What Is Wrong With The Banks?

This past week I met with a woman for whom we had done some estate planning in 2008.  At that time her husband was in failing health but was still living at home.  We prepared wills, powers of attorneys and health care documents for each spouse, and educated them on long-term care planning and asset preservation issues. 

In 2010 Mr. Simpson's condition deteriorated to the point that he needed to move into nursing home. Since the Simpson's already met the Medicaid eligibility criteria, Mrs. Simpson was able to file the Medicaid application on her own, and the application was approved. 

Sometime after Mrs. Simpson completed the Medicaid process she stopped into her bank.  Because she was now "on her own,"  the "helpful" person at the bank suggested that Mrs. Simpson add her daughter "Sally's" name to Mrs. Simpson's bank account just in case Mrs. Simpson needed help with her financial affairs.  However, in 2008 Mrs. Simpson had executed a comprehensive financial Power of Attorney that provided another of Mrs. Simpson's children with all the authority needed to assist Mrs. Simpson with her financial affairs.

Why, you might ask, does it matter whether a child is put on the account as a joint owner, or instead only has legal authority to act under a Power of Attorney?  Well, when a child's name is added to a parent's bank account, they immediately acquire an ownership interest in the account assets, including the right to immediately withdraw all the funds in the account.  Just as important, even if the child has no intention of withdrawing the account assets, if the child has judgments against them, the child's creditors can effectively gain control of the assets by "freezing" the jointly owned bank accounts. 

And, that's exactly what happened in Mrs. Simpson's case.  Sally happened to have run up significant credit card debt, and one of her creditor's had obtained judgments against her for non-payment.  As soon as Sally's name was added to her mother's account, Sally's creditor's pounced and were able to have Mrs. Simpson's account frozen.  Only after much effort and aggravation was Mrs. Simpson able to convince Sally's creditor that Sally was on Mrs. Simpson's account for "convenience" purposes only and have the account unfrozen.

I wish I could say that this was an isolated incident, but it happens all too frequently.  It seems that many bank employees have no concept regarding the interplay between creditor's rights and title of ownership, nor do they seem to understand that a durable Power of Attorney provides the named agent with all the legal authority needed to administer a principal's affairs without exposing the principal to the agent's creditors.    

In establishing these joint-tenancy accounts, bank employees are essentially practicing law without a license -- and doing poorly at it.

Obama Favors "Compromise" Position on Future of Federal Estate Tax

In response to a question during a recent public event in an Illinois farm community about the impact of the federal estate tax on family farms , President Obama reiterated his position that a "fair" federal estate tax exemption would look something like the $3.5 per person exemption that existed in 2009.  The President stated that he did not favor a return to the "2001 level" which provided only a $1 million per person exemption, but that a $3.5 million exemption -- or a $7 million combined exemption for a married couple -- "would exempt most - almost all family farms and nevertheless would still hit folks like Warren Buffett and make sure that he is able to pay what he wants to pay in terms of passing on something not only to his family, but also to the country that has blessed him so much."

To read  more on this issue, click here.

When Failing To Do Any Estate Planning REALLY Hurts

Last Friday afternoon I had the good fortune of playing golf on a glorious day with members of a local accounting firm. When I stopped into the office on Saturday  to check my messages and mail (with son and dog in tow), I had a rather desperate voice mail from a woman who was calling on behalf of her aunt.  When I returned the call, this young woman -- I'll call her "Anna" -- explained  that her aunt "Susan" had lived with a man for 33 years who passed away last week, but they had never gotten married and Anna's "uncle Ralph" never executed a will.  Anna said that the couple had attempted to get married but Ralph's condition deteriorated too quickly to permit the wedding to take place.

Anna was understandably concerned for her aunt's well-being, and she asked me what rights Susan has under New York law regarding Ralph's estate.  I asked Anna how Ralph and Susan's assets were titled, hoping that most of their assets were titled as joint tenants with rights of survivorship.  Unfortunately, Ralph has a number of assets in his name only, including the house where he and Susan had lived for many years.

I told Anna that New York, unlike many states, does not recognize "common law" marriage, except in the limited circumstance where a couple represented themselves to be husband and wife in another state that does recognize common law marriage.  About 20-years ago I was involved in just such a case, where a couple in a long-term relationship had traveled to Pennsylvania and registered in a hotel as "Mr. and Mrs. Robert Jones."  Since Pennsylvania does recognize common law marriage, we were able to convince the Sullivan County Surrogate that "Mrs. Jones" was entitled to spousal rights under New York law.  I explained to Anna that unless her Aunt Susan were to be able to present similar proof, she would be entitled to none of Ralph's assets.  Under such a scenario, all of Ralph's assets would pass to Ralph's children (who are not Susan's) children. 

Since Anna told me that Susan does not get along with Ralph's children, I had the sad duty to inform her that Susan might be at risk for being evicted from the home that she has lived in for many years.  To avoid such a result, Susan might be able to show that she contributed to the expenses and maintenance of the home for during her residency, and thus in fact has a reasonable claim to an equity interest in the home.

Unfortunately, all of Susan's options fall under the guise of "hopefully" or "maybe".  All of this could have been avoided had Ralph executed even a rudimentary estate plan consisting of a simple will that designated Susan as the beneficiary of the bulk of his estate, especially the home. 

Endless Litigation For Rosa Parks' Estate

Civil Rights icon Rosa Parks died in 2005.  Her will and trust specified that the bulk of her estate was to go to the Rosa and Raymond Parks Institute For Self Development, which she had founded to teach young people leadership and character development.  Since Mrs. Parks' death, however, her estate has been tangled in litigation, with accusations of wrong-doing involving many of Rosa's family members, friends and professional advisers. 

The attorney representing Mrs. Parks' friend and "caretaker," Elaine Steele, claims that the Detroit area judge handling the case improperly awarded to two other attorneys involved in the case attorneys' fees of almost $243,000 -- or almost two-thirds of the assets remaining in the estate.

Click here to read more on this case.

Federal Court Case Attacks Validity of Promissory Note Strategy

The Third Circuit Court of Appeals recently held in Sable v. Velez (U.S. Ct. App., 3rd Cir., No. 10-4647, July 12, 2011), July 12, 2011) that New Jersey's Department of Human Services may properly consider a promissory note purchased as part of a crisis Medicaid planning strategy as a "trust like" device and therefore count the notes as "available resources" subject to a Medicaid spend down. 

What is troubling in this case is that the notes in question appear to have been "DRA compliant."  That is, the notes (1) provided for payment in equal installments, (2) were payable within the lender's life expectancy and (3) could not be canceled upon the lender's death.  Notwithstanding such compliance, the court held that New Jersey DHS could properly determine that the Notes did not evidence "true" loans, since the transactions were not secured by any collateral from the borrowers had failed to meet their burden of showing that the notes were not the product of a "bad-faith arrangement."  Since the Court ruled that the plaintiffs had failed to meet that burden, DHS was permitted to determine that the instruments were essentially "trust like" devices, and thus subject to the Medicaid trust-transfer rules that impose a five-year look back period.

While the Sable decision is not binding precedent in New York, we may expect that the various New York County Departments of Social Services may attempt similar attacks on the customary gift/loan strategy presently used for crisis Medicaid planning.  To rebuff such attacks, practitioners may need to begin engaging in credit checks of our children/borrowers, and going a step further, requiring the children to offer collateral as security for the loans. 

Understanding the Impact of Gifts on Future Medicaid Eligibility

Without proper legal and financial advice, families sometimes take actions that seem innocent enough at the time, but which later may cause the family all sorts of grief.  Perhaps the most common error is when a parent or grandparent makes gifts to a younger family member without considering the impact such gifts will have on the donor’s potential Medicaid eligibility.  Many people have at least a vague understanding that they are “allowed” to make annual “tax free” gifts of up to $13,000 per beneficiary.  Such gifts, however, may prevent the donor from being eligible for nursing home Medicaid benefits if such gifts are made within five years prior to the donor applying for Medicaid.  As a general rule, gifts made within the five year “look back” period from the date a Medicaid application is filed will create a Medicaid “penalty period” based on the following formula:  the amount of total gifts during the look back period, divided by the “Regional Rate” for private pay nursing home care established each year by the New York State Department of Health.  For 2011, the Regional Rate for the Northern Metropolitan Region is $10,105 per month. 

The potentially dire consequences of this Medicaid penalty formula can be seen in the following example:  assume that in 2010 an Orange County resident in declining health made gifts of $50,000 apiece to each of her two children.  Soon thereafter the mother entered a nursing home and spent her remaining resources to pay for her long-term care.  By July 2011 the mother had “spent down” to the Medicaid eligibility limit of $13,800, and the children were advised by the nursing home to file a Medicaid application on their mother’s behalf.  Based on these facts, mom would be approved for Medicaid, but with a catch: the $100,000 in gifts made during the look back period would result in a period of Medicaid ineligibility for 9.9 months ($100,000 divided by $10,105). Mom would be responsible to pay the ten months of nursing home expense during the penalty period, but without any means to pay it!  Since the nursing home will surely not want to absorb that cost, it may decide to try to evict mom from the home and/or file a lawsuit against mom and the children to recover the gifted funds, typically on a theory of “fraudulent conveyance.”

While the family may contend that such gifts were for a purpose other than to qualify for Medicaid, the legal presumption is that all gifts within five years of the Medicaid application filing are subject to a Medicaid waiting period.  The law puts the onus on the donor to prove – usually at an administrative “fair hearing” – that the gifts were made, for example, to help a child in financial difficulty, or as part of an annual gifting program.  If such arguments are unsuccessful, then the gifts, if not returned to the parent or grandparent, may leave the senior unable to pay for needed long-term care. 

 

I do not mean to imply that gifts to family members should never be made.  Rather, it is critical that before gifts are made, the parent or grandparent review the gifts with an elder law attorney to understand the potential impact of the gifts in the Medicaid context.  A clear paper trail should be established to show both the source and the purpose of the gifts.  For example, if a parent wishes to give a son and daughter-in-law $25,000 towards the down payment on a home, a notation in the check memo (gifts should always be made by check or other traceable source) should specifically state “gift for home down payment”.  Should the parent suffer a decline in their health and seek nursing home Medicaid assistance within five years of having made that gift, the memo entry will provide support for the claim that the particular gift was for a purpose other than to help the parent qualify for Medicaid, and therefore should not result in a Medicaid “penalty.”

Asset Transfer That Rendered Spouse Insolvent Found to Be a Fraudulent Conveyance

Asset transfers inevitably form a part of almost any asset protection plan where Medicaid eligibility is a primary objective. A brand new New York decision provides a cautionary tale that too much of a good thing may be a bad thing.

On June 9, 2011, the New York State Supreme Court, Appellate Division for the Third Judicial Department, rendered a decision in Matter of Steele. After Mrs. Steele entered a nursing home in July 1998, Mr. Steele filed a "spousal refusal" letter, which excluded Mr. Steele's income and assets from the determination of Mrs. Steele's Medicaid eligibility.  Mrs. Steele received Medicaid coverage for approximately three years prior to her husband's death.  After Mr. Steele died in November 2001, the Saratoga County Department of Social Services ("DSS") brought a recovery action against Mr. Steele's estate, seeking reimbursement towards Medicaid paid by the County for Mrs. Steele's care.

At the time of his death, Mr. Steele relatively few assets.  Years before his death he had purchased an annuity (it is unclear if payments had terminated at the time of his death), and had transfered a summer camp to his children for no consideration, retaining a life estate in the deed of conveyance.  Finally, just before his death, Mr. Steele transferred his car to his caregiver.

It was this final -- and seeminly innocuous -- transfer of the autmobile that ends up as the determining factor.  Among it's many claims, the Saratoga County  DSS contended that Mr. Steele's purchase of the annuity, transfer of the remainder interest in the summer camp, and gift of his car rendered him insolvent and thus constituted a "fraudulent conveyance" under New York's Debtor and Creditor Law.  The court ruled that the purchase of the annuity was for consideration (which it was), and the conveyance of the real estate did not render Mr. Steele insolvent.  The court ruled, however, that the gift of the car did render Mr. Steele insolvent, since upon transferring the vehicle his liability  exceeded his resources by approximately $1,700, and thus did constitute a fraudulent conveyance.  As a result, the court held that the Saratoga County DSS was entitled to recover Mr. Steele's "available resources" at the time of the original Medicaid filing in 1998, plus his "excess income" for the 39 month period between Mrs. Steele's entry into the nursing home and Mr. Steele's date of death.

The implication of this case is that had Mr. Steele retained the car -- and thus remained "solvent' at the time of his death -- DSS would not have prevailed on its fraudulent conveyance claim and would have been entitled to no recovery against his estate. 

This moral of the story: engaging in a planned strategy of asset transfers has been, and likely will continue to be, a key to protecting assets when faced with long-term care cost; however, trying to save every penny will likely backfire under the theory, "pigs get fat, hogs get slaughtered!"