The Listen to Lawrence Letter: CDs and Irrevocable Trusts

August 11, 2023
August 8, 2023 • Volume 4 Issue 162
Want to get confused? Read on about a CD and an irrevocable trust.


In our trust, we have a CD. The dividends are posted monthly to the trust CD. The trustee is transferring these dividends monthly to his personal checking account which is outside the trust. The CD has an interest rate that currently is below market rates. The rate the CD is earning is less than half of the current CD rates. The CD has a remaining life to maturity of about two years. The trustee has been told by the financial institution if he breaks the CD to put into a current rate CD the penalty will invade the principal balance as the monthly dividends have been transferred to his regular checking account which is outside the trust. The financial institution will not waive the penalty, the trustee asked and they said no. What effect will the drop in principal due to the penalty have on the trust?


Many clients put their CDs into an irrevocable Medicaid trust. Why not? Five years later the CD will be protected from Medicaid. From the moment the CD is put in the trust, the CD will be producing income for the trust. The trust can be designed to pay that income to the Grantor, to the beneficiary, or to simply accumulate the income in the trust. This client’s trust allows the income to be paid to the beneficiary, who may also be the trustee.


Clients often want to break a CD to get a better rate. The fact that the income was paid to the beneficiary/trustee is irrelevant. Breaking the CD causes a penalty, and this is true whether a trust owns it or a person owns it. It is what it is….that is what you signed up for when you invested in a CD. No surprise there!

With all that preamble, it doesn’t answer the real question. The real question here is if the CD is broken and a penalty is paid (causing a drop in trust value), does this cause any problem with the trust for Medicaid purposes?


The answer is NO!

I hope this helps! Please forward this information to your friends and relatives to share these informative answers to some very commonly asked questions.


And, if anyone you know would like to receive this

Listen to Lawrence Letter, just have them email me at and I’ll add them to the list!


As always, please send me your questions. If you are thinking about it, others are probably too, so my answers will no doubt help you and many others.

Let’s stay connected.

Stay safe!