Transfer of Your Assets Without Proper Protection Carries Significant Risks

You can’t have your cake and eat it too – at least not when it comes to Medicaid or even general estate planning.  Oftentimes parents will mistakenly transfer their assets to a child in the child’s sole name so that they may be eligible for Medicaid should the need arise at a later date, but they think that they will still have access to the money because they trust the child.  What they don’t realize is that they have made a completed gift to that child of their assets which not only requires a gift tax return be filed if over $14,000 for the year, but also exposes all of those assets to the child’s creditors.  Additionally, once the transfer is completed, the child has no obligation to pay anything back to the parent, and if the child does, the child is now making a potentially reportable gift back to the parent.

A fairly recent bankruptcy case supports the argument that you should not transfer your life savings to your child free and clear unless you are prepared to kiss the assets goodbye.  In In re Woodworth, Mom transferred her modest life savings to an account solely in Daughter’s name in 2002 because she wanted to be eligible for Medicaid should the need arise.  Daughter paid the income tax on the account, made investment decisions, and had unfettered access to the funds.  Mom had a debit card if she needed to access the funds.  In 2010, Daughter moved the funds into an annuity type investment with Mom’s consent under the mistaken advice that it would be protected from creditors.  Unfortunately, Daughter filed for bankruptcy in 2011 due to a balloon mortgage on an investment property that she could not pay and the bankruptcy trustee filed a fraudulent transfer action to recover the money that was transferred to the annuity.  Mom tried to argue that it was really her money and not Daughter’s and the only reason she transferred it to Daughter was to be eligible for Medicaid.  The court did not look kindly on this common Medicaid fraud type transfer where parent transfers money but retains a secret reservation of title and benefits through agreement with the child.  So the court found that Daughter had all the indications of ownership while Mom did not, and the funds became subject to the bankruptcy and used to pay Daughter’s creditors.  And as a warning, don’t think your assets are any safer by owning them jointly with a child.  They can still be subject to the child’s creditors by virtue of the joint ownership.

Lessons learned – do not give your assets away free and clear unless you never want them back, and make sure you talk with an experienced attorney first before relying on an investment advisor’s advice regarding your estate plan and how to structure ownership of assets.

Article written by Kelly L. Wright, Special Counsel with Hinman, Howard & Kattell, LLP in the Jupiter, Florida office. To contact Ms. Wright please email her at kwright@hhk.com or call her at (561) 784-6945. 

 

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