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Mar 2013
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March 01, 2013

Estate Planning Tip: The Wrong Way to Gift for Medicaid Planning Purposes


A recent bankruptcy court case illustrates how gifting to children for Medicaid planning purposes can go terribly wrong.

In In re Woodworth, U.S. Bankruptcy Court for the Eastern District of Virginia, February 6, 2013, an elderly woman titled her $200,000 brokerage account in the sole name of her daughter for the purpose of protecting the assets if she someday needed nursing home care. No trust was created to hold the funds.

Several years later, the daughter filed for bankruptcy due to the collapse in real estate values and her inability to refinance a balloon mortgage. The bankruptcy trustee claimed the funds that had been transferred from the mother. The mother and daughter attempted to claim that the daughter had no more than legal title and that the funds were held subject to an implied trust.

The bankruptcy court would have none of it, stating that the mother “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 end result was that the mother’s life savings were swept into the bankruptcy proceeding to satisfy the daughter’s obligations.

Gifting can be dangerous and complicated, even when the estate is not large enough for there to be estate and gift tax consequences. In this case, if mother had sought legal advice, an appropriately structured trust could have been created that would have accomplished her Medicaid planning goals while still protecting the assets from her daughter’s creditors.

One year before the bankruptcy, the daughter apparently saw the handwriting on the wall and moved the funds into a trust.  However, by that time it was much too late. The funds were legally hers and any transfer into a trust she created was legally ineffective to protect the assets from her own creditors.
 

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