Posts Tagged ‘Crocker v. Ryan’

Quitclaim to Children Not “Fraudulent” Transfer

JUNE 3, 1996 VOLUME 3, NUMBER 49

Seniors concerned about the high cost of nursing care often transfer assets, sometimes even including their homes, to their children. Such transfers may actually make paying for nursing care more difficult, since Medicaid (ALTCS) eligibility does not count the residence as an asset, but does count the transfer to children as a disqualifying gift. Nonetheless, many elderly homeowners choose to transfer the home.

Elder law attorneys have long been concerned about another aspect of this practice. Every state has some form of a law making it illegal to give away assets to avoid creditors; do such laws prevent transfers to avoid future nursing home claims against the seniors’ assets? The so-called “fraudulent transfer” rules have not been widely tested, but a recent Tennessee case suggests that most such transfers are permissible.

Ruth Bryan, 71, owned a modest home in Tennessee and had a savings account of about $10,000. She had given her daughter a power of attorney to manage her affairs if she became incapacitated. When Ms. Bryan’s condition worsened and she was hospitalized, her daughter used the power of attorney to quit-claim Ms. Bryan’s home to herself and her brother (Ms. Bryan’s son).

Ms. Bryan improved enough to be discharged to Imperial Manor Convalescent Center, where she incurred a bill of $10,000 which she was unable to pay. Upon her release from Imperial Manor, she filed bankruptcy, claiming that she owned no assets.

The Tennessee court, at the bankruptcy trustee’s request, initially ruled that the transfer of Ms. Ryan’s home to her children was fraudulent, and set it aside. On appeal, the Tennessee Court of Appeals disagreed.

According to the appellate court, Ms. Ryan’s transfer of the home was not fraudulent for two reasons. First, it did not render her insolvent (remember that she also had a small bank account). More importantly, perhaps, she did not owe anything to Imperial Manor at the time of transfer (which was made while she was still in the hospital), and the bankruptcy trustee had not shown that Ms. Ryan’s daughter did not act for the express purpose of making her unable to pay her debts. At the time of the transfer, the daughter did not know that her mother’s debts would accrue beyond her ability to pay. Crocker v. Ryan, Tenn. Ct. App. (1995).

Arizona’s fraudulent transfer law is quite similar to Tennessee’s. Arizona Revised Statutes §44-1004 makes a gift fraudulent if the transferor “intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.”

In applying this law to the common practice of gifting one’s home to children, two questions come to mind:

  • Does the gifting parent have a basis to believe that he or she will soon incur a debt for nursing care?
  • Does the possibility of qualifying for Medicaid (ALTCS) assistance affect the expectation of the gifting parent?

There are two common circumstances where a senior who has given his or her home to children may qualify for ALTCS. In the first, the parent will have stayed out of the nursing home for three years following the gift. In the second, ALTCS eligibility rules expressly permit gifts of residences to children who have lived with the applicant and provided care for two years. Though there are other, rarer circumstances where transfer of the home is advisable, the fraudulent conveyance law makes it more difficult to recommend that seniors quit-claim the home to children.

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