Will Discretionary Trust Without HEMS Standard Affect Brother’s Eligibility for Medicaid?
I am trustee for a trust that my parents set up for my brother. The trust gives me total discretion as to when and how much to distribute to him without a HEMS standard. There is no special needs language in the trust. Should he require nursing home care in the future, would I be required to use trust funds or could he qualify for Medicaid?
No, you would not have to spend down the trust. Your brother can qualify for Medicaid coverage of his nursing home care and still have the trust funds available to pay for any additional needs he may have. In addition, assuming the trust has named beneficiaries to receive whatever remains after your brother dies, the state will have no claim to recover its expenses on your brother’s behalf from the trust funds. This is because the trust is a so-called third party trust created by your parents. If the trust were created with your brother’s funds, it would fall under completely different rules.
You reference the HEMS standard. This refers to common language in trusts meant to limit disbursements to purposes of the beneficiaries’ health, education, maintenance and support. It derives from tax rules that can permit a beneficiary to be a trustee of a trust with this restriction without being considered the owner of the trust property for tax purposes. The idea is that the trustee doesn’t have total discretion because she cannot make distributions for non-HEMS purposes, such as paying for an around-the-world cruise. But some courts have read this language in the opposite way, rather than being a restriction on discretion, they have interpreted it as an obligation to pay for the health, education, maintenance and support of the beneficiaries. Fortunately, your brother’s trust doesn’t have this language so there’s no risk of such a misinterpretation.