Oregon Estate Planning Trusts are Failing when it Comes to Incapacity

One of the stories I tell when touting the advantages of an estate planning trust is that the trust, unlike a will, provides directions for use of your money in the case of incapacity. The trusts I write and the trusts I see all have instructions about what your loved ones should do with your money if you develop dementia. Every trust has a clause explaining who should make the decision that you cannot handle your own affairs and how the decision should be made. I have re-written that clause in my own form a hundred times, because every one of my ideas, in real life, ends up being silly.

I have felt guilty about inability to write (or steal from some other lawyer's form) a satisfactory clause to transition trust management upon incapacity. Having just come from another court hearing in which children were asking the court to appoint a guardian and conservator for their mother, I wonder if the fault is really mine. Incapacity—and by that I mean dementia—does not call ahead to announce it is coming and show up when expected. Sometimes elders see it coming and step down from money management. Sometimes children see it in its early stages, locate the trust, and take the steps to protect the elder from cognitive decline. In just as many cases, however, the elder cannot see her own loss of ability and the children, if there are any, for a wide variety of reasons are not in a position to step in.

Guardianships and conservatorships end up before a judge because there is a crisis. The elder is in physical danger or the elder's money is in danger of being lost. Estate planning trusts were designed to avoid this trip to court, but estate planning trusts and family crises do not play well together. If grandma is wandering on the freeway or sending all her money to African scammers, that old revocable living trust she has sitting on the top shelf in the closet is unlikely to provide the kind of protection she needs. Guardianships and conservatorships are regularly ordered for elders who have trusts because the protective mechanism contained in the trust proved to be ineffective. When this happens, the trust, which was designed to simplify procedures in case of incapacity, makes the situation worse.

We estate planning lawyers mislead clients when we tout the disability provisions in our revocable trusts. Sure, the trusts sometimes keep the client out of court, but mant times they don't. If the case does go to court, the trust is seldom helpful. If grandma is sending all her money to scam artists the court appoints a conservator. Often this will be a professional fiduciary. The conservator then discovers that all of grandma's money is held in trust, and the person named in the trust to take charge is the same cousin Joe who sat on his hands and let the situation become a crisis in the first place. He doesn't want anything to do with managing the money and the court wouldn't trust him to do it if he did.

What happens? More often than not, the court appoints the conservator to be trustee of the trust. Now we have the worst of both worlds--a conservatorship and a trust administration. A similar thing happens when you create an estate planning trust but only manage to put half of your property into the trust: when you die you get both a probate and a trust administration. One of the cases in my office now involves a woman who got the full Monty—a conservatorship while she was alive, a trust case while she was alive, trust administration at her death, and lastly, a probate. Just imagine the attorney fees. The trusts, designed to help, were thwarted by the complexity and unpredictability of human endeavor, and ended up being a hindrance.

Incapacity refuses to play by the rules. It is creative, hurtful and destructive. It pushes aside the plans we made to control it and takes off in unexpected directions. I don't believe that better trust drafting is the answer. I simply do not think that trusts, when it comes to incapacity, are up to the task we ask them to perform. At the end of the day, only a judge truly has the ability to look at incapacity in its varied forms and adapt the protective intervention to the situation before it. When we draft trusts we should admit this outright and instead of writing trusts to avoid court, write them in a way that helps the court when the crisis comes.

This gives me an idea for another blog post. I think I will call it Legal Documents that Promise Too Much. Stay tuned. That may be my next one.

An Update on Income Cap Trusts in Oregon

An income cap trust is, as I have explained in another post, a legal trick that allows people with too much income to qualify for Medicaid to qualify anyway. In brief, the trick works by putting all of the elder's income into a trust every month. At the end of the month the trustee pays all the income to the care center, and Medicaid picks up the difference between what the care center received and what it charges. It is a little more complicated than that, but not much.

In the past people learned about income cap trusts when the Medicaid intake worker announced that the elder didn't qualify for long term care benefits because the elder had too much income. The applicant—usually one of the elder's relatives holding a power of attorney—was advised to get a lawyer. The relative would contact me or some other Oregon elder law lawyer to get a trust.

I have done a lot of income cap trusts. I downloaded a copy of the recommended trust from the Oregon Department of Human Services website and made a few changes. I wouldn't have had to make any changes, but lawyers can't leave anything alone if it was written by another lawyer. When someone hires me to do an income cap trust, I take out my version, change the names to fit the new client, and print it out. Next I call the case worker and agree on the income and payment numbers so that my client, the trustee, will know who and how much to pay each month from the income of the elder. I have my client open a bank account to hold the trust funds, give him advice on how to administer the trust, and my job is done.

Doing income cap trusts is easy work and it pays well. I like that, but it has always seemed to me unnecessary. Medicaid intake workers handle complicated income and asset matters every day. I could never understand why they couldn't take it one more step and help applicants set up income cap trusts.

Now it seems that they have. I have talked to several people in the Portland metropolitan area who have applied for Medicaid, and, when it was determined that the applicant needed an income cap trust, the Medicaid worker handed out a fill-in-the-blank trust form and do-it-yourself instructions. One of these folks wrote me an email, asking me what if any value I could add by doing the trust for them instead of using the form. I couldn't think of a thing. With good forms and the cooperation of the Medicaid intake worker, there is no reason that a reasonably intelligent family member couldn't create and administer an income cap trust without a lawyer.

I think that Medicaid should have been doing this all along, and to the extent that some Medicaid offices are not doing it, I would encourage them to do so. The use of income cap trusts is so standardized that I, as a lawyer, have a hard time providing any value to the client. I will miss the income, I suppose, but I won't miss the work. Creating and funding an income cap trust is necessary drudge work, but it is neither difficult nor creative. I am all for letting unrepresented applicants do all but the most complex of them.