Do irrevocable trusts (Medicaid Asset Protection Trusts (MAPT)) work in Iowa? A recent Iowa Supreme Court decision may lead one to believe that such trusts are ineffective for purposes of protecting assets from either the Medicaid program or Estate Recovery.
In the case in question, Arnold and Vesta Melby (the Melbys) owned a farm in Monona County. In 1991, Arnold and Vesta created substantially identical irrevocable trusts and funded the trusts with their respective one-half interests in the farm. The trusts named the Melbys’ son, Duane, as trustee.
The trusts contained several provisions outlining administration and were specifically designed to operate as “income only” trusts. In other words, during the Melbys’ lifetimes, the trusts would pay the net income generated to the Melbys, respectively. Additionally, upon the death of a trustor, in the event the trustor had no other resources available, each trust was to pay “all expenses of” its respective trustor’s “last illness and funeral,” “any indebtedness owed by the Trustor,” and “any estate tax, gift tax, inheritance tax or income tax owed by the Trustor.” Each trust also provided the surviving spouse with net income from the decedent spouse’s trust upon the decedent’s death. Then, following the deaths of both trustors, each trust directed any remaining assets to be distributed in equal shares to Melby’s three children.
Purpose of Irrevocable Trust (Medicaid Asset Protection Trust)
Oftentimes, the purpose for setting up a trust similar to the Melbys’ is to protect those assets placed in the trust, in the event either spouse needs to qualify for Medicaid. When set up properly, assets housed within a MAPT for five years or longer will no longer be countable assets for purposes of Medicaid eligibility. In the circumstance when Trustors elect to receive income, only the income from the trust can be counted for purposes of qualifying for Medicaid.
So Can an Irrevocable Trust Still Work in Iowa?
In this most recent case, In re Estate of Melby, the Iowa Supreme Court held the Melbys had an interest in payment from the trusts, and that such interest was subject to “any indebtedness owed by the Trustor.” This “indebtedness” included the Medicaid debt the Melbys both accrued over the years. A properly drafted irrevocable trust would not have included this detrimental language.
Bottom line: do irrevocable trusts no longer work after this decision? I would argue that this case does not represent the ineffectiveness of irrevocable trusts for protecting assets, but instead, the ineffectiveness of irrevocable trust when drafted poorly. For this reason, it is important you choose an attorney that works frequently in the area of elder law. The lawyers at Pearson Bollman Law work extensively in the area of elder law. Further, we belong to an organization called ElderCounsel. ElderCounsel provides Pearson Bollman Law with specialized education, support and, in our opinion, offers the premier elder law document drafting system.