Husband and wife created a revocable living trust many years ago and deeded their homestead into the trust (the “Trust”). Husband and wife have two children born of their marriage. The Trust required that upon the first of them to die, the separate property and one-half of the community property would be held in an irrevocable trust for the benefit of the surviving spouse and then equally to the children upon the death of the surviving spouse. Husband dies and his widow (wife) has changed her mind as she wants the homestead to only pass to their daughter. Additionally, wife is older now and has no long-term care insurance. If the home is in this type of trust there would be ineligibility for Medicaid which helps pay for long-term care costs.
Although there are several ways to undo an irrevocable trust, the solution in this case was a family settlement agreement. The family settlement agreement states all parties (wife and the children) agree that wife, as Trustee, could deed the homestead to herself, individually. Then both children (since they would have been beneficiaries) deeded their interest (if any) in the property to wife (their mother). Prior to these actions, confirmation from a title company was received since another way to modify or terminate an irrevocable trust is by court action (the title company could have required that).
After the property was deeded to wife, she then signed a Ladybird Deed (see article herein) to daughter in case wife needed long-term care Medicaid in the future to avoid a successful claim from Medicaid estate recovery by the state. Wife also did a new Will (although this was not mandatory) indicating the home would pass to daughter although it is unlikely that the Will would be probated as the home would simply pass by the Ladybird deed at wife’s death. The new Will was signed as further assurance to the title company that only the daughter was to inherit the homestead.
Wife’s achieved her goals of getting the home out of the irrevocable trust (even though it was irrevocable) without adverse taxation. Also, daughter could inherit the home even if wife needed long-term care.
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