of others, even if the person who created the trust later demands it. In Mr. Schweiger’s case, whether he wanted his daughters to receive money from the trust or not, the co-trustees should not have made any distributions to themselves without their siblings’ approval, or at the very least should have sought independent legal advice before doing so.

Third, it doesn’t take much to run into trouble as a trustee, even for a trust as short-lived as Mr. Schweiger’s. His had a lifespan of a little over one year, but because of their ill-advised decisions, the co-trustees paid a hefty price. From the co-trustees’ perspective, they arguably would have been better off had their father simply held onto his wealth or made outright gifts to his children.

An irrevocable Medicaid trust is a useful estate and Medicaid planning device, but it comes with myriad requirements. If you are contemplating such a trust, you should consult with a legal professional who not only has the requisite knowledge of Medicaid planning, but also understands the nuances of trust administration and the potential traps that may lead to litigation, particularly in instances where there are multiple beneficiaries or competing interests among family members.

If you have been named a trustee of another’s trust, consider seeking a consult with an experienced trusts and estates attorney to review the trust agreement carefully and discuss best and current practices of trust administration. The cost is nominal relative to the potential liability.

[1] The Schweiger Family 2013 Irrevocable Trust, NYLJ 1202799241052, at *1 (October 2, 2017).