This is the second post in my series on critical mistakes people make when facing a Connecticut Medicaid situation. Today I am going to look at a strategy that many people use for different reasons, disinheritance and non-binding oral trusts.

There can be a lot of anxiety when a loved one is in a nursing home and your assets are dwindling at the rate of +$9,000 every month. Unfortunately this anxiety can also lead to poorly informed decisions. Some families I meet come to me with an estate plan that disinherits a loved one that is in a nursing home or on Connecticut Title 19 Medicaid. The logic of this plan is to protect the family assets from being wiped out. This is a knee-jerk reaction that creates more problems than it solves in my opinion.

What can go wrong?

Many times I have family members contact me because a parent has disinherited the other parent (living in a nursing home or diagnosed with dementia) with the understanding that one child or all the children would actually use the funds to provide care for the surviving parent.

The first issue is that such an arrangement is almost non-existent on the scale of enforceability. At best there could be an oral trust but one side of the oral contract is deceased and if there is a conflict it is obvious that the other side of the contract (the child who received the funds) is saying there is no contract. Where is the evidence? At worst, the funds received by the child or children are treated as they look, outright bequests with no strings attached.

A second issue is liability concerns. The funds you intend to care for the surviving parent are now exposed to the liabilities of the person chosen to hold the funds. Common liability risks include divorce, bankruptcy, or even a car accident.

A family with a loved one in a nursing home or on a government benefits program has a choice. Disinheritance is not the only option. Disinheritance is not the preferred option and the government even recognizes this fact by providing specific protection to specific estate planning strategies.

A Special Needs Trust allows you to leave a legacy of care for a loved one in a nursing home without handing over everything to pay nursing home bills. It is absolutely critical that this unique planning is done by an experienced Connecticut special needs attorney because these trusts are reviewed by government benefits agencies and in Connecticut they are usually reviewed by the Attorney General’s office. One mistake in the document and the assets of the trust could be used to pay for bills you did not intend to pay.

I have seen too many families torn apart by using disinheritance as asset protection. There is no need for it. You have a choice. Put your plan on paper and leave your family with some security.

Apparently there is a lot of bad asset protection planning for Connecticut Medicaid Title 19 benefits going on out there. Asset protection can be very tricky. The wrong word in the wrong place can wreak havoc with a client’s goals and leave you with no protection. The right word (or omission) in the right place can conversely protect hundreds of thousands of dollars. Another case that went to judgment in Connecticut Superior Court highlights a common oversight when it comes to estate planning – flawed language leading to inadequate asset protection.

Rome v. Wilson-Coker (Ct. Super. Ct., No. HHBCV064012367S, Oct. 24, 2007).

Marjorie Rome is bipolar with a history of institutionalizations. She needs help and a certain level of benefits to receive treatment for her condition. Presumably with good intentions and a desire to help Marjorie, her father created a trust for Marjorie in his will. The trust was based on the model of a discretionary trust which vested discretion in the trustee to make or refuse distributions for Marjorie’s benefit.

Unfortunately, for some reason which I fail to comprehend, the trust language directed the trustee to make distributions as necessary for Marjorie’s “interest and general welfare, even to the extent of exhausting the entire Trust estate.” This is a big blunder if you want to include asset protection in your estate plan or trust and it cost the Rome family.

So eventually Marjorie entered a nursing home and applied for Medicaid. The Department of Social Services denied her application based on their determination that her father’s trust was available to Marjorie as an asset. The Trustee thought it was a good idea to deny distributions to Marjorie for nursing home costs, mistakenly believing that he actually had real discretion to do so.

Marjorie Rome later pleads her case to the Superior Court claiming that the trust is not available because the Trustee is refusing to make distributions to her. The court recognizes that the flawed language in her father’s trust gives Marjorie a right to compel distributions from the trust even if the Trustee refuses.

Her father made a mistake in his estate plan, and Marjorie had to pay for it. If you are looking for asset protection, do everything you can to make sure it works.

In August I first brought up the growing trend of insurance companies using ERISA laws to recover from the proceeds of personal injury suits pursued by their own customers against those responsible for the injury. You can read that article here.

I had hoped this would not become a snowballing trend because in many ways it is truly horrible. Unfortunately here I am writing about it again because Wal-Mart recently won an appeal to recover an entire settlement from one of their health insurance customers.

The customer suffered the injury and went through the process and expense to get the settlement, then Wal-Mart comes in after the customer did all the work and makes a claim for reimbursement of medical costs they paid. And to make it worse, they made the claim and were successful against the funds that went into a special needs trust.

Wal-Mart was paid, the attorneys were paid, and the injured person received nothing. If you ever pursue an injury lawsuit be sure your attorney has a plan for how to handle an ERISA reimbursement claim from your health insurer or you could end up with nothing to show for your time and effort at the end of the day.

You can read the full story here.

I came across this story right before I left for vacation and I wanted to highlight it for everyone. Providing for a Special Needs Child describes an interesting conversation between two parents about the unique estate planning issues families with special needs children face.

I am afraid the discussion of providing a secure future in case things do not go according to everyone’s own life plan happens all too infrequently based on the number of conversations I have had myself recently with families unaware of how critical it is to implement a plan to provide quality of life to a special needs child if the unexpected should happen.

What is the plan for educational needs?

Who will pay the medical bills if your child is no longer on your health insurance?

Will your child only survive with the bare minimum from government benefits programs or will you put in place a plan for the same quality of life you would provide?

Update: The original article “Providing for a Special Needs Child” is no longer available from the original site.