I am a partner of Riser Adkisson LLP and licensed to practice law in Arizona, California, Nevada, Oklahoma and Texas.  My practice is in the area of creditor-debtor law, and I am the author of books on asset protection and captive insurance.  I have been an expert witness to the U.S. Senate Finance Committee, and am very active in the American Bar Association, and currently am the Chair of the Committee on Captive Insurance.  I was also the collection attorney for the $20+ million judgment by the San Francisco Bay Guardian against the holding company of the Village Voice chain.  I am serving as an American Bar Association adviser to the Uniform Law Commission's revisions of the Uniform Fraudulent Transfer Act and the new Series of Unimcorporated Business Entities Act. 

There is a popular perception among many elderly Americans that, in order to qualify for Medicaid and other public benefits, they should move assets out of their own names and into the names of their children.  There are three serious problems inherent in such an asset transfer strategy.  First, the federal statute governing Medicaid eligibility provides for a “look back” period of 36 months, or in the case of transfers to a trust 60 months, for persons who have transferred their assets for less than fair market value (there is an exception for special needs trusts in subsection (d) of the statute, that is not relevant here).  See 42 U.S.C. sec.  1396(c)-(d).  Second, creditors of the transferor (the parent) might claim that the transfer was fraudulent, in derogation of their rights.  Third, the creditors of the transferee (the son or the daughter) might claim that the assets have been irrevocably transferred by the parent, and are now available to satisfy their claims.  Sadly, it is this last eventuality that has come to pass in this case. 

Though this is a “Medicaid Asset Protection” case, the Debtor is the Daughter, and not Mom.  By this time, Mom at age 71 is still working as a nursing assistant and living off approximately $200,000 left over from Dad’s sale of his business before he passed. 

Mom was not familiar with finances, and left those matters to Daughter.  A representative of Merrill Lynch set up an account in Daughter’s name — not Mom’s — though it was Mom’s money deposited into the account.  Mom was designated the 99% beneficiary in case Daughter died.  Daughter had access to the account through a debit card, and was reimbursed for the taxes she paid on the investment income. 

Was this a gift to Daughter?  Not according to Mom, who “was adamant in her testimony that she did not intend to make a gift of the funds to her daughter.  She testified that she wanted to protect the funds from “scammers,” that is, persons who would seek to cheat her out of the money, and that she put the money in her daughter’s name to protect it.  At the same time, [Mom] testified that it was her understanding that she could not have assets in her own name, in order to be eligible for Medicaid and other public benefits, should there come a time when she needed such benefits. 

Dissatisfied with Merrill Lynch because of investment losses, Daughter and Mom to move their account and Daughter took it upon herself to find a top-tier estate planning vehicle to hold the account — by searching the internet. 

Daughter finally settled on a planner by the name of Rocco Beatrice of Estate Street Partners in Boston.  The latter engaged to provide their “complete and integrated Ultra Trust package for the protection of [her] assets, for the fixed fee of $18,828.”  The Estate Street Partners’ Engagement Letter agreed to provide their “Ultra Trust — Financial Instrument for your Mother’s home & vehicles”, and further stated in bold, italic letters:

Attorney John F. Libertine sent the Ultra Trust and related documents to Daughter to give to Mom, with a cover letter that summarized a purpose of the Ultra Trust:

For Asset Protection purposes, this Trust has been designed to reduce creditor risk, eliminate probate, and eliminate the estate tax. 

Mom signed the document creating the LNDP&G Ultra Trust, and both Mom and Daughter signed a “Private Annuity Exercisable On Demand” and “Financial Instrument Private Annuity Agreement”.  Mom independently signed a document called the “Roadmap” which summarized the transactions, and also transferred the deed to her home into the Ultra Trust.  Within a few days, Daughter transferred the $142,742 constituting what was left of the Merrill Lynch account to the Ultra Trust. 

Mom later testified that she did not view the Ultra Trust as an investment, but rather wanted to protect the money until she died.  Further, Mom testified, and Daughter agreed, that they believed that Daughter could not access the money until Daughter reached age 75. 

With a name like “Ultra Trust” how could things possibly go bad?  Well, let’s see how does. 

Daughter had an investment property with a balloon mortgage, whose interest rates took to the skies while the value of the property made like the Hindenburg.  Bankruptcy soon followed, a Trustee was appointed, and the Trustee filed a fraudulent transfer action to recover the $142,742.  Here, the Court relates that:

The Defendants do not dispute that the transfer of the $142,742 to the LNDP & G Ultra Trust was a fraudulent transfer under Section 548(a)(1)(A) and (B) of the Bankruptcy Code. []  In this, they are well advised.  The Ultra Trust and related documents are vague, confusing, verbose and internally inconsistent.  They plainly were designed for the purpose of protecting assets from creditors. [] (“ Financial Instrument avoids creditor claims of fraudulent conveyance”), & 5 (“For Asset Protection purposes”). 

Instead, Mom argued that she transferred the $142,742 to Daughter in trust for Mom’s own benefit, and that Daughter held the money only as an effective trustee and not in Daughter’s personal name.  Therefore, according to Mom’s argument, the $142,742 was never part of Daughter’s bankruptcy estate. 

The Court rejected this argument, noting that when Mom originally transferred the money to the Merrill Lynch account, that money became simply Daughter’s money, since Daughter had access to the funds at any time and could change the beneficiary designation on the account to delete Mom. 

This reduced Mom to finally making what amounted to a “totality of the circumstances”, i.e., all the facts taken together indicated that the money was to be held in trust for Mom’s benefit, and that therefore Mom retained the beneficial interest in the money.  But the Court was not convinced:

After all, they argue, why would a woman who was advancing in years, nearing retirement and working for an hourly wage, give the entirety of her retirement nest egg to her daughter?  The answer lies in [Mom's] own testimony—she wanted to remove the funds from her own name and place them into the name of her daughter, in order to be eligible for Medicaid and other publicly available benefits, should the need arise. { Mom] 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. 

Moreover, the nature of the Private Annuity compels the conclusion that the funds are those of [Daughter].  If, as asserted by the Defendants, the funds were held in trust for [Mom], then [Daughter] would have had fiduciary duties to her mother, for the preservation and prudent investment of the funds for her mother’s benefit. * * *  Yet, [Daughter] spent the entire corpus of this supposed trust, $147,742, to purchase an annuity for her own benefit. * * * [ Daughter] testified that the annuity would be purchased only when her mother passed away, but this is not what the Private Annuity Agreement says.  It provided that the Consideration ($142,742) was to be paid “no later than September 15, 2011 . . ..  The fact that the Annuity is for [Daughter's] sole benefit, and not that of her mother, leads the Court to conclude that [Daughter] owned the beneficial interest in the funds at the time of the transfer to the Ultra Trust. 

Here, the terms of the private annuity agreement really backfired on Mom, since the Ultra Trust could not make any distributions to Mom if they endangered its ability to make payments on the private annuity to Daughter.  While Mom and Daughter apparently believed that the money would be available to fund Mom’s retirement, the plain text of the documents provided otherwise. 

And with that, the Court held that the $142,742 was part of Daughter’s bankruptcy estate, and entered judgment against the Ultra Trust and its Trustee for that amount. 

ANALYSIS

If one executes documents that changes ownership to somebody else in fee simple absolute and without reservations, it will be likely be effective for all purposes, good and bad.  Judges are not impressed by litigants, such as Mom here, who show up and claim that while the documents say one thing, they really meant something else altogether. 

Where one occasionally sees this in asset protection planning is where a high-risk professional transfers assets to a spouse against the possibility of a negligence lawsuit.  The marriage then sours, and the professional shows up in court trying to argue that the transfers were all just a sham to defraud creditors such that the court should ignore the planning.  This argument is, as here, a loser. 

This case is no more than a slight variation the give-it-to-the-spouse cases.  Instead of a spouse, we have daughter.  Instead of a professional negligence creditor, we have Medicaid.  At the end of the day, we have a debtor claiming that they still own the asset for some purpose other than creditors.  It’s an old lesson, often repeated and apparently never learned. 

While this case eventually turns on a bankruptcy fraudulent transfer issue, the Court has an obvious distaste for Mom’s transparent desire to cheat Medicaid, by claiming in the future that she didn’t own the money given to daughter.  Medicaid planning — to the extent that it can be done at all — is a very specialized area of planning that is best left to those long experienced in the area. 

Even ordinary asset protection planning is difficult, however.  Asset protection should only be done by a professional who is skilled in the area, and those who rely on financial planners or other non-attorneys for asset protection planning are likely to be sadly disappointed.  Looking for other business, whether getting more money under management or giving value-added to clients, there has lately been an influx of non-attorney planners into the asset protection sector notwithstanding that they are wholly unqualified to provide advice in this area.  Thus, Mom and Daughter originally went to Merrill Lynch, and not to an asset protection attorney, with predictable results. 

On another issue, if a person is going to give money to somebody in Trust, as Mom claimed that she did to Daughter, then it is critically important that the Trustee have no personal incidents of ownership in the Trust.  Here, Daughter received distributions (even if just to pay taxes on the investment income), and had access to the Trust through a debit card.  Where the Trustee has personal access to the Trust access, the implication is that transfers to the Trusts were really just gifts to the Trustee.  That very implication sank Mom’s case. 

But let’s move on to the “Ultra Trust”.  Here, we apply my tried and true rule-of-thumb for advanced trust structures that are used for estate and asset protection planning: The more impressively a structure is named, the less likely it is to work. 

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The Deficit Reduction Act of 2005 changed the look-back period for Medicaid eligibility purposes for all gifts (into trust or otherwise) to 60 months.  You state that it is 36 months for outright gifts.  That is incorrect.