Monthly Archives: January 2014

A Fresh Start: The Bankruptcy Estate in Chapter 7

Alberts Law, Debt Relief & Bankruptcy, , ,

Most individuals who file for bankruptcy do so under Chapter 7 or Chapter 13 of the Bankruptcy Code. Chapter 13 can be very powerful when a person falls behind in payments on secured loans, such as mortgages or car loans, because it permits you to set up a plan up to five years in length to pay off those missed payments. However, you still need enough income for your necessary expenses, which include current payments of the debts on which you had fallen behind and are included in the Chapter 13 plan. Meanwhile, a Chapter 7 bankruptcy generally focuses on discharging debts that are not secured by any specific property, with a goal of giving you a “fresh” start by getting rid of these debts while keeping as much property as possible. The process of defining what is in your “bankruptcy estate” is crucial in Chapter 7. A brief look at how this means follows.

A fresh start can have no beginning if you are not honest about what you own. All of your property must be disclosed, with exemptions (with amounts and categories defined by the bankruptcy laws) applied to as much of this property as possible. Any property that can’t be exempted or isn’t excluded by law becomes part of the bankruptcy estate, which a bankruptcy “trustee” controls until the bankruptcy ends.

A major part of the trustee’s job is to sell as much of the bankruptcy  estate as possible in order to pay off as much of your debt as possible. Due to the ability to exempt certain amounts of various categories of property, hiding property is not the answer to protecting what you own in order to have an opportunity to make a fresh start after a Chapter 7 bankruptcy. If and when hidden assets are discovered, this property will end up in the bankruptcy estate, and you may face more serious consequences that can include the loss of the property to creditors, the denial of a discharge of your debts, or even criminal penalties.

As you prepare to file under Chapter 7, you begin the process of defining the bankruptcy estate. This starts with making an inventory of all of the things that you own – this means that you have to list everything to which you have some ownership right. Some property that you receive after filing also would have to be included once a right to it exists. For example, property that you inherit within 180 days after filing must be listed in the appropriate schedule.

After an thorough inventory has been completed, you will have an idea of what might be in your bankruptcy estate. To further define your bankruptcy estate, you need to place realistic values on your ownership rights in this property. Sometimes, this may not be possible due to the type of property involved. A good example of this problem is a potential lawsuit that you might be able to bring against another party because you need to consider what the potential award would be if you win, the likelihood of success (which impacts the value of the estimated award), and even the likely ability to collect any judgment that you might be awarded (because a judgment that can’t be collected won’t have much value). In a situation like this, your best approach may be to describe what your cause of action in the lawsuit would be and list its value as “unknown” when you file.

You usually will be able to place a reasonable value on your property, though. This can seem difficult, but an experienced attorney can help you as you work through the list of property that will comprise your bankruptcy estate, unless the property is exempted or, possibly, excluded by law. However, before you can exempt property, you have to make a good-faith effort to value so you can use the exemptions, which are capped at certain dollar amounts.

Individuals often have trouble with this. Sometimes, they may tend to overvalue some property — for example, many things do not retain much value once they have been used. Clothing and furniture fall into this category, but people often tend to value these items closer to the prices at which they were purchased. One approach to start this process is to consider what you might ask for, and be able to get, for something at a garage sale or on eBay. There also are resources that can be used to value an older car while a house may need to be appraised in order to satisfy a trustee and the court. Once you have an inventory of property in which you have rights and have made a good-faith effort at valuing it, you are at the point in which your actual bankruptcy estate will be defined.

First, you look for property is not part of the bankruptcy estate. An ERISA-qualified pension, by statutory definition, never is part of the estate. Next, you consider possible exemptions, which could be state or federal exemptions in Pennsylvania (with the choice depending on which protects your property to a greater extent). This step essentially removes some property from a bankruptcy estate, depending on the property’s value and the amount of the exemption available. For instance, a vehicle with a market value of less than $3675 currently could be exempted from the bankruptcy estate so the trustee handling your property cannot touch it. It should be noted that federal exemptions are adjusted every 3 years — the next adjustment would occur on April 1, 2016.

Eventually, as you move through the steps in this process, what remains is the property that makes up the bankruptcy estate. In many cases, all property will be exempted – this is a “no asset” bankruptcy in which a trustee has no assets to administer to pay any of your debts; in these situations, there basically is no bankruptcy estate. You also could have a “nominal asset” case in which the bankruptcy estate’s value, at best, is little more than the cost of trustee’s administration of it; you may be able to get the trustee to abandon the property that remains because it can be seen as more trouble to sell it than it is worth. If abandoned, the property would return to you.

On the other hand, if your bankruptcy estate has assets that have more than a nominal value, you might be able to pay the value of the bankruptcy estate to the trustee in order to keep your property or the trustee may sell these items to third parties. In either situation, the trustee would use the proceeds to make payments to your creditors.

In the end, this is why the bankruptcy estate in Chapter 7 is of such importance. You want to retain as much property as possible in order to get a fresh start after going through bankruptcy. This requires that, prior to filing, you to pay attention to property that might be lost if it would be turned over to a trustee as part of your bankruptcy estate.

The Third-Party Supplemental Needs Trust & Its Role in an Estate Plan

Alberts Law, Estate Planning, ,

A third-party Supplemental Needs Trust differs from the various Special Needs Trusts that have been created through legislation. While both types are designed to provide disabled individuals receiving means-tested benefits such as Supplemental Security Income (SSI) and Medicaid (known Medical Assistance to Pennsylvanians) with additional benefits while not affecting these other benefits, the third-party supplemental needs trust comes with another benefit: it is not subject to any Medicaid “pay-back” provision so that whatever remains in the trust when the disabled beneficiary dies can be distributed to “residual” beneficiaries named in the trust document. However, these must be drafted carefully because these and other benefits will be lost if the requirements for a valid Supplemental Needs Trust, which have been developed primarily through the courts in Pennsylvania, are not followed closely.

Since we are looking at estate planning, we need to focus on the essential elements when a trust is created in a Will. The most important issue in Pennsylvania is determining the intent of the settlor or grantor (both terms refer to the person who created the trust) regarding the use of the property placed in the trust (this property is referred to as the principal or corpus) as well as the income generated by that property. The starting point always is the language in the trust that defines the settlor’s intent. However, we also have to look at how the trust actually will function to really grasp the reason(s) that it was created.

Two major factors in proving that a supplement needs trust was established are the number of beneficiaries for which the trust provides and whether the beneficiary who is disabled was receiving some type of means-tested assistance, such as SSI or Medical Assistance, during the settlor’s lifetime. Multiple beneficiaries, even if they are only residual beneficiaries, are important because the trustee in charge of handling decisions involving the trust has an obligation to all beneficiaries and cannot use the funds for only one beneficiary’s interests. The presumption is that the settler did not intend the entire supplemental needs trust to be used to help only one person to the exclusion of all other beneficiaries.

Also, if the settlor knew that the one beneficiary, perhaps his or her child, was getting means-tested government benefits such as SSI and Medical Assistance when the estate plan was developed, courts have presumed that the settlor would not want to jeopardize the eligibility of the child, for example. Passing these “tests” does not ensure that a trust will pass muster with the government. There are other factors that need to be handled properly to establish a successful third-party Supplemental Needs Trust.

Briefly, these include the beneficiary who receives government assistance being prevented from having any authority to terminate the trust or from directing that any part of the trust be used for her or his support and maintenance. Instead, the trustee must have complete discretion regarding what distributions will be made and for what purposes. Because a supplemental needs trust exists to supplement, not supplant, the benefits already being received, language is needed to keep the trustee from making distributions that would have a negative impact on the current sources of income (which, as noted above, generally is means tested). In fact, the trustee has to avoid giving money directly to the beneficiary since this would be considered income. However, as long as payments directly to third parties do not involve shelter or food (which SSI regulations look upon as income for the beneficiary), the trustee can purchase goods or services for the disabled beneficiary of the supplemental needs trust.

A couple of final points are to be remembered, as well. Any assets that go into the third-party supplemental needs trust must belong to someone other than the beneficiary – otherwise, this could not be a third-party trust, severely hindering the usefulness of the trust as a result. In addition, the settlor would be wise to include a “spendthrift” clause in the trust document so that creditors of disabled (and other) beneficiaries generally will be prevented from making any claims against the principal or income of the trust as long as money is not given directly to the beneficiary, which is an effective way to protect the wealth within the trust from creditors of a beneficiary other than the federal and state governments.

The third-party Supplemental Needs Trust has strengths and potential weaknesses that must be considered carefully to determine if it can work as part of your estate plan. If it can fit within your estate plan and if you believe that is needed due to your family’s circumstances, then you should seek out a professional to draft the trust due to its complexities. The crucial elements of a supplemental needs trust are set forth here, but you want to be sure that everything is in its proper place and worded properly so that your intent to assist a disabled beneficiary of the trust will be carried out successfully.

Creating an Estate Plan Involving a Disabled Child

Alberts Law, Estate Planning, ,

You may have heard of “special needs” trusts, particularly if you have a disabled child. A third-party Supplemental Needs Trust (SNT) often is considered a variation of this type of trust. However, in Pennsylvania, the third-party SNT grew out of a number of court cases as a way of helping someone on government means-tested benefits without making them ineligible for those benefits, which often include Supplemental Security Income (SSI) and Medicaid (or Medical Assistance in Pennsylvania), by providing additional fund犀利士
s and resources that won’t count against the individual’s eligibility. The benefits have strict financial requirements that can make estate planning when a disabled child is involved difficult, to say the least.

Due to these difficulties, various types of trusts and other possibilities, some more drastic in nature, are considerations when a disabled child (regardless of age) generally would be included in an estate plan. Parents could decide to disinherit the disabled child but often do not feel comfortable with this simple but seemingly harsh solution to protecting the person’s means-tested benefits. One common consideration is to leave share that the disabled child would inherit to another sibling, for example, with instructions that the sibling is to use this for the benefit of the disabled child. The inherent danger with this idea is that the parent’s wish is not legally binding, which is why it won’t count against the person who is disabled but also provides no guarantee that this plan will succeed as you had hoped. Also, if the other child has debts, the inheritance intended for the disabled child could end up benefitting the second sibling’s creditors, instead.

This may leave you looking upon the idea of disinheriting your disabled child while relying on someone else’s judgment and circumstances to allow your hope that this share of your estate will be used as you had wished to be too risky. If you really do not want to disinherit your disabled child entirely, then you need to explore other options. You could decide on an estate plan that simply leaves the share to your child who receiving SSI, Medical Assistance, or similar benefits, despite the possible consequences regarding such means-tested benefits. The most obvious of these consequences include a likely disqualification of the disabled child for those benefits for some period of time. In the end, there is no gain, only loss, with this plan because the inheritance, at best, merely replaces the government assistance. When you put together your estate plan, you are likely to want to find a better alternative than this option provides.

Particularly when you work with someone who has experience in estate planning, you probably will find out that better options do exist. One of these may be the third-party Supplemental Needs Trust in Pennsylvania. Although this can be hard to make effective when your estate is quite small, it is a powerful tool for helping your disabled child when your estate has enough resources for it to be cost effective and feasible to run in order to carry out your intent.

Importantly, this SNT can be set up in a way that will not jeopardize the government entitlements that the child receives while, at the same time, being available to supplement these benefits for an improved quality of life. Great care must be taken when you plan to use this type of trust because your intent has to be implemented through the document that creates the trust to accomplish your goal of providing additional benefits for your disabled child without putting the any of the other benefits from the government at risk. In the next post, we will look at some key points to remember your estate plan will include a third-party Supplemental Needs Trust.