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U.S. DISTRICT COURT RULES THAT A LIMITED POWER OF APPOINTMENT IN AN IRREVOCABLE TRUST DOES NOT CAUSE TRUST PRINCIPAL TO BE DEEMED AVAILABLE FOR MEDICAID ELIGIBILITY PURPOSES

Many individuals who have engaged in Medicaid planning in recent years have placed their assets, or a portion thereof, into an irrevocable trust. Federal law recognizes that individuals may set up such trusts to shelter their assets from the exorbitant costs of long-term care. These trusts have recently been under attack by the local departments of social services (the “Department”). The Department, in many cases, has taken the position that the presence of a limited power of appointment provision in such trusts causes the entire trust principal to be deemed an available resource for Medicaid eligibility purposes¹. As a result, the Department has been denying Medicaid eligibility to applicants who created irrevocable trusts containing a limited power of appointment where the assets in the trust cause the applicant to have non-exempt resources in excess of the Medicaid eligibility limit ($3,800 in 2002). A recent court case, Verdow vs. Sutkowy, confirms that the Department’s practice in this regard is illegal.

On September 9, 2002, the United States District Court, Northern District of New York issued its decision in Verdow vs. Sutkowy. The court ruled that the Department’s denial of Medicaid benefits where the applicant has created a trust containing a limited power of appointment violates federal law and specifically is in violation of the “Medicaid Qualifying Trust” statute. Therefore, the presence of a limited power of appointment provision in such trusts does not cause the trust principal to become an available resource and the assets in the trust should not be counted for Medicaid eligibility purposes. The decision applies to both lifetime and testamentary (i.e., accomplished through a will) limited powers of appointment.

The Verdow decision is very significant to those individuals applying for Medicaid who had established irrevocable trusts with a limited power of appointment. No longer should Medicaid coverage be denied based on the presence of a limited power of appointment provision in such a trust.

Interested parties who would like to discuss this decision in more detail with Robert J. Kurre may reach him at (516) 869-5200.

Robert J. Kurre, an attorney and counselor at law, offers legal services in the areas of Elder Law, Estate Planning and Estate Administration. He is the Vice Chair of the Elder Law, Social Services and Health Advocacy Committee of the Nassau County Bar Association. He is also a member of the National Academy of Elder Law Attorneys as well as the Elder Law and Trusts and Estates Sections of the New York State Bar Association. He is a published author, frequent lecturer, and instructor within his areas of practice.

This publication does not constitute the rendering of legal or other professional services by Robert J. Kurre, Esq. While extreme care is taken to present the material in an accurate fashion, Robert J. Kurre, Esq. disclaims any implied or actual warranties as to the accuracy of the material and any liability with respect thereto.

1 A power of appointment, in this context, typically refers to a power retained by the creator of an irrevocable trust to designate the person or persons who are to receive the trust assets following the death of the creator of the trust. This retained power may be exercised by the creator of the trust after the trust is signed by the creator. A power of appointment is ” limited” when it is exercisable only in favor of a person or class of persons who are designated in the trust instrument (i.e., such class typically excludes the creator of the trust, her creditors, her estate or her estate’s creditors). Limited powers of appointment had been used with frequency in irrevocable trusts as the presence of such provision could allow for favorable tax treatment. Additionally, the desire of the creator of the trust to retain the right to change the ultimate beneficiaries of the trust often led to the inclusion of a limited power of appointment in such trusts.