Insulation of Inherited Assets from Public Provider Consideration
| Publication year | 1993 |
| Pages | 523 |
1993, March, Pg. 523. Insulation of Inherited Assets from Public Provider Consideration
It has long been possible to shelter personal injury recoveries from public benefit providers for minor and mentally incapacitated adults who have been injured.(fn1) However, it has been less clear whether assets in trusts could be similarly insulated for such persons in cases where the origin of their resources is inheritance. This article discusses recent cases that allow inherited funds to be sheltered from consideration by public entitlement administrators when such funds are placed in restricted-use trusts by the guardians of incapacitated beneficiaries.
Where the source of an incapacitated minor's assets is personal injury recovery, Congress itself has clearly addressed statutory intent. In reporting on legislation of which the relevant federal statute [42 U.S.C. § 1396a(k)(2)] is a part, the conference committee wrote that
[t]he Committee does not intend that trusts established solely for the benefit of disabled children, from which the grantor or other individual can under the terms of the trust receive no benefit, be treated as Medicaid qualifying trusts [which disqualify the beneficiary from Medicaid funds].(fn2)
When an incapacitated adult is involved, similar protections are reasonably applied. As the court wrote in Matter of Gamble,
[a] person who is declared legally incompetent is substantially deprived of liberty. An incompetent [adult] is reduced to the status of a child and cannot dispose of his [or her] property or determine [his or her] place of residence. [Such person] cannot give... informed consent for medical treatment. The appointed guardian protects the incompetent person's rights by caring for his [or her] person and estate.(fn3)
In both instances, where children or adults have been injured, something is taken from them. They are less whole. However, when the source of an incapacitated person's resources is inheritance, the argument that the assets ought to receive trust protection---thus making such resources unreachable by public benefit providers---is less persuasive because there is no loss of the recipient's body or mind.
In the Michigan case of In re Johannes Trust,(fn4) the guardian, who also was the sister of a developmentally disabled adult, created a trust for her ward, funding it with proceeds received when the disabled person's aunt died. The ward's estate share of approximately $11,000 was deposited into a savings account by the guardian-sister. Thereafter, the guardian-sister requested that the Oakland County Probate Court authorize the proceeds to be placed in a restricted-use trust. The trust's purpose was to supplement other sources of income available to her incapacitated sister and to provide for benefits that would "maximize the quality of [the ward's] life."(fn5)
The appellate court did not invalidate the trust. However, it authorized the Michigan Department of Mental Health to reach its assets as a creditor of the trust beneficiary because the ward was deemed to be the settlor of the trust estate.(fn6) The court reasoned that, notwithstanding that legal control of the inherited funds was held by the guardian, such funds were the property of the ward. Therefore, the court concluded, it was the ward who was the settlor-in-fact.(fn7) Given...
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