Irrevocable Trust Fails to Protect Assets from Availability for Medicaid

"Comfort clauses" in an irrevocable trust are dangerous, and can undermine the objectives of the trust.  A New York appeals court provides another object lesson in the dangers of such planning, ruling that a Medicaid applicant's irrevocable trust is an available asset because the trust instrument gave the trustee too much discretion in the distribution of the trust principal after the trustee had used a home equity line secured by a trust asset to pay for the applicant's expenses. In the Matter of Pugliese v. Zucker (N.Y. Sup. Ct., App. Div., 4th Dept., No. 784 TP 19-00440, Oct. 4, 2019).

Anthony Pugliese was the beneficiary of a trust for which his son was the trustee. His son used a home equity line secured by a trust asset to pay Mr. Pugliese's living and caregiving expenses, which depleted much of the trust's value. Mr. Pugliese applied for Medicaid, but the state found that the trust was an available asset and denied him benefits.

Mr. Pugliese appealed, arguing that his son no longer wished to use his discretion as trustee to make distributions to Mr. Pugliese. The state affirmed the decision, and Mr. Pugliese appealed to court.

The New York Supreme Court, Appellate Division, affirmed, holding that the trust was an available asset because "the trust instrument gave the trustees broad discretion in the distribution of the trust principal, including for [Mr. Pugliese's] benefit."

An irrevocable trust for the purpose of Medicaid planning MUST provide all of the following in order to ensure that its assets are, subject to the applicable look-back, unavailable for determining Medicaid eligibility:

• You cannot own the assets;
• You cannot control the assets;
• The assets may not be used for your needs, and in particularly, your health needs. 

These trusts can be fashioned as "income-only trusts," where you have no ownership, control, or privilege to the principal of the trust, but the income from the principal is distributed to you.  This way, the funds in the trust are protected and you can use the income for your living expenses. For Medicaid purposes, the principal in such trusts is not counted as a resource, provided the trustee cannot pay it to you or your spouse for either of your benefits. If you do move to a nursing home, however, the trust income is countable, and will have to go to the nursing home.

Even if the trust is crafted properly, the conduct of the parties may undermine the trust.  This may, in fact, have been part of the problem in the Zucker case.   Even a wholly discretionary trust, like that in Zucker,  can be subject to a determination that you have a right  the conduct of the parties show the beneficiary has been able to freely access trust funds by simply asking.  In the Massachusetts case of Caruso v. Caruso,  which considered a trust for the purpose of property division in a divorce, the court found the beneficiary’s accountant, acting as trustee, amounted to a “yes man” for the beneficiary and was, therefore, in too close a relationship to exercise independent judgment. The court held that even though a trust is purely discretionary, when the beneficiary appears to hold de facto control of the trust, its property becomes subject to invasion. 

You should also be aware of the drawbacks to such an arrangement. An irrevocable trust cannot be changed, at least by you.  Changes in circumstances and changes to the law may impact your plan so adversely that you may regret the plan.

These trusts are also very rigid, so you cannot gain access to the trust funds even if you need them for some other purpose. For this reason, you should always leave an ample cushion of ready funds outside the trust.

These trusts may also increase the risk of institutional care.  When your Medicare hospital benefit runs out (often within a few days of your hospitalization, and very frequently before you are able to medically return home), you are left only the option of institutional care paid for by Medicaid.  This is, after all, the purpose of such planning, to make you eligible for Medicaid earlier.  If you want to age in place, you need to consider whether an irrevocable trust wholly frustrates your plan.  You may not direct payments from the trust for alternatives to institutional care, such as private nurses, home health care aids, or, in most cases, out -patient rehabilitation.  

Pocket Deeds Are Horrible Planning Instruments

I recently discussed with an estate planner the advisability of using a “pocket deed” to fund a revocable trust.  A pocket deed is a deed that is signed during a person’s life, but "pocketed," that is, not recorded, until after the person dies. Pocket deeds were traditionally used to transfer proper to heirs, but apparently in a more modern approach, it is now sometimes used to transfer property to a trust.  

This technique is usually intended to accomplish two goals:

1. Control – Unrecorded deeds allow the property owner to retain control of the property during his or her lifetime. Since the unrecorded deed is not a matter of public record, the owner remains the record owner of the property.  If the deed stays in the owner's possession )a bid assumption), the owner can destroy the deed if the owner changes his or her mind.
2. Probate – The recording of the deed after the owner's death is usually intended to avoid probate.  If it works (a big assumption), the transfer is treated as being effective when the deed was signed and the property won’t be included in the owner's probate estate.

The biggest objection I have to the modern approach is that it fails to appreciate the advantages of the trust.  In fact, advising a person not to record the deed  suggests that there is some disadvantage to transferring the property to the trust. If the trust is a revocable trust, and you are the trustee, you control the property before and after the transfer.  Since the purpose of the trust is to avoid probate, and transferring the property during your life accomplishes that, why not record the deed?

Pocket Deeds Frustrate Good Planning

Regardless, unrecorded pocket deeds are just a bad idea.  They are inconsistent with the fundamental bases of good planning, which assumes the worst, and on that basis implements a plan before the worst happens to derail the plan.  Worst cases include house fires, lost documents, improperly executed or authenticated documents, scrivener (drafting) errors, and the like. Implementing your plan today means that you will solve and resolve these problems.  Pocketing a deed for recording after your death means that these risks may frustrate your plan.  

Consider the following examples:

• A deed is prepared based upon the prior deed.  The County Engineer subsequently changes property description rules, and refuses to accept for recording property descriptions using historic references.  Years later the owner dies, leaving a signed deed that is not recordable given the subsequent changes.  The property must be probated. If the deed had been recorded when prepared, it would have been owned by the trust at the owner's death, and there would be no probate.  

• The result in the previous situation would be the same if there was an error in the title owner's name, or if the notary forgot to affix a seal, or the signature of the owner was defective, or the property description was defective.  If the deed is presented for recording and rejected by either the County Engineer or County Treasurer while the owner is alive, the owner simply corrects the deed and submits the corrected deed for recording.  If the deed is rejected after the owner has died, there is no one but the executor of the owner's estate that has authority to fix, correct, or amend the deed.  

• A deed is prepared and pocketed by placing the deed in a drawer.  After the owner's death, the family cannot find the deed, or inadvertently disposes of it when cleaning the drawer of other miscellaneous unnecessary paperwork.  Perhaps the person who finds the deed destroys it intentionally, in order to create mischief or opportunity (read on for an example how this might create opportunity).  A lost or destroyed pocket deed is unable to serve any purpose. The property must be probated. 

• A deed is prepared transferring several properties, each to a different child.  The deeds are placed in the family's home safe.  Several years later, one child finds the deeds while retrieving other paperwork from the safe.  He removes the deed transferring the property to himself and records it.  At a minimum the owner no longer controls the property.  More, the owner suffers the risk of loss realized by the child.  If the child declares bankruptcy, for example, the property may be lost to satisfy creditors.     

The foregoing examples simply describe how use of a pocket deed can result in the frustration of your estate plan.   But, that isn't the worst of the pocket deed story; pocket deeds can have significant adverse consequences.  The last example demonstrates how conveying property can create risks.  By the way, none of the examples are problems for an owner who simply conveys his or her real property to his or her trust.

Unrecorded Deeds Can Create a Cloud on Title

Under the laws of most jurisdictions, a deed is not effective until it has been properly signed and delivered.  The delivery requirement is important. Just signing the deed is not enough to complete the transfer.  Delivery of the property is presumed if the deed is publicly recorded.

In ordinary real estate transfers, the deed is delivered and recorded at the time of the conveyance.  But with pocket deeds, the deed is not recorded. There is no proof of delivery during the life of the owner.  This raises a number of questions.  Was the deed delivered to the transferee at all? Can delivery be proved? If delivery was not made, is the failure evidence that the owner changed his or her mind?  If the property is not delivered before the death of the owner, the transfer may be void or voidable.  If the transfer was a gift, meaning that no consideration changed hands, the transfer is not legally enforceable by the transferee.

Questions like these can create a cloud on title, meaning that title insurers will not write a policy on the property without some legal action to clear the title. The transferee would have every incentive to claim that the deed was delivered before the owner died, and the owner is not able to say otherwise. In these circumstances, title companies may be reluctant to simply accept the transferee’s word that the deed was properly delivered prior to the owner's death.  This is especially likely if the deed has remained in pocket (unrecorded) for years before the owner's death.

If the deed recording occurs shortly after execution of the deed, a title company will simply presume that there was valid delivery. But a conservative title company may require a declaratory action to quiet title before it will issue a policy on the property.  An action to quiet title will convert statements regarding delivery to legal testimony in a legal proceeding, after publication and notice to anyone who may claim otherwise. A title company can then be sure that there aren’t any competing claims to the property.

If a title company will not write a policy on the property without a declaratory action, the title to the property is unmarketable. The trustee or new owner will be unable to sell, mortgage, or otherwise deal with the property until the title issue is resolved.  The legal fees for bringing an action to quiet title are usually more expensive and time consuming than proper planning on the front end, and may result additionally in probate.

Unrecorded Deeds Can Give Creditors a Lien on the Property

An unrecorded deed does not put third party creditors on notice that the property has been transferred. This means that the transferor’s creditors (including creditors of his or her estate) may put a lien on the property. This leaves the transferee open to a claim by the transferor’s creditors. If that happens, the transferee would need a legal action to deal with the lien.

Unrecorded Deeds Can Create Tax Issues

Assuming that the owner does not have an estate that is taxable for Federal Estate Tax purposes (i.e., assuming the owner’s estate is worth less than $5.25 million under current law), it is usually better from a tax perspective for the owner to hold onto the property until death. This will give the new owner a full stepped-up basis in the real estate, effectively erasing any appreciation that accrued while the owner was alive. This can result in a significant income tax savings upon sale of the property. This tax planning opportunity is forfeited when a pocket deed is signed during the owner's lifetime.

Property gifted during the owner's life does not receive a step-up in basis.  The transferee would be forced to pay capital gains taxes on the sale of the property using the owner's original basis to determine the taxable gain.

In addition, the transferor is required to file a federal gift tax return (Form 709) for any transfer of property that exceeds the annual exclusion amount (currently $14,000). Since most real estate is worth more than $14,000, the transferor is usually required to file this return when the pocket deed is actually signed. The hassle and expense of filing the Form 709 can be avoided by holding the property until death.

The proponents of the modern version will correctly note that none of those opportunities apply when the property is transferred to a revocable trust.  But, the real nature of the transfer is nonetheless concealed until after the owner's death.  What if a taxing authority argued that the concealment suggested fraud (concealment is an indicia of fraud), and suggested the property was also actually conveyed to the heirs by an alternate pocket deed, which deed was destroyed upon the owner's death.  In this instance the parties conspire to structure a transaction so that it can be characterized in the most favorable way possible after the occurrence of one of several possible events.  In this way, the parties can "have their cake and eat it too."  This can result in the transfer being characterized so as to create a taxable event, and corresponding tax consequence, prior to death.  In other words, what would not have been taxable, can be made taxable by constructing the transaction is a suspicious way.

This danger is precisely why an Ohio senior should never prepare a pocket deed conveying the  home to a child.  The senior will likely claim a homestead exemption reducing the property taxes.  The homestead exemption is not available to the child, especially if the child is not living in the home.  When the the pocket deed is recorded after death, the child will be responsible for repaying the homestead exemption, since the senior was not entitle to the exemption after conveying the property to his or her child, together with interest and penalties for the unpaid taxes.      

Unrecorded Deeds May Invite Legal Challenge

Unrecorded deeds will not necessarily  avoid probate.  As explained above, anything that happens that prevents recording of the deed will necessitate probate of the property.  In addition, a pocket deed may create the opportunity for legal challenge or contest.

I once represented a child that was disinherited by his father's trust.  Of course, upon reviewing the trust, I advised my client that normally there would be little opportunity to contest the trust, and suggested he resign himself to the fact that the trust would be administered according to his father's wishes.  This was particularly unfortunate under the circumstances, because, although the son was once estranged from his father, the father and son had in the intervening years reconciled, and were for several year's before the death of the father on good terms.

Shortly after the father's death, a sibling shared the harrowing work the siblings were forced to perform in days before and after the father's death.  Apparently the deed was just one of many assets that were left out of the trust, until the father fell unexpectedly ill.  The new information breathed life into the son's claim under the trust.  Was it possible that the father has refused to fund the trust given reservations regarding the disinheritance?  If the trust was not an expression of the father's wishes through mistake or change in circumstances, the son would have a viable claim.  Although the matter could easily have been resolved in an expensive court action, it was resolved by settlement.  The settlement, regardless of the circumstances compromised the father's wishes; the son was neither disinherited nor treated the same as his siblings.  It is unlikely that is how the father intended his estate to be resolved.

A Last Will and Testament is more susceptible to challenge than is a trust.  If it is determined that the property is not owned by the trust, and the Will is successfully challenged, the distribution of the estate can be altered from what the owner intended.  If the probate estate is distributed intestate, i.e., without a Will, the estate is distributed according to the heirs at law.  Who the beneficiaries of the trust are is irrelevant to property being probated where there is no Will pouring the estate over into the trust.

In Ohio, perhaps the most famous case arising from a  contest to a deed recorded after death is the case Schueler v. Lynam, 80 Ohio App. 325, 75 N.E.2d 464 (App. 2 Dist. 1947). In that case, the court held that the pocket deed was null and void, in part because partys of the deed required completion after the death of the owner. 

But other states, too, have invalidated pocket deeds as perpetuating fraud. 

Unrecorded Deeds Surrender Intended Benefits of a Trust

Among the possible intended benefits of a trust are protection of the assets from court-appointed guardianship, protection from certain creditors after death, seamless management of the assets during periods of unavailability, incompetency, or incapacity.  These, and many other benefits of trust management are lost when assets are retained in the owner's individual name.  Quite simply, pocket deeds surrender any of the lifetime planning benefits of a trust.  Usually, this means that either the individual was not properly apprised of the benefits of trust planning, or if being directed by a professional representative (agent, financial planner, or attorney), the representative is unaware of the benefits, or is seeking to obtain some other objective.

Because pockets deeds don't always work, almost always take risks that could be avoided by simply implementing a plan, and have unintended consequences, like most attorneys, I do not recommend their use.  

Finally, if you  find an article written by an attorney concluding that pocket deeds are recommended and advisable, please send it to me.  If you are interested, there are many suggesting that pocket deeds should be avoided.  For example, go here, here, here, here, and/or here. 

  

Trust Naming Medicaid Applicant as Co-Trustee Is Available Asset

If planning for long-term care involves Medicaid eligibility planning, the applicant must turn over ownership and control of assets.  Otherwise, the assets will be countable, and the applicant will be ineligible for Medicaid. A most recent example comes from the State of Washington.  A  Washington appeals court recently ruled that a testamentary trust that named a Medicaid applicant as the beneficiary is an available asset because the applicant retained some control over the trust and because the funds in the trust came from either herself or her husband. Matter of Estate of Berto v. State (Wa. Ct. App., Div. 3, No. 33591-7-111, July 19, 2016).

Margaret Berto's husband died, leaving a testamentary trust that named her as co-trustee and the only beneficiary. The trust permitted distributions only at the discretion of the trustees, but provided that Ms. Berto could not be the sole trustee and could not solely determine distributions. Ms. Berto sold her home and deposited some of the proceeds in the trust.

Ms. Berto thereafter applied for Medicaid, and the state counted the trust as an available asset and denied Ms. Berto benefits. Ms. Berto appealed, arguing that the trust was not an available asset because she had limited control over the trust and there were restrictions on distributions.

The Washington Court of Appeals affirmed the state's decision, holding that the trust is an available asset. The court ruled that the trust does not fall under any of the exemptions for trusts in the state Medicaid regulations because "Ms. Berto had some control over the trust and all of the funds came from either her husband or herself."

Fraudulent Transfer Claim Against Nursing Home Resident's Sons Survives

Nursing homes and state departments of Medicaid will become more proficient in developing and implementing techniques to pursue assets in resource recovery over time.  Accordingly, planning techniques must be more, not less, sophisticated.  An excellent exampleof just how devastating simple, self-help, plans lacking in sophistication can be, is the planning of the Nyce brothers.  A U.S. district court recently ruled that a nursing home can assert its case for fraudulent transfer against the brothers, who transferred their mother's funds to themselves, because the claim survived the resident's death. Kindred Nursing Centers East, LLC v. Estate of Barbara Nyce (U.S. Dist. Ct., D. Vt., No. 5:16-cv-73, June 21, 2016).

Roger and Kinsley Nyce were agents under their mother's power of attorney. Their mother, Barbara Nyce, entered a nursing home and signed an admission agreement in which she agreed to pay the nursing home or apply for Medicaid. Ms. Nyce filed for Medicaid, but the application was denied because the Nyce brothers withdrew money from Ms. Nyce's bank accounts to pay themselves. Ms. Nyce also transferred her real estate to her sons. Ms. Nyce died owing the nursing home $137,586.92.

After Ms. Nyce died, the nursing home sued her estate as well as the Nyce brothers individually for fraudulent transfer. The estate cross-claimed against the Nyces, alleging breach of fiduciary duty and conversion. The case was removed to federal court, and the Nyces moved to dismiss the claims. The Nyces argued that the estate couldn't sue for fraudulent transfer after Ms. Nyce died and that the estate's cross claim fits into the probate exception to federal jurisdiction.

The United States District Court, District of Vermont, denied the motion to dismiss. The court held that the fraudulent transfer claim survived Ms. Nyce's death because state law does not require that there be a pending claim in order for an action to survive. The court further holds that the probate exception cannot be used to dismiss widely recognized torts, such as breach of fiduciary duty.

The brothers plan for protecting their mom's assets didn't turn out to be so Nyce. 

"Comfort Clauses" Hobble an Irrevocable Trust for Medicaid Planning

When I counsel clients regarding irrevocable trusts, clients often discuss the possibility of provisions giving them more control over the trust. Many have attended seminars where they are told that a "safety valve" can permit the irrevocable trust to be no more cumbersome or limiting than a revocable trust. There is no "safety" valve. These provisions are usually for the purpose of comforting the owner that they are not really turning ownership and control of assets over to another. These "comfort clauses" can make the owner more comfortable, but they can also threaten the integrity of the plan.

There is little question that provisions permitting trust protectors, and changes to the trust resulting from changing circumstances should be considered, but an irrevocable trust should be somewhat uncomfortable.   An irrevocable trust can protect assets only if there is a marked change in the owner's relationship with the assets; the owner must no longer have ownership or control of the assets, or the trust will not work for its intended purpose.  If a client is not, at least initially, uncomfortable with an irrevocable trust used for asset protection, the client probably does not understand the trust.

A recent New Hampshire case demonstrates the risk of diluting an irrevocable trust with "comfort clauses." New Hampshire's highest court recently ruled that a Medicaid applicant's irrevocable trust is an available asset even though the applicant was not a beneficiary of the trust because the applicant retained a degree of discretionary authority over the trust assets. Petition of Estate of Thea Braiterman (N.H., No. 2015-0395, July 12, 2016).

Thea Braiterman created an irrevocable trust in 1994, naming herself and her son as trustees and her children as beneficiaries. In 2008, Ms. Braiterman resigned as trustee, but the trust authorized her to appoint additional and successor trustees, including the power to appoint herself. The trust also gave Ms. Braiterman the ability to appoint any part of the income of the trust to any of the trust beneficiaries. The trust also did not limit her ability to impose conditions on the appointment of principal to the beneficiaries.

Ms. Braiterman entered a nursing home and applied for Medicaid. The state determined that the trust, which was valued at $156,000, was an available asset and denied her benefits. After a hearing, Ms. Braiterman appealed the state's decision to court.

The New Hampshire Supreme Court affirms the denial of benefits, holding that the trust is an available asset due to the degree of her discretionary authority over the trust. According to the court, an irrevocable trust is a countable asset even when the applicant is not a beneficiary if there are any circumstances in which payment can be made to the applicant. The court rules that there was nothing in the trust "to preclude [Ms. Braiterman] from requiring her children, as a condition of their receipt of the Trust principal, to use those funds for her benefit."

The question is whether comfort clauses are worth the cost and expense of the trust failing to accomplish its intended purpose. 

Ohio Attorney General Issues Warning About Grandparent Scam

Ohio Attorney General Mike DeWine recently issued a press release warning of phone scams targeting Ohio grandparents following an increase in complaints:

"In the past month, 11 Ohioans have reported losing an average of $3,800 to the “grandparent scam.” Most said they paid over the phone using iTunes gift cards after receiving a call saying their grandchild was in trouble.

One man received a call from someone who claimed to be his granddaughter. The granddaughter supposedly was in jail and needed $2,000 in iTunes cards to be released. After the man paid, he realized it was a scam.

“Many grandparents will drop everything to help their grandchildren,” Attorney General DeWine said. “That’s why this scam works. It’s terrible not only because of the money loss but because of the fear it instills in people. Our goal is to protect Ohio’s families and help them recognize the warning signs of a scam before it's too late.”

Since the start of 2016, the Ohio Attorney General's Consumer Protection Section has received about two dozen consumer complaints involving grandparent scams.  The scam often begins with a phone call telling grandparents that one of their grandchildren has been in a car accident, caught with drugs, or put in jail.

The caller pretends to be the grandchild, an attorney, or a law enforcement officer and tells the grandparent to send money to have the charges dismissed, to cover court costs, or to allow the grandchild to return home.

The grandparent is told to go to the store right away, to buy several gift cards, and to read the card numbers over the phone. Using this information, the scammer drains the cards’ funds almost instantly.

As part of the scheme, grandparents often are instructed not to talk to other people (such as the grandchild’s parents) about the problem. Callers may even threaten to shoot or harm the grandchild if the grandparent refuses to pay. 

If grandparents pay once, they likely will receive additional calls seeking more money, supposedly for attorney’s fees or other unexpected costs. Eventually, grandparents discover that their grandchild was not truly in trouble. 

Attorney General DeWine encouraged consumers to take the following steps to protect against grandparent scams: 

• Communicate with your family members. Talk to your family about scams and discuss how you would communicate during a true emergency. If you receive a call from a grandchild or another family member who claims to be in trouble, contact someone else (such as the grandchild’s parents) to determine if the person truly needs your help, even if you’ve been instructed not to contact anyone else. When in doubt, ask questions only your real family members would know how to answer, such as the last time you saw each other.
• Limit the amount of information you share online. Don’t post upcoming travel plans or detailed personal information online, and encourage your family members to take similar precautions. Check your account privacy settings and limit who can view your information. Be aware that scammers may use information posted on social media or publicly available online to learn more about their targets and to make their ploys seem believable.
• Be wary of unusual payment requests. If a caller demands that you pay over the phone using a gift card or a prepaid reloadable card, it’s likely a scam. Also be wary of requests for payment via wire transfer. These are preferred payment methods for scammers because it is difficult to trace or recover the payment once it is provided.

The Ohio Attorney General’s Office warns consumers about scams and offers a variety of educational materials, including a phone scams checklist."

The scam first appeared in 2008, prompting warnings from the Better Business Bureau (BBB).  The the scams quickly grew in sophistication and number, prompting the FBI to issue a warning about the scams. The AARP warned consumers about the "Grandparent Scam" in 2012.  In at least one tragic case, the scam turned deadly resulting in the loss of a life. 

To learn more or to report scams to the Ohio Attorney General’s Office, visit www.OhioProtects.org or call 800-282-0515.

If you are a member of a group or organization and want a simple flyer warning of and describing the scam, while providing useful tips regarding protective measures, go here.

Additional Resources:

If you have received a phone call from someone claiming to be your grandchild, or you have fallen victim to this scam you may wish to contact your local law enforcement agency or the following agencies:

Federal Trade Commission

Consumer Response Center

600 Pennsylvania Avenue NW

Washington, D.C. 20580 

(877) 382-4357

www.consumer.ftc.gov

Federal Bureau of Investigation

www.fbi.gov   

Tenant's Estate Sues Landlord for Buyout Payment- Contracts and Agreements Are Assets

Estate planning is a discipline that requires periodic consideration and reconsideration of your circumstances as they change. When the estate plan involves a trust or other entity, contracts and agreements that are assets of your estate, should work within the estate plan.  Oil and gas leases, land installment contracts, rental agreements, installment sales, notes, security interests that you take in other's property, and the like, should be crafted in order to ensure that these assets remain viable assets of your estate after your death, and are marshaled and disposed in accordance with your wishes.  Sometimes, this is a simple task of assigning or conveying the rights to your trust, company, or other entity. These are too often overlooked, though, leading to unnecessary loss, risk, and legal dispute.  

A recent example resulted in a New York City landlord and the estate of one of the landlord's tenants fighting over whether the landlord is required to continue paying on a buyout of the tenant now that the tenant is deceased.

Walter Blomeyer, a black-cab driver, lived for decades in a single-room apartment in a building owned by Icon Realty Management, according to a recent article in the New York Post.  When Icon decided to convert the building into luxury condominiums, it offered to pay Mr. Blomeyer $525,000 to  induce him to move. Mr. Blomeyer accepted the deal, which required Icon to pay Mr. Blomeyer an initial sum of $300,000, allow him to live rent-free in another one of their buildings for a year, and make a final $225,000 payment.

Unfortunately, Mr. Blomeyer died in February of a heart attack before the final payment was made.  Icon has refused to make the payment to Mr. Blomeyer's estate. Mr. Blomeyer's estate was forced to file suit against Icon for $225,000. According to the Post, Icon's attorney argues it doesn't have to pay the estate because there was nothing in the agreement about the estate benefiting from the agreement.  "His estate is entitled to nothing," the lawyer said.

If the agreement had been reviewed by the estate planning attorney prior to execution, the agreement could have been easily modified to remove any doubt that the obligation was owed to Mr. Blomeyer, "his heirs and/or assigns" and that payments could be made to him, "his estate, his personal representative, or the trustee of his trust." Simple language, and as my niece would say, "mischief managed."

For the article about this case from the New York Post, click here. 

Man Can't Challenge Discharge of Brother's Debt for Mom's Care under Filial Responsibility Law

A bankruptcy court has ruled that a man does not have standing to prevent the discharge of his brother's debt owed to their mother's assisted living facility under the state's filial responsibility law. In re: Skinner (Bankr. E. D. Pa., No. 13-13318-MDC, Oct. 8, 2014).

Dorothy Skinner lived in an assisted living facility until she was evicted for non-payment. The facility sued Ms. Skinner's sons, Thomas and William, under Pennsylvania's filial responsibility law. The court entered a default judgment against Thomas for $32,224.56. Thomas filed for bankruptcy and sought to discharge the debt.

William filed a claim in the bankruptcy court, arguing that Thomas's debt is non-dischargeable because it resulted from fraud and embezzlement. William argued that Thomas used their mother's assets for his personal expenses, so if William is liable to the assisted living facility, he is entitled to be reimbursed by Thomas.

The U.S. Bankruptcy Court, Eastern District of Pennsylvania, dismissed the claim, holding that William does not have standing because he is not a creditor of the debtor. According to the court, even if Thomas's actions injured Mrs. Skinner, that conduct was directed at Mrs. Skinner and her property, not at William. The court rules that William "may not invoke a cause of action that belongs to his [m]other to remedy the [Thomas's] liability for the Support Claim."  

Of course, underlying this case of one sibling fighting another is the liability created by filial responsibility; the siblings are jointly and severally liable.  Joint and several liability means that the creditor, in this case the assisted living facility, can enforce and collect the debt from the siblings jointly, or any one or more of the siblings severally.  If one sibling is unable to pay, the full debt falls to the other(s).  The assisted living facility can collect the full debt from any one of the siblings who is most likely to pay quickly.  Hence, one sibling seeks to stop a bankruptcy court from exonerating the other, leaving the sibling that does not file for bankruptcy solely responsible for the debt.  

Filial responsibility will only create more instances of familial discord and conflict as circumstances cast these obligations to fall inequitably among family members. Moreover, the court suggested that the Pennsylvania law does not allow for an action for contribution or reimbursement; if one family member is held responsible and another is not, the responsible family member may not be able to do anything about it.  Bottom line: parents' efforts to treat children equally or equitably will likely be sacrificed on the altar of Medicaid resource recovery in a filial responsible world. 

To read more about filial responsibility, click here, here, here, here, and here.  

Elderly Couple May Be Responsible for Adult Son's Unpaid Medical Bills

An elderly Pennsylvania husband and wife are being asked to pay their deceased adult son's medical bills under a law making family members responsible for a loved one's unpaid bills. The case is a reminder that such “filial responsibility” laws may go both ways – requiring parents to pay the debts of adult children as well as the children to pay for their parents'.  

For those involved in estate and retirement planning, the case underscores just how clueless policymakers are to the challenges of proper planning.  The financial risk of filial responsibility debt adds yet another layer of uncertainty, and non-quantifiable risk to planning considerations.  For the well-informed senior, asset protection planning is the order of the day, since only asset protection planning will mute the blow of unexpected financial filial responsibility.  But, the vast majority of ill-informed seniors will continue to accept too much risk for too long in their retirement plans in order to reach an ever receding horizon represented by the amount of money necessary to live comfortably safe from risk.  This species of planning has brought current financial and retirement planning to the crisis point at which most seniors find themselves today.  

Alternately, seniors and their children, recognizing the seemingly insurmountable hurdles of these risks will simply eschew savings and financial planning- living month-to-month, year-to-year as best they can, relying upon the harsh and dangerous hand of government benefits as their safety net.  Many will find the benefits they imagined to be illusory.  Others will find that the benefits come at a cost- sacrifice of independence, quality of care, quality of life, and control.  Never before in history have so many risked so much for so little.     

Peg and Bob Mohn's son died at age 47, leaving unpaid medical bills. Now according to an article in The Morning Call, debt collectors are trying to dun the Mohns using an archaic state law that was not enforced until recently. Pennsylvania is one of at least twenty-eight (28) states that currently have filial responsibility laws. These laws usually make adult children responsible for their parents’ care if their parents can't afford to take care of themselves, but some of the laws also make parents responsible for their childrens' care. Filial responsibility is the law in the State of Ohio, although like Pennsylvania a few years ago, the law was rarely enforced.

Filial responsibility laws, which originated before the advent of the modern public support system, have been rarely enforced since these public support systems were enacted. States and health care providers have been clamoring for states to begin enforcing the laws in order to recover medical expenses, including Medicaid payments. In May 2012, a Pennsylvania court found an adult son liable for his mother's $93,000 nursing home bill under the state's filial responsibility law.

According to attorney Stanley Vasiliadis who is quoted in the Morning Call article, these laws provide additional incentive for people to plan their estates. Without proper planning, children could be on the hook for their parents' nursing home bills, and vice versa.

States with filial responsibility laws include: Alaska, Arkansas, California, Connecticut, Delaware, Georgia, Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, Montana, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia, and West Virginia. Two states, Idaho and New Hampshire, recently repealed their filial responsibility laws, but elder law attorneys in Pennsylvania haven’t made much headway in convincing their legislators to repeal.

These laws differ from state to state.  If you live in a state that still has such a law on the books, check with your attorney to find out how you can protect yourself from a child or parent’s debts. 

For more information on filial responsibility laws, go here. 

Inherited IRA's are not Exempt from Creditors in Bankruptcy

In a unanimous opinion, the U.S. Supreme Court has ruled that funds held in an inherited individual retirement account (IRA) are not exempt from creditors in a bankruptcy proceeding because they are not retirement funds. Clark v. Rameker (U.S., No. 13-299, June 13, 2014).

Heidi Heffron-Clark inherited an IRA from her mother. Her inherited IRA had to be distributed within five years, and Ms. Heffron-Clark opted to take monthly distributions. During the five-year period, Ms. Heffron-Clark and her husband filed for bankruptcy and claimed that the IRA, worth around $300,000, was exempt from creditors because bankruptcy law protects retirement funds.

The bankruptcy court found that the IRA was not exempt because an inherited IRA does not contain anyone's retirement funds. Ms. Heffron-Clark appealed, and the district court reversed, ruling that the exemption applies to any account containing funds originally accumulated for retirement. The Seventh Circuit Court of Appeals reversed, holding that the money in the IRA no longer constituted retirement funds, while the Fifth Circuit Court of Appeals decided in In re Chilton (674 F.3d 486 (2012)) that funds from an inherited IRA should be exempt. The U.S. Supreme Court agreed to resolve the conflict.

The U.S. Supreme Court affirmed the Seventh Circuit's decision in Clark, holding that the funds held in inherited IRAs are not "retirement funds." In a unanimous opinion delivered by Justice Sotomayor, the Court finds that funds in an inherited IRA are not set aside for retirement because the holders of inherited IRAs cannot invest additional money in the account, are required to withdraw money from the account even though they aren't close to retirement age, and may withdraw the entire balance of the account at one time.

If you want to ensure that your IRA's are inherited by your heirs and remain exempt from their creditors, see an elder law attorney.  

For the full text of this decision, go to: http://www.supremecourt.gov/opinions/13pdf/13-299_mjn0.pdf

Bankruptcy Court Refuses to Discharge Granddaughter’s Debt to Nursing Home- Lessons for Caregivers

A U.S. bankruptcy court refused to discharge an Ohio woman's debt to a nursing home for the cost of her grandmother's care, finding there exist questions regarding whether the woman knew a gift she had received from her grandmother was an improper transfer of assets for Medicaid purposes and whether the woman intended to defraud the nursing home. In re Donley (Bankr. N.D. Ohio, No. 13-60758, April 17, 2014).

On October 6, 2011, Michele Donley signed an agreement admitting her grandmother, Virginia Carnes, to a nursing home.  She signed a second agreement accepting personal liability for the cost of services provided.  In the admissions agreement, and in two subsequent Medicaid applications, Ms. Donley denied that her grandmother had transferred any assets that might affect her grandmother's eligibility for Medicaid benefits.

Ms. Carnes, however, had gifted $50,000 to Ms. Donley in 2007, which Ms. Donley used as a down payment on a home. The gift  was determined to be an "improper transfer" thereby resulting in a transfer penalty which made Ms. Carnes' ineligible for Medicaid benefits until February 2013. Ms. Donley was unable to keep up with payment for her grandmother's care due to the period of ineligibility, and the nursing home filed an eviction action and later obtained a judgment of $17,441.50 against Ms. Donley for unpaid services.

Ms. Donley filed for bankruptcy protection, and sought to have the debt discharged.  The nursing home opposed the discharge of the judgment ostensibly on the grounds that Ms. Donley acted willfully or maliciously in causing the nursing home's loss.  Section 526 of the Bankruptcy Code excepts from discharge debts that are willfully or fraudulently procured, or resulting from willful or malicious conduct.    

Ms. Donley filed a motion for summary judgment, arguing that the nursing home lacked evidence to establish the elements of a claim, which she argued required a showing of fraud. The nursing home countered that considering Ms. Donley's multiple misrepresentations regarding her grandmother's transfer of assets, questions of fact existed about Ms. Donley's state of mind, making summary judgment inappropriate.

The United States Bankruptcy Court, N.D. Ohio, agreed with the nursing home and denied Ms. Donley's motion for summary judgment. The court determined that there existed a genuine question of fact whether Ms. Donley knew the $50,000 gift from her grandmother was an improper transfer at the time she signed the agreement and whether her misrepresentation was intentional or reckless.

There are several important lessons to take away from the Donley case.  First, Medicaid planning is an important consideration any time that a person wants to make a gift to another.  It is possible, even likely, that Ms. Donley's grandmother did not intend to make her granddaughter financially responsible for her long term care when she made the gift that permitted her granddaughter to purchase her home, but that is exactly the resulting legal and financial consequence.

Second,  caregivers, family members, and/or fiduciaries should have nursing home admission agreements reviewed by counsel before signature.  It is likely that an advising attorney would have explained the consequence of signing a personal guarantee, and absent such a guarantee, the nursing home's case would have been more difficult to prosecute.

Third, When applying for Medicaid, disclosure of all gifts must be made, regardless whether the parties intended the gifts as long-term care planning gifts, or whether the gifts might be overlooked.  The State is quite proficient at discerning improper transfers, and financial transactions, regardless the value, leave a footprint.

Fourth, counsel should be retained by caregivers, family members, and/or fiduciaries prosecuting any application for Medicaid.  Family members often reason that, since there is no value to the applicant's estate, the cost of counsel is unwarranted.  Counsel should be retained for the purpose of advising the person assisting in preparing or otherwise prosecuting the application  in order to protect his or her estate.  It is unclear what options might have been available to Ms. Donley had counsel been fully apprised of the situation (non-institutional care, mortgage, reverse mortgage, establishing residence of the grandmother in daughter's home and qualifying her care as necessary to avoid nursing home care, as examples),  but it is apparent that proceeding without regard for the ultimate possible consequence was an expensive, and possibly financially disastrous strategy.

Finally, nursing homes do evict residents.  There is a common misconception that nursing homes will always bear the financial burden of an indigent resident.  Nursing homes are not hospitals, many of which are required by federal law to provide care to indigents.  A nursing home will protect itself legally and financially, as it should for its own financial health, and ultimately for the health and safety of its residents.

Nursing homes have excellent lawyers representing their interests.  Likewise, caregivers and fiduciaries should have excellent lawyers representing their interests.  

For a full text of the decision, click here.     

Understanding the Medicaid Look-back Period

Medicaid uses a "look-back" period in determining Medicaid eligibility.  Medicaid, unlike Medicare, is a means-tested program, which means that you are only eligible for it if you do not have sufficient means, or have very few assets. The government does not permit the transfer all of a person's assets in order to qualify for Medicaid, so it has imposed a penalty on people who transfer assets without receiving fair value in return, often called a transfer penalty.  Transfers of assets for less than fair market value are considered "improper transfers."

In order to identify who has transferred assets, states require a person applying for Medicaid to disclose all financial transactions he or she was involved in during the five (5) years immediately prior to submitting the Medicaid application. This five-year period is known as the "look-back period." The Department of Medicaid or other appropriate state agency determines whether the Medicaid applicant transferred any assets for less than fair market value during this period.

Any transfer can be scrutinized, no matter how small. There is no exception for charitable giving or gifts to grandchildren. Informal payments to a caregiver may be considered a transfer for less than fair market value if there is no written private care agreement, and even these are scrutinized carefully. Similarly, loans to family members can trigger a penalty period if there is no written documentation establishing the existence and reasonableness of the loan. The burden of proof is on the Medicaid applicant to prove that the transfer was not made in order to qualify for Medicaid.

Transferring assets to certain recipients will not trigger a period of Medicaid ineligibility even if the transfers occurred during the look-back period. These exempt recipients include the following:

• A spouse (or a transfer to anyone else as long as it is for the spouse's benefit);
• A blind or disabled child;
• A trust for the benefit of a blind or disabled child;
• A trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances).  

In addition, special exceptions apply to the transfer of a home. The Medicaid applicant may freely transfer his or her home to the following individuals without incurring a transfer penalty:

• The applicant's spouse;
• A child who is under age 21 or who is blind or disabled;
• Into a trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances);
• A sibling who has lived in the home during the year preceding the applicant's institutionalization and who already holds an equity interest in the home;
• A "caretaker child," who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant's institutionalization and who during that period provided care that allowed the applicant to avoid a nursing home stay.

If the state Medicaid agency determines that a Medicaid applicant made a transfer for less than fair market value, it will impose a penalty period. This penalty is a period of time during which the person transferring the assets will be ineligible for Medicaid. The penalty period is determined by dividing the amount transferred by what Medicaid determines to be the average private pay cost of a nursing home in your state.

Transfers to a person's revocable trust are not considered improper transfers, because they do not affect "ownership" for purposes of Medicaid.  In other words, a revocable trust is not a Medicaid planning trust and does not shield assets from Medicaid spend down.  In Ohio, a couple may apply for and receive Medicaid if the home is in their revocable trust, due to changes to the law in 2016.  An attorney should be consulted nonetheless because leaving a home in a trust after Medicaid eligibility can be disadvantageous and inadvisable, of course depending upon the trust terms.  Consult an attorney when applying for Medicaid, and after eligibility to ensure proper management of the assets.  

If you have transferred assets within the past five years and are planning on applying for Medicaid, consult with your attorney to find out if there are any steps you can take to prevent incurring a penalty.

Revised 12/1/16