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This one has been bothering me for a month because I fail to see the reasoning. It's based on there not being an "adverse party," even when in the cases I work with, the trustee is under court supervision. It's considered a "grantor trust" because it was not created by a third party, but how can a newborn child be considered the "first party" for a trust arising from medical malpractice at the moment he was born?
I traced this back to a PLR from 2010 (PLR-129484-10), which involved a deceased father who named his disabled son as the beneficiary of an IRA. There is no court approval involved. Is the court, or the court-supervised trustee, an "adverse party" to take this out of the "grantor trust" category? I don't think the mumbo-jumbo about what's left over going to the Medicaid provider, has anything to do with it. Those are just terms that may be required in some cases. In fact, they might be read as creating an "adverse party" where one doesn't otherwise exist.