In a private letter ruling recently, the IRS addressed the issue of transferring an inherited…
Recent Case Allows Special Needs Trust After Death
A New York trial court recently approved a trustee’s petition to reform his deceased father’s trust in order to protect his disabled sister’s Medicaid benefits. In Matter of Newman (2008 NY Slip Op 50127, Jan. 22, 2008).
When he died in 1988, William Newman established a trust in his will for his disabled daughter. The will required the trustee to use the trust income for the daughter’s benefit and gave the trustee discretion to spend the trust principal for her support and maintenance. Mr. Newman’s daughter lived on her own until 2006, when she moved into an adult care facility and qualified for Medicaid. In order to maintain her eligibility, her brother, the trustee, then petitioned the court to reform the trust to make it a Supplemental Needs Trust. The guardian ad litem opposed the petition, arguing that the trustee, who was also a remainderman, had a conflict of interest.
The court approved the petition, finding that the trust meets all of the statutory conditions for reformation. Specifically, the court determined: 1. that the beneficiary is disabled; 2. that the intent of the donor was to supplement her benefits; 3. that the trust prohibits the trustee from using the assets to jeopardize her benefits; and 4. that the beneficiary cannot compel distributions from the trust. Finally, the court dismissed the guardian ad litem’s argument regarding the conflict of interest, calling the analysis “restrictive” and contrary to the intent of the donor.