Category Archives: Alberts Law

Estate Inventory: Why It Matters and Tips on Its Preparation

Preparing and filing an estate inventory is an essential duty for the estate’s personal representative (the executor if there is a Will or the administrator if there is no Will). This is set forth in Section 3301 of the Probate, Estates and Fiduciaries Code in the Pennsylvania Consolidated Statutes. How this is done and why it is important need to be understood.

Estate Inventory Collects & Values the Decedent’s Property

Basically, the personal representative, who is in charge of the estate, must file a list of all real and personal property in the estate that is located in Pennsylvania. The property that is included is any property that the decedent owned solely or as a tenant in common. Property owned jointly with survivorship rights as well as property with named beneficiaries and “payable-on-death” accounts do not have to be listed in the estate inventory, although they could be included in a memorandum section in the interest of completeness.

Valuation of these assets is an important task of the personal representative. If you have this responsibility, you need to remember that all property in the estate inventory is valued as of the date of death. How this can be done for different types of assets will be reviewed in more detail, later. The date by which this document must be filed with the Register of Wills can differ based on circumstances, but it usually would be filed no later than the date that the estate’s inheritance tax return is due.

Why is the Estate Inventory Important?

Before looking at approaches to the preparation of the estate inventory, we should address why it is important. Of course, as mentioned earlier, Pennsylvania law names this task as a duty that a personal representative must fulfill so you have to do this because Pennsylvania tells you that you must. However, there are reasons that this duty exists.

One reason is that the estate inventory tells everyone with an interest in the estate all of the assets under the personal representative’s control. You have assumed personal responsibility for the listed assets and can be held liable for mishandling them. Their valuation also is used to determine the filing fee for the opening of the estate, which matters to the Commonwealth. This is why you can underestimate the estate’s value at the beginning when you do not know everything in the estate. When the estate inventory is filed, all assets will be included at their date-of-death values so the filing fee that was unpaid originally can be calculated at this point.

There are other reasons that make the estate inventory important for the personal representative. It can be useful when preparing the inheritance tax return because it includes assets and related information about those assets that will appear on various schedules of the return.

In addition, property listed in the estate inventory gives you the starting point for the estate accounting. This accounting should be provided at least on an informal basis if the estate is closed with a family settlement agreement. However, for an estate that closes after an estate audit at court, the accounting must be formally submitted to the court and interested parties for review. By having an accurate starting point, you are more likely to survive an audit unscathed.

Have a Plan to Locate & List Assets for the Estate Inventory

When you have a duty to complete, you need a good plan for handling this responsibility. As noted above, the estate inventory lists all real and personal property of the decedent at date-of-death values. There are numerous steps involved as you prepare the finished document.

The personal representative needs to find all the personal items, money and similar assets (such as bank accounts, stocks, and money-market funds), and real estate owned without any survivorship rights by the decedent. After identifying this property, you then have to value it. Generally, you can value the items without an appraisal. However, expensive personal property (which could include jewelry and art collections) and real estate (when located in Pennsylvania) will require a professional appraisal.

Detailed descriptions are important, especially with more valuable property. Real estate should be described well enough to be identified by someone looking at the estate inventory. Therefore, you should include its full address.

The type of property may lead to some less-than-obvious considerations. For example, financial accounts may involve a right to interest or dividends that are owed but not yet paid. These rights – if they exist at death – are estate property and must be listed in the estate inventory. A personal representative can work with the financial institutions to obtain theses values. Also, you could find previously unknown assets being held by Pennsylvania’s Bureau of Unclaimed Property.

When you begin to prepare the estate inventory, you probably would be wise to start with a more comprehensive list of property that then is grouped into categories, such as “household furnishings” or “wearing apparel,” before you file the document. Although it may not be filed, the more comprehensive list is useful for the personal representative tracking what becomes of the estate’s property.

Listings in an Estate Inventory: Categories v. Items

Household items and furnishings often are the most common estate items. Because they tend to have relatively small values, you could consider grouping them into categories. As an example, you probably would not produce a list of furniture that includes “sofa, $100; chair, $5”; and so forth. Instead, you would list “household furnishings,” encompassing items similar enough to be placed in a group. This is even more appropriate with small goods of minimal values falling within specific groups, such as “100 hardcover books,” “150 paperback books,” and “kitchen appliances.”

Remember that the items placed in a category with a blanket value are common items with nominal individual values. When the value of personal property is higher (e.g., something worth $3000), you would itemize it in the estate inventory. This would be true of jewelry. You might have a single category for costume jewelry, but you would itemize more expensive jewelry with their individual values and descriptions (stone type, carat weight, etc.).

Financial assets were mentioned earlier when looking at estate property that might be overlooked, such as accrued interest or dividends. All of the decedent’s financial assets are part of the estate inventory, though. You would include cash in the deceased person’s possession and bank accounts (with date-of-death balances). Also look for uncashed checks, balances of loans made to others, Certificates of Deposit, and similar financial assets. With financial accounts, you should include individual account types and numbers in the estate inventory.

Investments must be documented and valued. Among these are 401(k) accounts, IRAs, pensions and retirement savings, stocks, bonds, mutual funds, and annuities. Additionally, a personal representative must identify and list impending court awards that the estate will receive. Life insurance without a beneficiary also is in the estate, although it is not subject to inheritance tax.

Some Valuation Sources for the Estate Inventory

If the decedent owned motor vehicles, boats, or any other vehicles, the personal representative generally can use sources such as the Kelley Blue Book ( for a reasonable valuation. When listing these, you should include the make, model, and year for these vehicles.

The personal representative is responsible for locating any safe deposit boxes. Once located, they can be accessed by following the process detailed in Pennsylvania. Once you have permission, you need to include the number for the safe deposit box, where it is located, and the contents within the box.

Finding assets and then valuing them can be difficult at times. Financial assets may be difficult to identify at times, but the personal representative should review any personal income tax returns for the last 3 to 5 years for clues. Financial assets are not as difficult to value as they might be to find because there are public sources for such property as stocks and bonds. You would have to do some research to obtain the date-of-death values, but the information is not difficult to access. For other financial assets, you might have financial statements to use, or you could requests valuations from the financial institutions when necessary.

Valuation of Common Personal Items in an Estate Inventory

Personal property for which the title does not have to be transferred to the estate can seem to be difficult to value. Furniture, appliances, and clothing are notable examples. However, a personal representative seeking assistance with valuation for the estate inventory can find guides.

Establishing how much silverware, clothing, and small kitchen appliances are worth can be accomplished by using sources that provide estimates. For instance, you could use the Valuation Guide for Goodwill Donors, a similar source, for a starting point.

When an item is more valuable, you might want to turn to other sources that can establish a fair market value to include in the estate inventory. If the property is routinely sold in the marketplace, you could look at several ways to determine the value of single items or collections in this “middle” tier of possessions. One place to start often is eBay ( ). If you are a registered user, you can type in the item that you are researching, and eBay searches for it. The search results are displayed for completed auctions, and you would look at the prices listed in green, which show sales. If the details of the estate item are similar to the details of the sold item, then you have a reference point when completing the estate inventory.

The Estate Inventory – The Effort Will Pay Off in the End

When you have uncovered all real and personal property that can be found and have chosen a reasonable method to obtain the date-of-death valuations, you then can prepare the official estate inventory to be filed with the local Register of Wills. Because it has various uses, the personal representative of an estate must take this task seriously. It is not easy, but it will make other aspects of handling an estate easier and more successful.

Workers Compensation Offset & Social Security Disability

If you receive Workers Compensation when you also qualify for Social Security Disability (SSD) in Pennsylvania, your SSD award may be subject to Workers Compensation offset. Basically, your SSD could be reduced as a result.

A few points should be noted at the start. First, Supplemental Security Income (SSI) and Social Security retirement benefits are not subject to an offset generally. For example, SSI is affected in the usual manner: Workers Compensation is considered unearned income so, after the first $20 is this income is deducted, the rest reduces SSI dollar for dollar.

Second, Pennsylvania applies the Workers Compensation offset in the same way that all but approximately 14 other states do. These other states reduce the Workers Compensation award that is paid to someone receiving SSD. This only is possible if a state’s Worker Compensation law required this type of reduction under its law prior to February 18, 1981. For the purpose of this article, we will review the majority approach, specifically as Pennsylvania applies it. Also, since this is an introduction to the concept of offset, it will focus on a disabled individual without discussing this concept’s application when dependents also receive payments due to the disabled worker’s earnings record. Section 504 of the Social Security Handbook can be reviewed for its look at family benefits and additional details about concepts introduced here.

Workers Compensation Offset for a Disabled Individual

The standard rule is the total received in Workers Compensation and SSD cannot be more than 80 percent of the amount that you earned when fully employed. This amount officially is known as the “applicable limit.” To ensure that this is the maximum amount received, the Social Security Administration reduces your SSD income by the amount lowers the sum of these two payments by the necessary amount so that the maximum percentage is not exceeded. The reduction in your Social Security Disability is what is called the Workers Compensation offset.

The idea may not sound complicated, but the limit of 80 percent of your previous income level has to be defined and calculated. At this point, the idea is not as straightforward as the general rule might make it seem. The Social Security Administration calculates the maximum amount of combined benefits permitted by federal law so that it can reduce the SSD paid in a given month to keep this amount from exceeding the maximum. The impact of the Workers Compensation offset actually impacts people who earned less income because their benefits will be closer to the income that they earned while higher earners have a larger gap between earnings and the sum of the benefits that they possibly can receive.

Average Current Earnings & Workers Compensation Offset

When it comes to calculating the income that is used to determine if there will be a Workers Compensation offset, the SSA actually uses three methods of calculation to find your pre-injury income (which is called your “average current earnings”), which is the starting point in this process. Your “average current earnings” will be the highest income level produced by three methods of calculation.

The first calculation by Social Security is the average monthly wage – the “unindexed Primary Insurance Amount” – on which your Social Security Disability benefit is based. Then, there is the “high 5” calculation, which is the five consecutive years that add up to your earnings for this length of time; average monthly earnings are determined based on this amount. Finally, the average monthly earnings for either the calendar year in which you became disabled or any of the five calendar years prior to that is calculated – this result is known as the “high one.” Whichever of the three calculated amounts of average current earnings is highest will be used for the next step in finding the Workers Compensation offset. The “high one” tends to result in the highest value and ends up being the amount used.

Determining the Workers Compensation Offset

Next, the SSA uses its determination of your average current earnings and calculates 80 percent of it to set the combined dollar limit for your monthly SSD award plus your Workers Compensation amount. The Social Security Disability income will be reduced by the necessary amount to keep the total amount of benefits that you receive from exceeding the maximum. Potentially, your SSD could continue to be subject to the Workers Compensation offset until you reach full retirement age, at which point the SSA replaces your SSD with Social Security retirement benefits.

Monthly benefits are not the only category that can be affected under the federal law. Often, people receiving Workers Compensation will trade monthly payments for a lump sum. If this occurs, you would not avoid facing the Workers Compensation offset, but, since your regular SSD payments are received on a monthly basis, the Social Security Administration must alter the way that it handles the calculation of the average current earnings.

Adjustments Required for Payment of a Lump Sum

The general principle involves dividing this lump sum by the amount of Workers Compensation that you were getting each month. The possible reduction of SSD benefits focuses on the monthly amount that was being received by viewing its receipt as continuing for the number of months that is the result of this formula. To attempt to minimize the impact of the offset when a lump-sum settlement has been reached, a person might agree an amount replacing a lower Workers Compensation amount that would have been received monthly until the individual would reach Social Security’s retirement age (e.g., age 65 currently) so that the average current earnings that could trigger the offset are reduced.

An additional consideration is that the SSA may exclude medical and legal benefits that are part of the lump sum. If these amounts are subtracted out of the settlement, the reduced Workers Compensation settlement will yield fewer months for the offset potentially to be in effect after this total is divided by monthly amount currently being paid. However, you need to realize that the Social Security Administration may want to see the documentation of such a settlement before its acceptance.

In practice, the Workers Compensation offset has numerous potential pitfalls, and you have to be aware of these when you receive Social Security Disability benefits. If you take a chance without being sure that you have the implications explained to you by someone whom you trust, you may cost yourself some income to which you would have been entitled if you had understood the concepts that apply as well as how they apply to your situation.

Past Relevant Work and Disability according to Social Security

Past Relevant Work (PRW) can prevent you from being found disabled by the Social Security Administration, but claimants often do not understand what this means and why it can be so important in deciding a disability claim. In the five-step sequential evaluation to determine whether or not a claimant is disabled, this issue does not arise until Step 4 but will end the case for someone found capable of doing PRW – this person cannot be disabled.

The Basic Definition of Past Relevant Work

At its most basic level, Past Relevant Work examines your current capacity to perform past work, which may show the ability to do Substantial Gainful Activity (SGA) now. To define Past Relevant Work, you focus on a specific portion of your past work – this is the “relevant” part. The Social Security Administration uses a 15-year window here. This window “closes” at the earlier of two dates: the “date last insured,” which is the last day that you met the requirements to be eligible for Social Security benefits, and the date that the disability determination is made. Then, you look at all of your work from whichever date applies to the date ending 15 years prior to this date.

However, not all of your past work within this timeframe is necessarily relevant (SSR 82-62).The general rule of thumb is that you had to have earnings that at least equaled the amount set as Substantial Gainful Activity (SGA) when you did the work. Relevant work also means that you performed the work long enough to know how to do the job. The level of skill required by a job provides the guidance here. For example, unskilled positions usually are considered to take no more than 30 days to learn. As a job becomes more complex to learn, you would need to earnings at SGA level for a longer period of time. Being able to explain what you had to do at a particular job is important because this demonstrates the necessary skill level, which, in turn, affects how long you had to do a job at SGA level for it to be considered PRW.

Past Relevant Work becomes very important if you are not found to meet or equal one of the SSA’s listed impairments because, while PRW cannot lead to a finding that you are disabled, it can eliminate the possibility of being found disabled. For example, if the Administrative Law Judge (ALJ) at a hearing decides that you did something that would be Past Relevant Work and also decides that your functional capacities at the time of the hearing would allow you to do this job now, then you are not disabled. Everything that would qualify as PRW during the prior 15 years must be beyond your functional capacities for your disability claim to reach the fifth and final step of the sequential evaluation (i.e., whether or not a claimant can do any job found in significant numbers in the national economy).

The SSA chose fifteen years as the lookback period for a specific reason. The theory is that jobs and their requirements gradually change over time with societal and technological changes occurring. What employers will need to do a particular position has to adjust to these changing demands. The thinking is that, after 15 years, a comparison between what you had to do then versus what you would have to do in the same work now is unrealistic.

Past Relevant Work: Viewed from Two Perspectives by Social Security

Past Relevant Work is viewed from two potentially different perspectives. First, an ALJ at a hearing wants to know how you performed this work (SSA – POMS: DI 25005.020 – PRW as the Claimant Performed It – 04/27/2017). This could be very different from the standard definition since one employer’s needs may differ from another’s. Being able to explain how you did a job on a function-by-function basis is crucial here. Another reason is that your work as you did it may not be among the standard definitions found in the Dictionary of Occupational Titles (the “DOT”) because many jobs are composed of various elements of different jobs. These “composite” positions are not found in the DOT.

As long as you can perform all of the essential parts of the job as you did it, you usually are not considered disabled. There is enough flexibility in the concept of Past Relevant Work that part-time work could be considered PRW under certain circumstances as could work performed during a 4-day week instead of the 5-day week that is part of the standard SGA definition. While you may be able to do PRW as you actually performed it, this flexibility regarding defining your Past Relevant Work might not preclude a finding of disability at Step 5. For example, an inability to work a 40-hour week could significantly erode your occupational base, leading to a favorable disability determination here.

The second way that Past Relevant Work is evaluated does focus on how the work generally is performed in the national economy. The DOT remains the starting point for this definition. A decision on disability should consider and discuss PRW from both perspectives.

In the context of the SSA’s sequential evaluation of disability claims, Past Relevant Work could be irrelevant if a final determination on a claim is made in any of the 3 prior steps (Code of Federal Regulations § 404.1560). However, since there is no guarantee that this will happen, a case must be approached with the idea that Step 4 will be reached. This means that a claimant’s PRW needs to be developed. The main source of documentation for vocational evidence of Past Relevant Work should be the claimant, who can describe past employment in terms of the tasks, responsibilities, and other factors that comprised the work. If the claimant cannot or, for some reason, will not provide this information and if no other source for this vocational information is available, the claim generally will be denied.

How the Ability to Do Past Relevant Work is Determined

After the information about PRW is determined, it is used to decide if you are able to do your Past Relevant Work. Your Residual Functional Capacity (RFC) – what you can do despite any and all limitations due to your impairments – is determined prior to Step 4. RFC is described on a function-by-function basis. This is compared to the physical and mental demands of your PRW at this point. The issue is whether the RFC will permit the claimant to do the Past Relevant Work as the claimant actually performed it or as it generally is done in the national economy. The facts of the case are used to decide how these comparisons are made.

In the end, if PRW cannot be done under either test, then the disability determination moves to Step 5. This is the final step, which looks at the ability to do any work at SGA level that is found in the national economy in significant numbers.

It is important to remember that a decision regarding Past Relevant Work does not occur in a vacuum. There must be a current comparison point, which is why mental and physical Residual Functional Capacity must be established prior to Step 4. For example, at a hearing, the Administrative Law Judge will determine the claimant’s functional limitations, looking at capacities to sit, stand, walk, lift, and carry (among other physical abilities). They are compared to the physical demands of PRW. If there is evidence of mental or emotional impairments that affect a person’s RFC, then the ALJ needs to know job responsibilities and duties from the PRW that would be likely to produce tension and anxiety, for example. Again, this is a function-by-function comparison of current Residual Functional Capacity with the claimant’s Past Relevant Work and what it required the person to do.

Quick Tips to Remember about the Development of Past Relevant Work

If you apply for disability, you always must bear in mind that you are the primary source of your work experience (Code of Federal Regulations § 404.1565). You need to give a detailed description of jobs that you performed. Then, you have to give credible testimony of the work requirements that you no longer can meet as well as the reasons why you cannot perform them anymore. Your testimony is not the only consideration, though. Disability decisions rely on medical evidence so the evaluation of medical evidence must support your reasons. Other sources that may influence any decision about your current ability to do PRW may come from a Vocational Expert at your hearing and even the somewhat outdated Dictionary of Occupational Titles, providing an overview of how your Past Relevant Work generally is performed in the national economy.

Taken together, all of these things lead to the decision at Step 4 of the sequential evaluation. The decision maker should state the relative weight given to medical and non-medical factors in the determination regarding your ability to do your Past Relevant Work. In doing this, your Residual Functional Capacity must be explained as well as the factual findings of the physical and mental demands of the past work being considered. In the final analysis, you need to remember that you will give much of the information needed to make this decision so you cannot afford to treat your Past Relevant Work as an afterthought. While no finding regarding this issue can ensure a favorable disability determination, a decision not to fully develop your Past Relevant Work can easily doom your disability claim.

Estate Property Transfers Without an Estate

Pennsylvania provides a number of ways that estate property of a deceased individual can be distributed. Usually, this involves opening an estate. When this step is taken, the personal representative for the decedent receives Letters Testamentary as the executor named in a Will or gets Letters of Administration as the administrator when no Will naming an available executor is found. Pennsylvania law dictates who can be chosen as the administrator. Meanwhile, assets with a named beneficiary or a co-owner with a right of survivorship are transferred outside the estate.

There are other ways to distribute estate property without going through the usual steps to transfer estate property. When an estate has a total value of less than $50,000 in real and personal property, the personal representative can settle it by petition. This is possible one year after an estate is opened and the first complete advertisement of the grant of letters.

On the other hand, small estates consisting of no more than a gross value of $50,000 in personal property can be settled by a petition to the court. This does not require an estate to be opened. In this situation, you would not deal with any real estate owned by the deceased in this petition. The procedure also does not count payments to family and funeral directors under Section 3101 of the Probate, Estates and Fiduciaries (PEF) Code, which is the focus of the remainder of this article.

Payments to Family & Funeral Directors under Section 3101

Distributions under Section 3101 deal with the transfer of ownership of estate property without requiring any action involving an estate or the court. This property generally is monetary and can come from a variety of sources. As set out in the PEF Code, there are a number of ways for specific persons to obtain payments. The total value must be below a maximum amount, as well. The distribution would not involve the court system since you would not need to get a short certificate to transfer ownership. In addition, there is no need to present a petition when this provision applies. A brief review of what can be obtained without opening an estate follows.

The employer of a person who resided in Pennsylvania at the time of death can pay wages, salary, or employee benefits up to $5,000 to the person’s spouse, any of her children, her mother or father, or any brother or sister of the individual. The distribution preference in this and the other categories follows the order in which they are listed. Therefore, a surviving spouse is preferred over anyone else listed here. The person receiving payment of this estate property can be held accountable if the distribution was improper, although the employer is released from liability.

Banks, savings and loan associations, credit unions, and other savings organizations also are permitted to release funds of an estate after the death of a depositor, a member, or a certificate holder. The amount cannot exceed $10,000. Also, a receipt for the funeral bill or an affidavit of a licensed funeral director acknowledging satisfactory payment plans have been made has to be presented. The order of preference is the same as in the prior paragraph: a spouse, any child, the mother or father, or any sibling of the decedent.

A patient’s care account also can be accessed when the deceased was a qualified recipient of Medical Assistance and a patient in a facility that held such an account for the individual. The payment first would be released to a licensed funeral director for burial expenses of $10,000 or less. The facility can pay what remains, again, to a spouse, any child, a parent, or any sibling. The total amount paid from the account cannot be more than $10,000, though.

A life insurance policy that does not name a living beneficiary (primary or contingent), for example, results in property payable to the estate. Unlike most estate property, these life insurance proceeds are not subject to inheritance tax. They can be paid to the same list of relatives, in the same order, as listed in previous paragraphs. The insurer’s payment cannot exceed $11,000. There is a 60-day period following the death before the payment can be made. In addition, payment cannot be made if there has been written contact from an estate’s personal representative before the funds are released. The adult requesting the payment must submit an affidavit specifying the relationship to the decedent.

Finally, under Section 3101, estate property of a Pennsylvania resident held by the Bureau of Unclaimed Property can be released by Pennsylvania’s Treasurer. Certain conditions have to be met. One condition is that the person making the claim must be one of the following: the surviving spouse, a child of the deceased, one of the individual’s parent, or a sibling. In addition, the unclaimed funds or abandoned property must be no more than $11,000 in value. Finally, there cannot be a personal representative for the decedent or – if there is one – this person must have been appointed at least five years ago. The claimant submits the required documentation to the Treasurer, who determines if the claimant is entitled under the statute to claim the property.

Transfer of Title to a Vehicle

One additional category for transferring estate property without opening an estate or petitioning the court merits mention. Transfers of title to motor vehicles from a decedent can be accomplished without having opening an estate. The Vehicle Code permits title to be transferred from a deceased owner to certain relatives.

For example, when there is no Will, a surviving spouse could assign the title to another person. As long as this person submits the proper documents to the Department of Transportation, she becomes the new owner. In addition to an acceptable proof of death (usually, a death certificate), you need Form MV-39 (“Notification of Assignment/Correction of Vehicle Title upon Death of Owner”) and Form MV-4ST (“Vehicle Sales and Use Tax/Application for Registration”). Although you must submit a sales tax form, no sales tax is assessed. However, you may have to pay inheritance tax.

Other relatives may be involved in this assignment of title, as well. For instance, if the decedent had children over 18 years old and a surviving spouse, all would have to sign the MV-39 form transferring title to whomever they choose. Rather than review all possible fact patterns in which relatives can assign title, the Department of Transportation has a fact sheet on its website that detailing possible transfers after the owner’s death.

The categories of estate property that have been reviewed are examples of transfers of property without letters testamentary or letters of administration being issued. Other possibilities meeting this criterion, such as a small estate petition, involve the entire estate or, at least, all of the personal property of the decedent. They also action through the court. The categories of estate property discussed here do not require action involving the court. I will leave you with one word of caution to keep in mind, though. Since property was transferred from an estate, you still must check on the possibility that you have to pay inheritance tax.

Life Insurance with No Beneficiary

There are a number of reasons why a person might purchase a life insurance policy on herself. Often, the death benefit is to be used to pay for funeral expenses and other bills that the person still owed when she died. Another person should be named as the beneficiary if the policy purchased for this purpose. This person would be given responsibility for making these payments. However, life does not always go as planned.

When there is a named beneficiary, a life insurance policy is payable without having to go through the administration of an estate. When the company that issued it receives the necessary documentation, the money would be paid to this beneficiary, and, if used as planned, everything goes smoothly. Of course, the best laid plans of a deceased individual may go astray if events prior to her death do not follow the expected plan.

Often, the policy’s beneficiary is a child of the owner of the policy. This generally would mean the odds that the intended person will receive the proceeds. As long as the beneficiary uses the proceeds as the deceased parent requested, the plan will be a success. Then again, the odds may be in favor of this happening, but life does not promise, let alone guarantee, that something won’t go against the odds.

An elderly parent generally will outlive an adult child. When the adult child is the named beneficiary of the older parent’s life insurance policy, there could be a major problem if the child ends up dying first. Other variables of life may wreak havoc on what was expected. This example is based on a situation that occurred and is not all that rare. The other parent already had died. There were two adult sons, although only one was a beneficiary on the policy. He also had three children. When he died before his mother, her straightforward idea began to get complex and unworkable.

The Importance of Contingent Beneficiaries

After the son died, the policy’s contingent beneficiaries would be the crucial parties if the plan is to be implemented. A contingent beneficiary replaces a beneficiary who is unable to perform in this capacity. Sometimes, there is no contingent beneficiary, which will lead to potentially unintended consequences. The first problem is that the benefits remain to be paid. If no one was named to receive them under the new circumstances, the death benefits are paid by default to the decedent’s estate.

Since no Will existed, after the estate was opened and the policy was found by the estate’s personal representative who did then does what the insurer requires to prove that the named beneficiary could receive the death benefits while he (the other son) had the right to collect the asset on the estate’s behalf, the money ultimately would be paid to the parent’s estate. Being that she lived and died in Pennsylvania, the death benefits now must pass according to the intestacy laws of Pennsylvania – this result diverged considerably from what was intended.

Because the proceeds passed through the estate, any distribution and use would be delayed and may not follow the original plan that had seemed so carefully constructed. This could have been avoided, in part, by naming a contingent beneficiary in case the first beneficiary could not receive the death benefits. This was not done when the policy was purchased, and the mother did not update her beneficiaries after the son chosen to get them had died. Either way would have avoided payment to the estate. Also, if either path was taken, the likelihood that the policy’s benefits would be used as planned would have been better than the intestate distribution could promise since the parent had not discussed how the proceeds were to be used with anyone other than the original beneficiary.

Taxation always is concern and often is a reason that people pursue so-called nonprobate methods to distribute property. Life insurance proceeds that are paid to the beneficiary named in the policy have not been subject to Pennsylvania inheritance tax. However, after December 13, 1982, even when a policy’s proceeds are paid to the estate instead of a beneficiary, no inheritance tax is assessed. 72 P.S. § 9111(d). With this not being an issue, the question of what happens to the insurance proceeds that now were part of the estate is the main one in need of an answer.

The life insurance benefits now are another asset of the mother’s estate. The beneficiary designation is of no consequence because the one brother who was named already is dead. Since the mother had no Will at her death, Pennsylvania’s intestacy laws will determine what happens to the benefits after the insurance company has paid them to her estate.

Who Inherits if There is No Beneficiary?

The law is found in Title 20 of the Pennsylvania Consolidated Statutes in Chapter 21, “Intestate Succession.” Sections 2103 and 2104 provide the answers. The first section applies to an estate, such as this one, in which there is no surviving spouse. It provides the order in which property will pass based on the relationship to the person who has died. The mother’s issue are at the top of the list in intestacy so all the insurance proceeds will be distributed to those who meet the definition of issue. The surviving son qualifies here, but you have to look at the next section (“Rules of succession”) to determine his son as well as the shares for anyone else.

“Issue” includes siblings and, when applicable, their descendants. This is applicable in the current case. The brothers would have been in the same degree of consanguinity because they directly descended from the same ancestor – their mother. However, with only one son surviving, the number of equal shares is defined at this level of survivorship since he is the closest surviving relative. Since there were two sons, this means that there will be two equal shares. The surviving son will receive half of the benefits from the life insurance policy now. It is worth noting that this section contains a survivorship clause – anyone who would inherit under Pennsylvania’s laws of intestate succession must outlive the decedent by five days. He did, so this becomes a meaningless footnote here.

There still is the second one-half share of the insurance proceeds to be distributed. The statute dictates that this share passes by representation to the three children of the deceased brother, which gives each an equal share of one third of what their father would have received under the laws of intestacy. In the end, by not naming a contingent beneficiary in the life insurance policy, the mother altered her intended plan to a considerable extent. Instead of one person receiving all of the proceeds from the policy, her estate will distribute half of the benefits to her surviving son and a one-sixth share to each of the surviving children of the deceased son, who was supposed to receive all of the proceeds when the life insurance policy was purchased by the mother.

This situation provides a good lesson regarding any estate planning. When circumstances change, your plan may not represent your intentions. If the resulting change to your estate plan is significant, then you need to revise that plan as soon as you can because you’ll never know when it had to be implemented.

Elder Law and Estate Planning

Elder law and estate planning are not two terms for the same area of law. However, they are related. Estate planning is an important part of the work that an elder law attorney does. At the same time, the attorney generally takes a broader, more holistic approach in an elder law practice.

To paraphrase the National Elder Law Foundation’s definition of elder law, this area of practice involves counseling and representing of older persons and their representatives in matters regarding the legal aspects of health-care and long-term care (LTC) planning. Additionally, the attorney educates clients about and helps them to obtain public benefits. The definition includes discussing the possible need for surrogate decision-making while addressing the issue of legal capacity. The attorney and client also need to talk about the conservation and, ultimately, disposition and administration of estates. After the consideration of tax consequences, the attorney looks at how to implement the client’s decisions about these estate issues.

As the diversity within the definition suggests, the elder law attorney needs good resources in numerous non-legal fields. This may include access to medical professionals, financial advisors, and social workers, for example. The legal goals often cannot be achieved without first addressing non-legal issues. The lawyer needs to deal with them successfully for the overall result to be positive. Often, topics include resolving family conflicts, understanding a client’s illness, and adapting to any consequences of those health problems.

Elder law is a challenging legal area. To help the client, an attorney must focus on aging, disability, and incapacity, as well as the difficulties that a person faces with each problem. Then, the attorney has to assist the client in creating a plan to deal with all of these. They need to work together to plan for health-care issues. Meanwhile, they have to look at long-term care since the client may require this at some point. The attorney must review obstacles to LTC financing and look for ways around these. In addition, barriers to essential assistance and services will exist. To overcome these, the attorney works with the client and family members to find solutions. Due to all of the issues that an individual may face, this practice area involves a powerful need for comprehensive estate planning.

In general, the elderly have a greater sense of urgency to prepare documents that are necessary due to serious illness or death (as with a Last Will and Testament). At the same time, attorneys in elder law often have clients who have special needs caused by disabling diseases. This makes sense because the issues often are similar. Both need to deal with possible incapacity in the relatively future while many younger people in good health may not view these matters as important at the moment. At this point, I will look at the elder law issues that have been raised from the perspective of individuals with special needs since they have to plan for the same types of problems regardless of age.


Special Needs Planning and Multiple Sclerosis


The National Academy of Elder Law Attorneys (NAELA) teamed up with the National Multiple Sclerosis Society and the Stetson University College of Law to prepare a video series for people with MS. This disease tends to strike people between the ages of 20 and 50. In addition, women get MS at a much higher rate than men do. Its progression is not predictable. However, MS often becomes disabling over time because it attacks a person’s central nervous system. This results in the flow of information within the brain, and between the brain and body, being disrupted.

Since the disease’s progression is unpredictable, the individual diagnosed with MS and family members need to look at the complex legal and other issues that may arise. To do this, they should seek the assistance of an attorney with experience in elder law and special needs law.

These videos focus on planning for possible incapacity and accessing LTC benefits. As a result, they can help not only people with special needs, such as those caused by MS, but also the elderly. In addition, anyone interested in an introduction to various estate planning documents can find benefit.


The Video Series on MS – Looking at Legal Issues & Plans


The five videos in this series are:

  • How Elder & Special Needs Law Attorneys Can Help People Diagnosed with MS (Presented by Craig C. Reaves, CELA, Fellow, CAP)
  • Legal and Care Planning for Younger People with MS (Presented by Robert Brogan, CELA, CAP)
  • Coordinating Attendant Care and Available Resources (Presented by Stephen Dale, Esq., LLM)
  • Family Law and Divorce: When a Partner Has MS (Presented by Patricia E. Kefalas Dudek, Esq., CAP, Fellow)
  • Property and Health Care Decision-Making Agents: An Overview (Presented by Mary Alice Jackson, Esq., Fellow)


I have placed two of the videos dealing with the types of issues that I mentioned earlier below. They also discuss a number of legal documents that are useful when these issues arise. The presenters review various kinds of trusts and the purposes they serve. Additionally, they talk about medical and financial powers of attorney, which can benefit everyone. A person with MS understands some of these benefits more than the average person. For example, powers of attorney can make a guardianship, which strips a person of at least some civil rights, unnecessary. While a debilitating disease may make the possibility of a guardianship seem more real, anyone can be in an accident that results in incapacity and the need for a substitute decision-maker. Powers of attorney fill the void here.

These two videos also look at other tools for planning for events that can occur during anyone’s life at some point.  This includes what commonly is called a Living Will in Pennsylvania. A Living Will permits you to make end-of-life choices while you still are able express your preferences.

This video provides an overview of Property and Health Care Decision-Making Agents:

I also included the video about Legal and Care Planning for Younger People with MS:



NAELA: A Useful Resource for Elder Law & Special Needs Law


All of the videos in this series can be viewed on the NAELA website. In addition, you can find a lot of other useful elder law materials by visiting this website at

This video series highlights some of the benefits provided by attorneys experienced in elder law and special needs law. As the population in Pennsylvania and elsewhere ages, people increasingly will need attorneys who are well versed in elder law and special needs law. An attorney who can help you handle the often overlapping legal, medical, and financial decisions as you plan for an uncertain future can be very helpful. The National Academy of Elder Law Attorneys is a good source for this legal assistance. Remember that estate planning is a major part of elder law so NAELA attorneys can be good resources in this area. They also can provide information about long-term care options and how to access these services. Considering what you may need and want whenever you might become incapacitated is important. Having a documented plan in place to deal with this possibility is essential.


An insolvent estate has debts in excess of decedent’s assets. This means that not every debt can be paid in full. Pennsylvania law determines the order that debts are paid and, ultimately, the amount. Surviving spouses and children often worry about their responsibilities for debts that the estate cannot pay. Generally, this is not a problem. This is a brief overview of what usually happens and why.

Usually, a decedent’s creditors only can reach assets in the decedent’s estate. A number of assets are exempt from claims of creditors or are not part of the estate. Therefore, creditors cannot pursue these. Examples include a life-insurance policy owned by the decedent naming a beneficiary other than the decedent or the estate. In addition, property owned with someone else having the right of survivorship is not part of the estate. These usually are removed from the estate when determining its solvency.

Responsibilities of the Personal Representative

The estate’s personal representative – the executor when a Will is being probated or the administrator when there was no Will – determines if an insolvent estate is involved. This is done before paying debts or making distributions. An insolvent estate adds difficulty to the personal representative’s job. Since one of the first responsibilities being the payment of the deceased individual’s debts, the personal representative review all claims against the estate. Next, the order in which the creditors will be paid is determined. Gathering the estate’s assets to use  to make the payments is another crucial task.

The personal representative quickly learns if the estate is insolvent. If it is insolvent, this individual should not make distributions to heirs or beneficiaries. Doing so can lead to liability for debts that otherwise could have been paid.

Section 3392 – Classification of Debts & Priority of Payment

With an insolvent estate in Pennsylvania, you have to look to the law for guidance regarding payment of debts. Section 3392 of Title 20 of Pennsylvania’s Consolidated Statutes sets out classifications of various types of debts and the order in which these are paid.

While there are 7 categories listed in Section 3392 (“Classification and order of payment”), there is an additional one given preference over these. These are claims that the federal government may have for taxes owed to it. Generally, the phrase, “subject to any preference given by law,” gives top priority to federal tax debts subject to liens. As the personal representative of an estate, you must look for these before paying other debts. Otherwise, you could be responsible for paying the debts that have priority due to the mistake of paying debts of lower priority instead.

Section 3392 is important when there is an insolvent estate, but it applies to all estates. This is especially important since an estate that looks solvent may be viewed differently after all claims against the estate have surfaced. You cannot pay claims of a lower classification before all claims of higher classifications are paid in full. Also, with an insolvent estate, when you reach the classification at which there are not sufficient assets to pay all claims, you would make partial payment for each claim using the same proportion throughout that class. Any classes below this would have to go unpaid.

As for the classes themselves, the first category to be paid involves the costs of administration of the estate. This includes filing and related fees (such as advertising the estate). Other administrative costs that Pennsylvania gives top priority include legal fees and the personal representative’s compensation. Second in the list is the family exemption, which is cash or property with a value of up to $3,500 that can be claimed by a surviving spouse or children and parents of the decedent who resided in the decedent’s household.

After this, priority is given to funeral and burial costs as well as the cost of medicine used by the deceased person during the final 6 months of life. Medical, nursing, and hospital services during this period also are in this category, along with money for services provided by any employees of the decedent during these 6 months. The final part of this category are services provided by Medical Assistance in the last 6 months of life.

The fourth priority for payment is the cost of a grave marker. Then, priority is given to any rent owed for the decedent’s residence during the 6 months immediately prior to death.

Listing 5.1 (actually the sixth priority) involves claims made by Pennsylvania and its political subdivisions. Finally, there is a catchall category of all other debts and claims, which would include such items as credit-card debts solely in the decedent’s name. If there are sufficient assets in the estate, the personal representative should work to pay all of the above debts as soon as possible. Then, the assets that remain can be distributed to heirs or beneficiaries (depending on whether there is a valid Will).

Possible Liability of Third Parties for the Estate’s Debts

However, when an insolvent estate may exist, not all claims and debts can be paid from its assets. This can raise a question that is important to various parties interested in the estate: can someone other than the decedent be held responsible for debts that cannot be paid by the estate? The answer is a qualified “yes.”

Again, remember that executors and administrators can be responsible for debts in some circumstances. To avoid this, they cannot distribute assets from an insolvent estate since they face personal liability for the debts that cannot be paid as a result. A distribution from an apparently solvent estate is an “at-risk” distribution because there can be claims that become known after the distribution. An executor runs the risk of being responsible for paying any amount of a claim that the money received by the beneficiary could have paid. With “at-risk” distributions, a personal representative generally wants to be protected by an “indemnification agreement.” This means the recipient agrees to reimburse the estate if this is needed to pay its debts.

When faced with an insolvent estate, the personal representative often seeks the court’s protection before acting. In this situation, you should not consider paying debts of the insolvent estate unless you obtain court approval of a petition under Section 3392. This will prevent you from being held responsible for paying the debts personally.

There also are some situations when others can be held accountable for debts in the name of the deceased person. While creditors may have more incentive to pursue third parties in an insolvent estate, the debts may be enforceable under any circumstance. You always will be liable for a debt on which your name appears as a co-signer or guarantor. Charges that you made on a decedent’s credit card can leave you with responsibility for that debt.

As for spouses or children, liability usually follows a similar course. In other words, surviving spouses and children generally are not responsible for debts solely of the deceased spouse or parent. However, when both spouses sign a note for a loan, for example, the estate and the surviving spouse are liable for the debt, even if only one spouse received its benefits. Also, if a surviving spouse or child signed a contract as a guarantor when the decedent needed medical care, liability for any unpaid debt likely remains. An important point that runs throughout all of this is that creditors want to be paid and potentially will look at all possible sources when a decedent leaves an insolvent estate.

Debt Forgiveness and Income Tax

Debt forgiveness, which is the cancellation of a debt that you owe to someone, often can lead the IRS to see an increase in your income tax bill. However, there is no simple rule to be applied to every situation. For example, if you are in bankruptcy, the IRS is unlikely to see income that can be taxed after debt forgiveness. On the other hand, when a commercial lender cancels your obligation to repay a debt, you may find yourself with income equal to the amount of debt forgiven. In this situation, you do not have any money in hand, but you can expect a tax bill on the amount of money that the lender decided could not be collected from you. Your former lender usually should send you an IRS Form 1099-C (“Cancellation of Debt”) to let you know that the debt that you no longer owe triggered an increase in income taxes at the time of debt forgiveness. Remember that the IRS also gets a copy of the 1099-C and is unlikely to forget the incomes taxes that you now owe.

You may wonder why you receive debt forgiveness income when you cannot repay a loan. One point that will be discussed later is that the IRS does not see income when a debt is cancelled so the explanation here is general. The idea behind debt forgiveness resulting in income begins with the fact that the funds you originally borrowed were not income since those funds represented money loaned to you that had to repay to the lender. When a debt is forgiven, you no longer have to have any obligation to pay back whatever amount of the loan remains unpaid – essentially, your wealth has increased now that you have money that you can keep.

As long as none of the exclusions or exceptions (which will be mentioned below) regarding debt forgiveness income applies, the formula for calculating income simply involves subtracting the fair market value of the property from the debt owed at the time that the lender took a specific action, such as foreclosure or repossession. Also, you may receive a capital gain due to foreclosure, for example; this is not debt forgiveness income but usually occurs when the property’s fair market value is greater than its adjusted basis (approximately your original purchase price plus the costs from major improvements). An amount could be excluded due to the length of time that this was your personal residence during the last five years – I won’t go into the details here because the focus is on debt forgiveness for the moment.

There are several exceptions when debt forgiveness does not lead to taxable income. The examples provide general rules about various exceptions, which could be subject to exceptions themselves – consulting with someone who handles these matters about your specific situation always is advisable.

In general, a debt that is cancelled through a gift, a bequest or devise, or an inheritance is not considered income. Certain student loans also provide that all or part of the debt incurred to attend a qualified educational institution will be canceled if the person who received the loan works for a certain period of time in certain professions for any of a broad class of employers. If your student loan is canceled as the result of this type of provision, the cancellation of this debt isn’t included in your gross income. To qualify for this treatment, the loan must have been made by entities in one of three categories: 1) the federal government, a state or local government, or an instrumentality, agency, or subdivision of one of those governments; 2) a tax-exempt public benefit corporation that has assumed control of a state, county, or municipal hospital, having employees defined as public employees under state law; or 3) an educational institution (an organization that has a regular faculty and curriculum as well as regularly enrolled students who attended educational activities at that place). Other criteria have to be met for these loans not to be income if they are cancelled. One major reason for debt forgiveness here is to encourage students to serve in occupations or areas with unmet needs in which the services provided are for, or under the direction of, a governmental unit or a tax-exempt Section 501(c)(3) organization.

There also is an exception for deductible debts. Most individuals use the cash method of accounting so income is seen when the money is received while expenses are counted when money is paid for goods or services. Therefore, when a debt was supposed to be paid but the obligation to do so was forgiven, you would not realize income at that time if payment of the debt would have been a deductible expense for you.

The Home Affordable Modification Program (HAMP) also has some exceptions to debt forgiveness income. Reduction of your principal mortgage balance generally is not income when Pay-for-Performance Success Payments and PRA investor incentive payments are involved. Meanwhile, when the principal balance is reduced due to Principal Reduction Alternative under the same program, you should expect that you have taxable debt forgiveness income. Any exception to possible debt forgiveness income can become complicated; again, seeking a professional’s assistance is the best way to protect yourself from making costly mistakes in this area.

After any possible exceptions are reviewed, you then look at the exclusions. For individuals, some of the most common situations that are excluded from consideration as income from the cancellation of a debt would be the following. The most common one probably involves bankruptcy – if a debt is discharged in a bankruptcy case, then it cannot be counted as income from debt forgiveness. Insolvency, which involves a situation when your assets have a fair market value that is less than the amount of all of your debts, also would exclude you from having debt forgiveness income. However, this is not easily determined so you would be wise to have a tax professional examine your financial position to determine if you are insolvent.

Another category of exclusion that is complicated and would require the help of a tax professional usually deals with certain farm debts. The IRS also has noted that non-recourse loans are not subject to debt forgiveness. These loans permit a lender to repossess the property that you financed with the unpaid debt or, if this does not apply, the property that you used as collateral in the event that you defaulted on the loan. There is no personal liability for the default on a non-recourse loan, which is why you do not gain taxable income from the debt’s cancellation. On the other hand, this type of loan still could result in a capital gain when the property is sold.

Exceptions should be applied before you apply the exclusions because their effects on “tax attributes” of yours are different. Unlike exceptions to tax forgiveness income, exclusions require you to reduce tax attributes, which include certain credits and losses as well as the basis of assets. Remember that, while income due to debt forgiveness can seem to be a relatively simple concept, there are many twists to this concept of which you must be aware, and the only way to approach this is to consult with a tax professional about all of the implications that ultimately will impact your tax bill.

There is one final word of caution when the possibility of income from debt forgiveness exists. Whether or not a Form 1099-C was received does not determine income tax implications. The IRS requires these forms only under certain circumstances. When a creditor cancels a debt of less than $600, you may not get a Form 1099-C. However, you must look at the possibility that you received income that is taxable due to debt forgiveness despite the absence of the 1099-C because the IRS would look for income in this situation and will not be do forgiving if you neglected to pay tax that you owed.

A Self-Funded Special Needs Trust, an Exception for Medicaid (MA) & SSI Eligibility

In 1993, Congress passed a law (often called OBRA ’93) that allows some disabled individuals to be the beneficiaries of what is known as “self-funded” Special Needs Trust (SNT) under the Social Security Act. This is set out in Title 42 of Section 1396p(d)(4(A) of the U.S. Code. Since the law can be somewhat confusing, the Social Security Administration (SSA) developed a review process with 8 steps when its staff evaluates a trust under this law.

In terms of terminology, we are looking at self-funded Special Needs Trusts. Another type of trust is called a “supplemental needs” trust. This developed from cases, not specific legislation. While OBRA ’93 permitted assets of disabled individuals to be used in certain types of trusts, a supplemental needs trust has created by a third party with the assets of the third party. However, we only look at self-funded SNTs here.

In reviewing the steps used by the SSA, these also provide a practical way to quickly determine if a person who might meet SSA’s definition of disability could be the beneficiary of a self-funded SNT. If it survives this quick test, then you still must pay attention to the remaining details for SNTs. After all, a person with the trust generally can’t benefit if leads to ineligibility for government benefits based on need, such as Supplemental Security Income (SSI) and Medicaid (generally known as Medical Assistance, or MA, in Pennsylvania).

The first step looks at the age of the disabled individual. A Special Needs Trust that holds the assets of a disabled person must be created before the person reaches 65. The trust can continue after the individual’s 65th birthday, but it must exist as a self-funded SNT before that date.

Next, the SSA focuses on the source of the trust’s assets. There must be assets in the Special Needs Trust that a person meeting the SSI definition for disability, which generally involves a medical impairment that prevents the person from engaging in full-time employment for a period expected to last at least 12 consecutive months. If not (on either count), a self-funded SNT cannot exist.

The third requirement of the SSA is that the person meeting the definition of “disabled” is the trust’s only beneficiary. This does not mean that the trustee can’t make direct payments to third parties if these do not pay for anything defined as food or shelter by the SSA. However, the trust can’t give benefits to third parties during the disabled person’s life. Also, the trust can’t be terminated during the individual’s life (unless the trust’s property – often called the corpus or principal – could be paid only to the states or creditors for goods or services that were provided by them to the disabled person.

In addition, Social Security reviews how the trust was created in the fourth step of its evaluation. Specifically, only the following can place the person’s assets into the trust: a parent, grandparent, a legal guardian, or a court. The disabled individual cannot place assets into the self-funded Special Needs Trust. However, parents and grandparents may be allowed use a small amount of their money to start the trust, after which the disabled person (or a person with legal authority, such as via a Power of Attorney, to exercise control over the disabled person’s assets) may transfer property into the trust. As for a court, it must issue an order creating the trust; anything less (like merely stating approval of the trust) is insufficient. Basically, action by an appropriate party must be taken to start  the SNT. The reason that the agent under a Power of Attorney isn’t an appropriate party is that the disabled person gave the agent permission to act  here and has control over the existence of the relationship.

The fifth step in establishing the self-funded Special Needs Trust is that the document must require reimbursement from the trust after the disabled beneficiary’s death to all states that made Medicaid payments for the individual. No other debts can be paid until all of these amounts have been repaid. This is why these trusts are called payback trusts, with the repayment not limited to Medicaid received during a specific timeframe in the trust document.

If the criteria in the first five steps are not met, this still could be a “pooled” trust, which was created in the same legislation (OBRA ’93). This bears some similarity to a bank account controlled by the bank. However, the strengths and weaknesses of this type of trust account merit more detailed explanation than can be given in a paragraph. What is probably most notable is that the disabled person can work with a nonprofit organization to set up the pooled trust account. For now, it should be noted that the SSA goes to the eighth step when a pooled trust might be involved.

As noted in the first step, assets of the disabled person must be in the trust before the person’s 65th birthday. The sixth step looks at additions to the Special Needs Trust after the person has reached 65. In general, the regular SSI and MA rules apply so, after the month of the addition, it will count as a resource. In the month that it was placed in the trust, it might be considered income or a resource, depending how it became part of the trust. Annuity and support payments can be exceptions to the rule if there was a right to receive payments prior to age 65, with the rights to payments assigned irrevocably to the SNT before that age.

There is no issue regarding increases in the principal of the self-funded Special Needs Trust due to assets of the disabled individual placed in the trust before turning 65. Interest, dividends, and any other earnings from that part of the trust are not considered additions.

This leads to Step 7, which focuses on assets in the trust before the individual reached 65. If someone has legal authority to revoke or terminate the trust and any of its funds are then available for food or shelter needs, the principal is considered a resource for SSI eligibility. Also, when a person can use the principal for support and/or maintenance, it again is a resource. Finally, when the disabled beneficiary has an interest that can be sold, this person has a resource. The SSA provides the example of an individual who has the right to monthly payments. Unless a spendthrift provision is in the trust, the right to these payments could be sold for a lump sum that also would count as a resource.

Step 8 does not involve the self-funded Special Needs Trust because it looks at assets placed in trust after 65. It looks at whether these assets qualify as a pooled trust. Since this is a different exception to SSI and MA rules from OBRA ’93, it won’t be examined here. However, it is important to remember that this other exception is available if an SNT is no longer a possibility.

Abandonment of Property

At the start of a bankruptcy filed under Chapter 7, a debtor creates a bankruptcy estate that includes all interests in property in which you, as the debtor, hold any legal title or equitable. To show why abandonment occurs, if you gave a security interest in property, such as a house with a mortgage, in exchange for a loan, you agreed to a lien on that property created by agreement. A lien is an interest in the property that gives the creditor security for payment of a debt or performance of an obligation. This can create difficulties for the bankruptcy estate’s trustee, who looks for estate property to sell to generate funds to pay creditors some amount of money for what you owe them since the security interest must be paid first, leaving a smaller pot left to divided among other creditors.

The security interest also makes the use of exemptions more likely to succeed in protecting property from being lost during a bankruptcy – if the value of the lien and the amount of any exemptions cover your property’s total value, then a trustee could not generate funds for other creditors by selling the property since the secured creditor must be paid while you are entitled to receive the amount of your exemption. However, if you have a considerable amount of property that you want to keep but lack exemptions to cover all of it, you would need to consider Chapter 13 of the Bankruptcy Code, as Chapter 7 would leave at least some of the property unprotected. Meanwhile, in Chapter 13, plan confirmation regarding debt payments vests property interests in the debtor so the trustee doesn’t have to deal with the issue of abandonment.

Any nonexempt property creates an issue for a Chapter 7 trustee, though. It often will be “abandoned” or may be sold back to the debtor. These options arise because the trustee would have to liquidate the property – this involves converting it into cash and paying creditors of the estate. However, the costs of liquidation would include any liens and taxes that exist as well as costs of handling the sale. Often, this leaves little for distribution. This is why abandonment commonly occurs. The trustee decides how much of a burden the asset is when the estate is being administered or deciding that the asset is of inconsequential value and benefit to the estate. The value and benefit to the estate usually are the deciding factors. If the effort and obligations involved in getting rid of an asset outweigh the benefit that the estate would receive, the trustee has no reason to do anything with it. As a result, abandonment of this property occurs, which often puts the asset back in the debtor’s possession.

 Abandonment may happen during or after the administration of the bankruptcy estate, at some point following the meeting of the creditors when the nonexempt assets are turned over to the trustee’s control. Commonly, the debtor schedules the property when filing for bankruptcy, but it is not administered by the trustee through the closing of the estate. The presumption of abandonment will arise and, if no court order states otherwise, the property remains with the debtor by operation of law. Also, a trustee may pursue abandonment prior to the closing of a case after deciding that the property is too burdensome to administer or, more commonly, determining its value is inconsequential and retention does not benefit the bankruptcy estate, as mentioned earlier. This type of abandonment generally requires notice from the trustee to parties that might have an interest in the property followed by a court hearing if a party objects to abandonment.


A party in interest regarding specific property also could file a motion requesting abandonment. The Court would have to sign an order for the property to be abandoned here. While the party bringing the motion usually would be a creditor, the motion could be brought by the debtor who might think that the trustee is waiting for any nonexempt equity to increase in value before finishing the administration of the property, which often is real estate in this situation.

 The Bankruptcy Code does prevent the abandonment of property at times. Property could remain in the bankruptcy estate because it has not been administered or abandoned by the time that the case closes, which could occur when the property that doesn’t appear in the bankruptcy schedules. The trustee cannot administer or abandon unknown property. A debtor might need to reopen the case to attempt to get an order for the abandonment of the property. The cost and the time to do this is a reason for being thorough and forthcoming when you originally decide to file for bankruptcy.

While abandonment can occur at various times and in various ways under the Bankruptcy Code, its impact is what really matters. At the point that abandonment occurs, possession generally remains with the party having possession. Often, the debtor is this person when no security interest exists. However, with property that is used as collateral for a debt, the result could be different. For example, property that was repossessed and remains with the creditor at the time of abandonment may remain with the secured creditor. Often, secured property is under the debtor’s control and will remain there when it is abandoned by the trustee. Since abandonment doesn’t affect the automatic stay’s status, the secured creditor cannot take action to get property returned (for example, via lien enforcement through the legal system).


When the automatic stay ends, a secured party can look to non-bankruptcy laws to see what to do to get the property. With real property, this would involve following the foreclosure procedure under state law; if successful, the creditor eventually could have a sale scheduled.


Abandoned property and unsecured debts lead to a straightforward result since these debts are discharged and the property is not used as security for any debt – the property remains with the debtor. When secured interests are involved, the ultimate disposition of property becomes less predictable. In Chapter 7, the discharge eliminates personal liability for the amount owed so you can’t be sued for any deficiency, such as when property is sold but the proceeds are less than the debt. (You may have to worry about the IRS, though, because you had a debt obligation of which some portion never has to be repaid – this often is considered income to a person who no longer needs to worry about repayment of the entire debt. The IRS does have an exception regarding primary residences and discharge of indebtedness, though.)

Although you aren’t liable for the debt after abandonment of a secured property interest, the lien that attached to the property itself remains if you did not take care of this issue during the bankruptcy. This is why a secured creditor can take steps to sell the property after obtaining relief from the automatic stay or after the bankruptcy court issues the discharge order in your case. If there is no sale, the debt remains attached to the property. As long as a valid lien under state law exists, a secured creditor has a right to payment from the disposition of this property, although you, as the debtor, have been relieved of personal liability through the Chapter 7 bankruptcy.