California Heir Liable to Reimburse State for Mother's Medicaid Benefits

A California appeals court has ruled that the heir of an estate who sold her interest in her mother’s house to her brother is liable to the state for reimbursement of her mother’s Medicaid expenses. Estate of Mays (Cal. App., 3d, No. C070568, June 30, 2014).

Medi-Cal (Medicaid) recipient Merver Mays died, leaving her house as her only asset. Ms. Mays’ daughter, Betty Bedford, petitioned the court to be appointed administrator of the estate, but she was never formally appointed because she didn’t pay the surety bond. The state filed a creditor’s claim against the estate for reimbursement of Medi-Cal expenses, and the court determined the claim was valid.  A dispute arose between Ms. Bedford and her brother, Roy Flemons, over ownership of the house. After the court determined Mr. Flemons owned a one-half interest in the property, Ms. Bedford and Mr. Flemons entered into an agreement in which Mr. Flemons paid Ms. Bedford $75,000 and transferred the house to his name.

The state petitioned the court for an order requiring Ms. Bedford to account for her administration of Ms. Mays’s estate. The court determined Ms. Bedford was liable to the state for the amount she received from Mr. Flemons because although she wasn’t formally appointed administrator, she was acting as administrator. Ms. Bedford appealed.

The California Court of Appeal, 3rd Appellate District, affirmed on different grounds. The court ruled that Ms. Bedford cannot be held liable due to her failure as administrator of the estate because she was never formally appointed administrator. The court held, however, that Ms. Bedford is liable as an heir of the estate who received estate property. According to the court, Ms. Bedford’s settlement with Mr. Flemons was “essentially an end-run around the creditor’s claim and the estate process” and “the $75,000 payment represented proceeds of the estate that would otherwise be available to satisfy creditors’ claims.” 

For the full text of this decision, go to:http://www.courts.ca.gov/opinions/nonpub/C070568.pdf

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

Supreme Court to Decide Whether Inherited IRA's Protected from Creditors

The U.S. Supreme Court has agreed to hear a case that will decide whether inherited individual retirement accounts (IRAs) are available to creditors in bankruptcy. The decision in Clark v. Rameker will resolve a split between the lower courts.

Heidi Heffron-Clark inherited a $300,000 IRA from her mother. Inherited IRAs must be distributed within five years. During the five-year period, Mrs. Clark and her husband filed for bankruptcy. The Clarks argued the IRA was exempt from creditors because bankruptcy law protects retirement funds. A district court agreed with the Clarks, but the 7th Circuit U.S. Court of Appeals reversed in Clark v. Rameker (714 F.3d 559 (2013)), holding that the money in the IRA no longer constituted retirement funds.

Meanwhile, the 5th Circuit U.S. 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 will resolve this issue later this term.

For more information about this case, click here.

The Ohio Legacy Trust: A New Asset Protection Trust

Ohio has joined the growing list of states, which have enacted domestic asset protection trust legislation. The "Ohio Legacy Trust Act" (the “Act”), takes effect on March 27, 2013, and permits, for the first time, statutory protection for the creation of self-settled spendthrift trusts called “legacy trusts”. One of the purported reasons for the Act is to enhance the attractiveness of Ohio as a jurisdiction in which to remain after retirement, rather than encouraging residents to move to other states that better protect assets. There are eleven states that now have domestic asset protection trust statutes, i.e., Alaska, Delaware, South Dakota, Nevada, Missouri, Tennessee, Wyoming, Oklahoma, Rhode Island, Utah and New Hampshire, and other states, such as Florida, have greater homestead protection than the State of Ohio.

The case for the necessity of an asset protection trust in Ohio was capably made by The Estate Planning, Trust and Probate Law Section of the Ohio Bar Association:

We live in a litigious society and adequate insurance may not be reasonably obtained at an affordable price to protect an insured from most claims. Some claims will exceed the available limits, in other cases coverage may be denied or the insurance company might fail. 

As an example: an executive was working from his home one weekend and had a business delivery at his house. The UPS delivery person slipped on his son’s skateboard and broke his back. The company insurance did not cover the accident, because it occurred off business premises. Both the homeowner’s insurance and the executive’s umbrella insurance policy declined coverage because it was a business delivery. Instead, the executive was personally liable for the entire judgment amount. 

Under the Act, creditors are generally prohibited from bringing any action: (1) against any person who makes or receives a qualified disposition of trust assets from a legacy trust; (2) against any property held in a legacy trust, or; (3)  against any trustee of a legacy trust. “Qualified disposition” means a disposition by or from a transferor to any trustee of a trust that is, was, or becomes a legacy trust. 

Asset Protection Entities Suffer New Assaults

Reverse Piercing of Corporate Veil Reaches Entity Assets

Generally, business entities such as corporations or limited partnerships are legally separate and distinct from the shareholders and members of such entities. When justice requires, however, courts have ignored the separation of the business and the individual and have allowed a creditor of the business to satisfy the debt from the assets of an individual closely connected to the business. This concept is known as "piercing the corporate veil."

A variation on the idea, called "reverse piercing of the corporate veil," allows someone to reach the assets of the business entity to satisfy a claim or judgment obtained against a corporate insider. In both instances, a court disregards the normal protections given to a business structure in order to prevent abuses of that structure.