Friday, July 12, 2013

Bankruptcy Trustee Is Entitled to Funds Transferred in Order to Qualify for Medicaid

The following article serves as a warning about do-it-yourself estate planning.  An effective technique of protecting assets from nursing homes and long term care expenses is to transfer those assets to an adult child. However, the assets can be lost to that child's own creditors.

I always recommend that my clients transfer assets to a trust instead of a child so that the money is protected from both the parent's and child's creditors.

The following article is courtesy of

A woman who transferred funds to her daughter to qualify for Medicaid cannot claim that she retained ownership of the funds when her daughter declares bankruptcy, according to a U.S. bankruptcy court. In Re Woodworth (Bankr. E.D. Va., No. 11-11051-BFK, Feb. 6, 2013).

In 2002, Dorothy Stutesman transferred $142,742 to her daughter, Holly Woodworth, so that she would not have assets in her name if she ever needed Medicaid. In April 2010, Ms. Woodworth transferred the money to a trust designed to protect the assets from creditors. The entire corpus of the trust was used to purchase an annuity to benefit Ms. Woodworth. In February 2011, Ms. Woodworth filed for bankruptcy.
The bankruptcy trustee sought to void the trust, arguing it was a fraudulent transfer under bankruptcy code. Ms. Woodworth did not dispute that the transfer was fraudulent, but she argued that the property was never part of her estate because she was holding it in trust for her mother.

The U.S. Bankruptcy Court for the Eastern District of Virginia enters judgment for the bankruptcy trustee, holding that Ms. Woodworth clearly had complete ownership of the funds. According to the court, "Ms. Stutesman 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."

For the full text of this decision, click here.

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