One issue that we have been encountering from time to time of late is the problem of people filing bankruptcy without being aware of what their parents have done in terms of managing their own estate. In the good old days, estate planning was simply a matter of writing a will. Wills are not an issue in bankruptcy, as long as the person who wrote the will is still alive. Wills can be rewritten if need be. As a result, the Trustee in Bankruptcy cannot assert any claim to anything in a will of a living person. There can be issues if the person dies a short time after filing, but that is not the subject of this blog entry.
Today, Medicaid planning is a major issue as well. It is not enough anymore for people to write wills and expect their children to inherit. If you own a house, and Medicaid pays for you to go into a nursing home, then Medicaid will take your house when you die, or at least enough of it to get reimbursed for paying your nursing home expenses. As a result, it is necessary to get the house out of your name and into the name of whoever you want to inherit, before you go into the nursing home. In fact, it is necessary to do that five years or more before you go into the nursing home. As a result, people are putting their homes into irrevocable trusts, or sometimes simply deeding their homes to their children while retaining a life estate for themselves. In both of these cases, the child, or other beneficiary now has an actual, nonvoidable interest in the property. Therefore, that interest would be part of their bankruptcy estate. If this interest is of significant value, it is something that the Trustee can take.
I remember the first time I had this issue come up. I filed a chapter 7 petition for a husband and wife. This case was particularly embarrassing because the husband was somebody I had known for years. The case seemed to be going just fine, and we went to our hearing without incident. Later I received a letter from the United States Trustee demanding to know why I neglected to put on the petition that the wife had a remainder interest, along with her four siblings, in her mother’s house. I immediately pulled out the file, and saw that the reason was tha I did not know. I called my client, In that conversation, I asked her why she did not tell me about her interest in her mother’s house and she told me that she did not know. She called me back the next day and told me that she called her mother and asked her mother why she never told her. The mother answered, “because it’s none of your damn business.” I have since learned that this is the prevailing view among people who have retained life estates in property for Medicaid planning purposes. As long as they are alive, it is still their house.
Now in this case the “good news” was that the house was not particularly expensive; mom was not very old; there was still some mortgage on the property, and my client only had a 1/5 remainder interest. As a result, her interest in the property was not worth very much, and I was able to protect it.
This was probably one of the first times the United States Trustee had written such a letter. In other words, until this happened to my client, I do not believe that it was a big issue that parents were creating Medicaid trusts that were resulting in children having assets that they did not know about, and were unknowingly taking into bankruptcy. Now, it is a better-known problem.
As such, going into bankruptcy without having first looked into this issue creates a couple of risks. One risk, is that the interest that you are taking into bankruptcy may be too large to protect. You may go into bankruptcy and unknowingly surrender your inheritance. The other problem is that the Court may always decide that the failure to list the interest in the parent’s property was not unknowing and was not excusable. At that point, the Court might not allow you to protect the asset, even if you originally could have. The Court does expect you to know what you have and the Court does not always believe you when you say “I did not know”. This issues is one of the traps for the unwary when filing bankruptcy. By the way, the bankruptcy petition does not ask directly if you have any interest in your parents’ property. The petition does ask if you have any contingent or equitable interests in property, and that question covers this issue. However, your average form preparer, and your average lawyer who “dabbles” in bankruptcy, is unlikely to understand that Medicaid planning by your parents is one of the issues that such question is getting at. When the form was first drafted, there was no such thing as a Medicaid trust. It was just generally interested in assets of all sorts and still is. Consequently, this is an issue that people need to be on the lookout for when filing for bankruptcy. An experienced bankruptcy lawyer can help you to resolve this question. A lot of people who are not experienced bankruptcy lawyers might not know what to look out for. There are many such issues.