Posts Tagged ‘fraudulent transfer’

Put Your Accounts in Your Daughter’s Name — What Could Go Wrong?

Seniors are subjected to a constant drumbeat of advice: make sure you have no assets in your own name, or you will lose them to the nursing home. Transfer everything to your children to “protect” your assets. Is it good advice?

We usually counsel against such transfers. They are a bad idea for several reasons, but chiefly for these two reasons:

  1. Such transfers are not likely to work, given the five-year look-back period for Medicaid eligibility. In other words, if you make such a transfer shortly before you go to the nursing home, you won’t be eligible for government assistance with your long-term care costs for up to five years — or even longer, in some cases.
  2. Even if you successfully “protect” your assets from your own nursing home costs, you have just subjected them to the recipient’s creditors and claims.

That second item was the one that cost Deborah Smith (not her real name) her entire life savings. In 2002 Ms. Smith transferred her brokerage account, worth about $200,000, into her daughter’s name. Why would she do such thing? She later testified that it was because she understood that she could not have any assets in her own name if she later wanted to qualify for Medicaid assistance with her long-term care costs. She wanted to protect her money from that possibility, and also from any “scammers” who might try to talk her out of her funds.

Ms. Smith, 71, lives — and still works as a nursing assistant — in the small Arizona town of Cottonwood. She and her husband owned a small pharmacy there, and sold their business to a large chain store in 2002, just before her husband’s death. The proceeds went into an account in their joint names, and was transferred to Ms. Smith’s name upon her husband’s death.

Later in that same year, while visiting her daughter in Virginia, Ms. Smith decided to put her entire life savings into a brokerage account in her daughter’s name. The daughter’s Social Security number was listed on the account, the daughter paid taxes on the income, and she was listed as the sole owner. Ms. Smith did have a debit card on the account, which she could (and did) use to pay for purchases.

In 2010, after the stock market dropped precipitously, Ms. Smith’s daughter moved the money into a new investment vehicle. She paid over $18,000 for a complicated trust arrangement (called “Ultra Trust®“) in order to protect the money from creditors. Although she initially contacted the purveyors of the trust instrument, Estate Street Partners, LLC, (“…learn how to Hide Your Assets despite what your lawyer told you…”), she received documents for her mother’s signature from lawyer John Libertine. The documents included a trust naming a third person as trustee, and a private annuity agreement.

Meanwhile, Ms. Smith’s daughter was having trouble with her own investments. She owned a piece of investment real estate with a second mortgage. When that loan’s balloon payment came due, the property had diminished in value to the point that she could not refinance — so she declared personal bankruptcy. The question then became whether her mother’s brokerage account was part of her bankruptcy estate.

The bankruptcy court ruled that yes, the account did belong to Ms. Smith’s daughter. Although both women testified that they thought of the money as belonging to Ms. Smith, and that the daughter was just holding it in a sort of trust arrangement for her mother, the bankruptcy court noted that Ms. Smith had said she transferred the money in order to make sure he had no assets and could qualify for Medicaid if she ever needed it. Here is the bankruptcy judge’s telling analysis:

“After all, [Ms. Smith and her daughter] argue, why would a woman who was advancing in years, nearing retirement and working for an hourly wage, give the entirety of her retirement nest egg to her daughter? The answer lies in Ms. [Smith]’s own testimony — she wanted to remove the funds from her own name and place them into the name of her daughter, in order to be eligible for Medicaid and other publicly available benefits, should the need arise. Ms. [Smith] can’t have it both ways — she can’t part with title for purposes of Medicaid eligibility, and at the same time claim that she retained an equitable title to the asset. To allow this kind of secret reservation of equitable title would be to sanction Medicaid fraud.”

The bankruptcy judge, incidentally, also completely dismissed the effect of the trust arrangement established by Ms. Smith’s daughter. The end result? Ms. Smith’s life savings were swept into the bankruptcy proceeding to satisfy her daughter’s investment losses. In re Woodworth, US Bankruptcy Court for the Eastern District of Virginia, February 6, 2013.


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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