by Anita Schnee, Attorney at Law
Dorothy Stutesman had saved up over one hundred thousand dollars. She wanted to leave that money to her daughter Holly Woodworth, but Dorothy was concerned that she might lose it all, instead, if she became ill and had to pay for her own nursing-home care. An investment broker suggested that if Dorothy gave the money to Holly while Dorothy was still well and living at home, Holly could put the money in trust. The money would be held in Holly’s name, but it would remain available for Dorothy’s benefit until she died, at which time Holly would inherit the money.
That way, Dorothy would no longer have legal title to the money and, if she stayed healthy for another five years, she could qualify for Medicaid government benefits after that if she needed them to pay for the nursing home. Holly’s solvency didn’t seem to be a problem at the time, but, in any case, the trust was designed to shelter the money from any creditors she might have.
Then, however, the real-estate market collapsed. Holly became unable to pay a mortgage that had come due on a piece of investment property, and she was unable to obtain another loan because the property had lost its value. She had to file for bankruptcy.
Bankruptcy law provides that if a debtor like Holly transfers property within a certain time before filing bankruptcy, the bankruptcy trustee can undo the transfer and use the property to pay creditors instead. This meant that Holly’s having put her mother’s money into the trust, within the time, would be used to pay off the mortgage.
But, you say: The trust was supposed to protect assets from creditors!
True – but only after the time had run out for the bankruptcy trustee to undo the transfer. Unfortunately for Dorothy and Holly, the transfer of the money into the trust fell within the time, so the trust’s provisions attempting to shelter the money from creditors failed.
But, you say: What about the plan that while Dorothy was alive, the money would remain for Dorothy’s benefit, not Holly’s?
That was the fatal flaw. The trust was designed by people who did not understand the complicated intersection between Medicaid and bankruptcy law. The trust was simply the wrong kind. It failed to juggle the need to get the money out of Dorothy’s name, yet still provide for Dorothy’s benefit. For this reason, the bankruptcy judge ruled that the money was Holly’s, not Dorothy’s, and it was therefore available to pay Holly’s creditors.
The judge was sympathetic. He believed Dorothy and Holly when they testified that they intended the funds to be used for Dorothy’s benefit – but, he found, this simply showed that they had misunderstood trust terms.
The moral of the story: Let us do your Medicaid planning. Don’t rely on those who may know finance, but who do not know the intricacies of how bankruptcy and Medicaid law intersect.
The case was Meiburger v. LNDP & G Ultra Trust (In re Woodworth), 2013 WL 753509 (Bankr. E.D. Va. 2013), available here.
