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.  

Hapatitis Infection Risk in Nursing Homes Up 50%; Infection Risk Across the Board Increases

The rate of nursing home infections increased during a recent five-year period, with especially dramatic surges in multi-drug resistant organisms and viral hepatitis, according to recently published findings from Columbia University School of Nursing and the RAND Corporation, and reported in McNight's.

The prevalence of viral hepatitis in nursing homes increased 48% between 2006 and 2010, the investigators determined.  Outbreaks of Hepatitis C are common, including a recent outbreak in North Dakota involving ManorCare.  MDRO (multi-drug resistant organisms) prevalence increased by 18% and pneumonia by 11% during the same period. The rates of urinary tract infections, septicemia and wound infections also rose.

“Infections are a leading cause of deaths and complications for nursing home residents, and with the exception of tuberculosis we found a significant increase in infection rates across the board,” said lead study author Carolyn Herzig, MS, project director of the Prevention of Nosocomial Infections & Cost Effectiveness in Nursing Homes study at Columbia School of Nursing in New York City.

According to the authors, further research is needed to determine the cause of this troubling trend. They emphasized that potential residents and their families should look for facilities with strong infection control practices, including protocols to limit catheterization, easy access to hand sanitizers and isolation rooms for infected residents.

The results came from an analysis of data that nursing homes self-reported to the Centers for Medicare & Medicaid Services, and the study was supported by the National Institute of Nursing Research. 

Infection control has emerged as a top priority both for providers and the government. The White House recently launched a nationwide effort to reign in MDROs related to antibiotic prescribing practices.

Good News for Trusts that Manage Real Estate

In the recent Frank Aragona Trust case, 142 T.C. No. 9 (2014), the US Tax Court reached a taxpayer favorable decision, one that benefits trusts that materially participate in real estate business activities.  For years, the IRS has steadfastly refused to allow trusts to deduct net operating losses related to real estate activities against other ordinary income unrelated to the real estate; based on the so-called “passive activity loss” limitations.  Now, it may be possible for such trusts to deduct the losses associated with the real estate against other profitable activities to reduce income taxes.

Frank Aragona formed a trust In 1979, naming himself as the grantor and trustee and with his five children as beneficiaries. Frank Aragona passed away in 1981 and he was succeeded as trustee by six trustees. One of the trustees was an independent trustee and Frank Aragona's children comprised the other five trustees. Two of the five children had very little involvement with the trust or the business of the trust. Three of the five children worked full time for a limited liability company (LLC) that was wholly owned by the trust. This LLC managed most of the trust's rental real estate properties. It employed several people in addition to Frank Aragona's children including a controller, leasing agents, maintenance workers, and accounting clerks. In addition to receiving a trustee fee, the three children who were employed by the wholly-owned limited liability also received wages from the limited liability company.

During 2005 and 2006, the Frank Aragona Trust incurred substantial losses from its rental real estate properties. The trust also reported gains from its other (non-rental) real estate activities. In the Tax Court, the IRS argued that the trust's rental real estate activities were passive because a trust is incapable of materially participating in rental real estate activities. Alternatively, the IRS argued that even if a trust could materially participate in rental real estate activities, in the Aragona case, the court should disregard the activities of the three trustees who also work for trust's wholly-owned LLC because these trustees performed their activities as employees of the LLC and not in their duties as trustees. The trust contended that it could materially participate in its rental real estate activities, and that the activities of the three trustees who were also employed by the wholly-owned limited liability company should not be disregarded.

The material participation exception applies when more than one-half of the personal services performed in trades or businesses by the taxpayer are performed in real-property trades or businesses where the taxpayer materially participates and performs more than 750 hours of services during the year in real-property trades or businesses in which the taxpayer materially participates.

More than ten years ago, in Mattie K. Carter Trust v. United States, 256 F. Supp.2d 536 (N.D. Tex. 2003), a Texas district court held that the material participation of a trust in ranch operations should be determined by reference to the persons and agents who conducted the ranch's business on the trust's behalf, including the trustee.  According to the court, in determining whether the trust materially participated in the real estate activities, the trust's non-trustee's fiduciaries, employees, and agents should be considered.

In the years since the Mattie K. Carter Trust case, the IRS has issued a series of rulings in which it disagreed with the holding of the case and stated that only a trustee could be considered in making the determination.  Further, according to the IRS, if the trustee is also an employee of the underlying business, a taxpayer could only consider the time spent by the trustee in his duties as a trustee, and not in his duties as an employee.

Prior to 2012, the issue did not garner much attention because it only affected those trusts involved in rental real estate activities whose operations incurred losses.  However, with the recent enactment of the 3.8% Net Investment Income Tax, this issue has become a hot-button issue among tax practitioners.  Material participation is important in the context of the 3.8% Medicare tax because under §1411, "net investment income" includes income from a "passive activity (within the meaning of section 469) with respect to the taxpayer." Therefore, all rental real estate activities conducted through a trust or estate will not have to be concerned with the material participation rules.

    

The Tax Court held that, “[a] trust is capable of performing personal services [because …] services performed by individual trustees on behalf of the trust may be considered personal services performed by the trust.”  The Tax Court rejected the IRS’s argument that a trust is incapable of providing personal services, reasoning that, “[I]f the trustees are individuals, and they work on a trade or business as part of their trustee duties, their work can be considered ‘work performed by an individual in connection with a trade or business.’”

    

Also, the Tax Court rejected the IRS’s argument the work of certain trustees as employees of an LLC that managed most of the Trust’s rental real estate properties – which was wholly owned by the Trust – should not count because such work was performed as employees and not as trustees.  The Tax Court counted the work of the trustees which they performed as employees of the Trust’s wholly owned LLC because, “trustees are not relieved of their duties of loyalty to beneficiaries by conducting activities through a corporation wholly owned by the trust.”

The Tax Court did not, however, “decide whether the activities of the trust’s nontrustee employees should be disregarded.”

Given that the IRS expressly disregards the work of non trustee employees towards the material participation test, what is certain is that trusts can count the work of their trustees (even if performed as employees of a corporation wholly owned by the same trust).  Work performed by trustees as employees of a corporation that is unrelated to the trust might not count.

The Frank Aragona Trust decision is good news for those ongoing trusts that actively manage real properties as a business and have income tax losses in such activities. It may now be possible for such losses to be deducted against other activities.  

While the case resolves some uncertainties it does not resolve all uncertainties, most importantly whether to include the activities of trust employees who are not themselves trustees towards satisfaction of the material participation requirement.

Sources: Estate Planning: Good news for trusts that manage real estate

               Tax Court Gives Taxpayer a Victory in Frank Aragona Trust Case -- But Doesn't Go All the Way

Tom Clancy Estate In Family Fight Due To Poor Estate Planning

The following is an excerpt from an article entitled, " Tom Clancy Estate In Family Fight Due To Poor Estate Planning," published at the Probate Lawyer Blog:

The Tom Clancy Estate has been valued, based on probate court filings, at $82 million. It includes a $65 million ownership stake in the Baltimore Orioles, a rare, working World War II tank, a $7 million mansion overlooking the Chesapeake Bay, and more than $10 million in business interests based on his works.

Clancy left his mansion and another property to Alexandra, along with a Ritz-Carlton condo owned jointly by the married couple -- plus any other joint bank or investment accounts (which do not pass through probate and would not be public record).

The famed author wanted the rest of his estate divided between a series of trusts he created. His will specifies that one-third go to a trust for his wife, another one-third to a family trust (benefiting his wife and all of his children), and a final set of trusts for the four adult children from his first marriage, as well as grandchildren.

He also left a portion of the residue of his estate (it's unclear how much) to the Hopkins's Wilmer Eye Institute, which was founded based on a $2 million donation Clancy made in 2005, and where Clancy was treated for an eye disease.

Seems like he had his estate well planned, right? Unfortunately, his estate planning was not as thorough or well-thought-out as his meticulously-detailed novels.

Click here to read the rest of this interesting article.

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.