Testamentary Trusts can be distinguished from inter vivos trusts, created during the Settlor’s lifetime, because the property being transferred into a Testamentary Trust remains in the decedent’s name at the time of death. Therefore, probate is necessary to move that property into the trust.
A Testamentary Trust is not the preferred manner to address an individual’s desire to minimize estate tax. A Testamentary Trust is normally created to address the accumulation of estate during a person’s lifetime (or as a result of a postmortem lawsuit), it provides management of the proceeds from a life insurance policy held on the Settlor, or it can shield the value of estate assets from the cost of a spouse’s anticipated nursing home stay. More often than not, our clients use a Testamentary Trust to shield the value of trust assets from the cost of a spouse’s anticipated nursing home stay.
Medicaid rules provide a special “safe harbor” for testamentary trusts. The assets of these trusts are treated as available to the Medicaid applicant only to the extent that the trustee has an obligation to pay for the applicant’s support. If payments are solely at the trustee’s discretion, they are not considered available. Trusts established and funded on or after August 10, 1993, are governed by Consolidated Omnibus Budget Reconciliation Act of 1993, as codified in 42 U.S.C. §§ 1396a(k) and 1396p. Because federal law found at 42 U.S.C. §1396p(d)(2)(A) place restrictions on trusts established “other than by will,” many treat a testamentary trust as a “safe harbor” in Medicaid planning. The logic being that if Congress wanted to eliminate all trust planning that helps people qualify for Medicaid, they would have eliminated the “other than by will” exception in the statute. Judicial decisions bear out this safe harbor exception, indicating that testamentary trusts cannot be counted by Medicaid.
Therefore, Testamentary Trusts provide an important mechanism in Medicaid Planning.