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Nov 2013
15
November 15, 2013

Estate Planning Tip: Trust Decanting – A Powerful New Tool for Medicaid Planning


Bills passed by the Michigan legislature and signed by the Governor in December, 2012 expressly allow a trustee to “decant” assets from a trust.  What is decanting?  The term itself is borrowed from the world of wine and spirits and refers to the pouring of spirits from one vessel to another.  In the world of trusts, it has to do with a trustee exercising a power to distribute assets to or for the benefit of a beneficiary by transferring assets from an existing trust into a second trust.  The second trust has to be for the benefit of the same beneficiaries but in some circumstances can postpone or suspend the period for vesting of an interest in the trust.  This can allow the trustee to delay the time or change the standard under which a beneficiary will receive trust assets.

This power can be very important for a number of tax planning and asset protection reasons.  A recent New York case demonstrates that it can be very useful for Medicaid planning reasons.  In In re Kroll, a trustee of a trust that was established for the beneficiary when he was 19 months old petitioned the court (under a statute similar to the Michigan statute) for approval of its actions in decanting trust assets to a second trust just prior to the beneficiary’s 21st birthday.  Under the terms of the first trust, the beneficiary had the right to withdraw all assets upon attaining age 21.  The trust had assets valued at approximately $400,000.  The beneficiary suffered from several disabilities and received Medicaid and SSI.  Distribution of the trust assets to him would have rendered him ineligible for these benefits until the assets were spent down.  The New York Attorney General objected to the petition and argued that the second trust had to be considered a self-settled trust and that the assets would be countable to the beneficiary for Medicaid purposes unless it had a Medicaid payback provision.  The court held that the decanting was proper and had occurred prior to the beneficiary’s 21st birthday.  Therefore, the second trust maintained its status as a third party trust and the beneficiary could maintain his eligibility for government benefits while using the trust assets for his supplemental needs.    

Decanting in this case saved the client $400,000 and demonstrates that it can be a powerful tool to rearrange existing trust arrangements that no longer meet a beneficiary’s needs.

 

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