"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. 

The Ohio Family Trust Company Act Offers an Important Wealth Planning Tool

On June 14, 2016 Governor Kasich signed House Bill 229, which allows an Ohio family to establish its own trust company to serve as trustee for its family trusts.  The Act gives wealthy and ultra-wealthy families another way to preserve and grow their fortune for many generations.

Ohio now joins more than 15 states authorizing family trust companies (FTCs), which have become increasingly popular wealth planning tools. Before passage of the Act, an Ohio family selecting a trustee had to use either a commercial trustee, or one or more individuals.  This meant that an Ohio family that wanted to use an FTC was required to form and operate the FTC in another state.

The goal of most, if not all, families that have acquired substantial wealth is to preserve and grow their assets and transfer them to succeeding generations in a deliberate way that will avoid the proverb, “shirtsleeves to shirtsleeves in three generations.” [Note: This proverb is surprisingly common.  The Scottish version is "The father buys, the son builds, the grandchild sells, and his son begs."  The Japanese is, Rice paddies to rice paddies in three generations."  The Chinese state it plainly as, "Wealth never survives three generations."] Success is only possible if a family cultivates, across generations, positive and productive attitudes about money, responsibility, investing, planning, and risk and develops a resulting understanding of both the benefits and burdens of wealth. These values, skills, attitudes and insights sets families successful in managing wealth over generations apart from those that watch wealth dissipate over the generations.  

An FTC provides as framework for developing these values and educating generations of family members.  Of course, the wealthy and ultra-wealthy use trusts to hold their assets, to accomplish estate and tax law planning and to ultimately distribute those assets to family members and charity.  But trusts present challenges to the very wealthy.  Assets owned by a trust are often  illiquid (such as private  equity- interests in privately-owned businesses, or they are difficult to value (such as certain real estate, mineral, oil, and gas interests, life insurance, farms and ranches, loans and notes, collectibles, and intellectual property).  These assets comprise a substantial portion of the wealth of wealthy and ultra-wealthy families.  According to analysis of estate tax returns, real estate and other “unique assets” constitute roughly half of the affluent’s investment portfolios.

These assets are typically owned by the trustee of the trust, whether it is an individual trustee or a bank or trust company. These types of assets are appropriate, albeit aggressive, investments for the family. If a bank or trust company serves as trustee, the family is often in the position of having to justify keeping these investments because of their speculative nature. If an individual or series of individuals serve as trustee, they may have difficulty administering a trust involving a business or other hard-to-value assets. You can choose anFTC as trustee instead of an individual, bank or trust company.  

 An FTC allows families to establish long-term multi-generational trustee arrangements without using a bank, investment or trust company. This means greater privacy and control for the family. Often, families want to use individual trustees instead of a bank or trust company, but because of internal family dynamics and conflict, they are hesitant to name relatives. Appointing relatives, friends or business associates necessarily means divulging private information about your finances and family to others which can be uncomfortable for both you and your friends. An FTC can help alleviate the feeling that “there is no one to turn to” when selecting trustees of your various trusts.  

Typically FTC's are governed by a board of directors. One of the primary board functions is to create a discretionary distribution committee to make all distribution decisions from all trusts. Another important board function is to name an investment committee to make all investment decisions. Both the board and the committees can be populated with a combination of individual family members and independent individuals familiar with your family such as investment advisors, attorneys or  accountants.

Because the FTC is governed by a board, it brings formality and discipline to the family governance process. The Board can manage various trusts, oversee privately-held businesses, and insure and manage collectibles, mineral interests, and intellectual property rights and interests.  Formality means that meetings must be held and minutes taken.  Board members must be accountable and act in accordance with the family values, and decisions must be made regarding investments of assets in each trust and distributions of assets from those trusts. One board makes these decisions instead of a varied group of individual trustees of your family’s separate trusts.

An FTC is defined  as a corporation or limited liability company that (1) is organized in Ohio to serve only family clients, (2) is wholly owned by family clients and is exclusively controlled by one or more family members or family entities, (3) acts as a fiduciary, and (4) does not transact business with, propose to act as fiduciary for, or solicit trust business from, a person that is not a family client.  Ohio’s legislation allows for unlicensed and licensed FTCs.  

An unlicensed FTC  may provide services only to “family members,” and since the FTC will not be audited by the Department of Financial Institutions, it must abide by certain restrictive SEC rules in order to provide investment advice without registering with the SEC as a registered investment advisor. While an unlicensed FTC is not subject to banking regulations, it is required to submit an annual affidavit to the Department of Financial Institutions confirming its compliance with the statutory limitations.

One of the limiting features of an Ohio FTC is the definition of “family member.” This definition ensures that an FTC is not serving the general public (and, in fact, solicitation of trust business is explicitly prohibited by the bill). Family members are defined as a class, all of whom have a common ancestor who is not more than 10 generations removed. This so-called designated relative must be identified at the inception of the FTC and cannot be changed. Family members also include spouses, spousal equivalents, adopted children, stepchildren and foster children. The definition also includes the following related persons/entities: family charities, family estates, irrevocable trusts with family beneficiaries, key employees, trusts formed by key employees, and business entities wholly owned and operated by family members. These rules are intended to track the SEC’s definition of a “family office.”

A licensed FTC is subject to the following requirements: (1) it must have a minimum capital balance of at least $200,000, and up to $500,000, at the discretion of Ohio’s superintendent of financial institutions; (2) it may provide services to “family members,” certain non-family members and certain affiliated entities; (3) it must maintain office space and at least one part-time employee in Ohio; (4) it must hold at least two governing board meetings per year in Ohio; (5) it must perform certain administrative activities in Ohio; and (6) it must maintain a fidelity bond and directors/officers insurance, each in the amount of $1 million. A licensed FTC is also subject to supervision by Ohio’s Department of Financial Institutions and will be audited every 18 months.

For more about the Act, go here. 

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   

Filial Responsibility In the News

Philly.com published the most recent warning: Children May have to Foot Bill for Indigent Parents' Care. The author writes:

Remember when Mom and Dad bailed you out on that overdue bill?

Now, it may be your turn.

More than half of U.S. states have so-called "filial responsibility" laws that require adult children to support their parents if they become indigent.

For example, under Pennsylvania's 2005 statute, spouses, parents, and children are obligated to care for or financially assist destitute family members.

That means you could be held financially responsible for a parent's nursing-home care, says Marc Jaffe, estate-planning lawyer and partner at Fromhold Jaffe & Adams in Villanova.

"A nursing home will sue an adult child to recover monies the parent didn't pay," Jaffe says.

"It's not used very often. And you are not necessarily responsible for all of that person's debts. However, you might be held responsible for that person's food, shelter, clothing, medical care, and other similar necessities if the person did not have the funds to pay," he notes.

Such lawsuits "may become more common, as the government in general is looking to be less generous with benefits, and if a medical provider doesn't get paid, they may look more toward the family," Jaffe adds.

For the remainder of the article, go here.

Update [July 13, 2016]:  A similar article, "Are You Going to Saddle Your Kids With Your Debt?," can be found here. 

Nursing Home Involvement in Patient's Death Object Lesson on Aging-in-Place Planning

An effective Aging-in-Place strategy will include, as a last resort, identification, consideration and communication of standards used in selecting institutional care.  So many folks assume they have an effective Aging-in-Place plan, but never consider the likelihood of short or long-term institutional care, which may, regardless of an underlying plan, be inevitable. 

This oversight can have tragic consequences if short-term institutional care becomes inevitable!  If decision-makers cannot effectively evaluate competing institutional care options, a choice of care may be uninformed.  Mistakes can be  severe and permanent. Consider the case of a Massachusetts nursing home.  

Massachusetts officials announced this week that they are maintaining a freeze on admissions at a South Yarmouth nursing home as a federal investigator’s report reveals details about the death of a patient that collapsed during physical therapy, and later died.

According to a Centers for Medicare & Medicaid Services (CMS) report, Windsor staff failed to perform chest compressions or use an automated external defibrillator (AED) on a patient who became unresponsive while doing light hand and wrist exercises in his wheelchair in the rehabilitation gym.  The CMS report describes a chaotic scene, with precious and possibly life-saving moments lost while staffers scrambled to respond.  Reading the report of the event one might conclude that there was no consideration by the management or staff of the possibility of such an event, and there appears to have been no knowledge of, reference to, or implementation of a concerted emergency life saving plan.  

CMS criticized the institution  for going three years without mock trials of code blue emergency drills, which include notifying the entire nursing home staff of an emergency and making the facility accessible to rescue personnel. 

The result was horrific.  A physical therapy assistant said she couldn’t get an outside line on a nursing home phone while dialing 911 emergency services and after numerous attempts resorted to using her personal cell phone to call 911.  Other staff  struggled put the patient, who wore a nasal cannula for oxygen, in an oxygen mask, but it was not applied properly.  By the time emergency rescue crews arrived and started performing CPR, the resident had no cardiac activity or signs of life. When a second rescue crew arrived about three minutes later with additional emergency equipment, access to the patient was delayed by locked doors as many of the staff were unaware of the emergency.

The American Heart Association says that after 10 minutes few attempts at resuscitation succeed.

The patient was transferred to Cape Cod Hospital and put on a ventilator, but family members decided to withdraw life support March 6, and the patient died one hour later.

 CMS fined Windsor Skilled Nursing and Rehabilitation Center $90,000 following the death of the 54-year-old resident in March.  The sanction works out to approximately $3000 for each of the almost 30 years of the patient's life expectancy.  The sanctions took place after investigators determined that Windsor staff failed to do CPR on the patient after he went into respiratory and cardiac arrest.

The nursing home submitted a plan of correction with public health officials that is under the process of review.  If the 120-bed nursing home is not brought into “substantial compliance” with regulations by Aug. 27, the government will no longer reimburse Windsor for services delivered to Medicare and Medicaid patients.The federal agency threatened to rescind Windsor’s Medicare and Medicaid contract by June 19, but that deadline has now been extended to Nov. 27.  The sanctions and warnings started after state Department of Public Health officials took the rare move of finding that Windsor was in “immediate jeopardy” May 27.  "Immediate jeopardy" was changed to “non-immediate jeopardy” June 7, but a CMS letter to Windsor dated June 8 said “substantial compliance, however, had not been achieved.”  Meanwhile, the institution to cares for patients.

Windsor spokesperson Ernie Corrigan said earlier this month that the nursing home staff has gone through “hundreds of hours of training” since the May 27 jeopardy finding.  He said in an email that the staff had followed proper protocol as far as life-saving measures were concerned:

The response staff was continuously at his side, detected and continued to detect a pulse, and followed the protocols outlined by emergency medical trainers and the American Heart Association that dictate that you do not provide CPR or AED assistance when a patient continues to have a pulse. It is our view that everyone involved did their very best and performed admirably during a rapidly deteriorating medical emergency that eventually led to this patient’s death.  

State health inspectors will conduct an unannounced follow-up inspection once the nursing home submits an acceptable plan of correction, according to an official with the state Department of Public Health.  If DPH finds the nursing home to be in compliance with regulations, it will lift the freeze on admissions, the DPH official said.

In addition, CMS will not terminate its contract with Windsor if the nursing home comes into compliance with state and federal regulations, a CMS spokesperson said.

Findings of jeopardy and nursing home terminations in Massachusetts are not common. Last year, five Massachusetts nursing homes were placed in jeopardy, a DPH spokesman said.  Only one nursing nursing home in Massachusetts has had its Medicare provider agreement involuntarily terminated since June 2015.

For more information, please go here.