Question:
I have a client with an irrevocable Medicaid trust. That trust gives him a limited testamentary power of appointment he would like to exercise in order to direct the assets stay in trust for his son (rather than have them go outright to the son at client’s death per the terms of the trust).
Two questions:
(1) Will exercising the power of appointment expose those assets to estate recovery (on the theory that the will must be probated and thus they are distributed according to his will).
(2) If that alone is not enough to expose them, would exercising the power to send the assets to a new revocable trust that I would now draft for him expose those assets to estate recovery? Would it be safer to create a new irrevocable trust of which the client is not the Trustee and exercise the power to send the assets to that instead?
Response:
The exercise of the power of appointment should not subject the trust contents to estate recovery since it still does not make them part of the probate estate. It simply redirects where they go upon the client’s death.
In addition, directing the assets to a new revocable trust should not be an issue since it will become irrevocable upon the client’s death.
I say “should” in both cases because sometimes state Medicaid agencies come up with outlandish legal theories that have to be litigated.
A new irrevocable trust might be slightly safer, but I’m not sure how you do that if the original trust is irrevocable and the client is not a beneficiary.
