Medicaid Estate Recovery – Questions

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I looked at the basics of Medicaid Estate Recovery in Pennsylvania previously in the first part of this series, but there are other matters that may come into play and should be kept in mind whenever the possibility of estate recovery exists. One involves an objective of estate planning (namely, to transfer wealth to those of one’s own choosing), which estate recovery can hinder. Another issue concerns the need to protect a claim subject to estate recovery, including who can be held responsible for not doing so. A third topic of potential interest is the ability of the Department of Public Welfare (DPW) to postpone or waive its claim and the implications of these paths.

When someone may become subject to Medicaid Estate Recovery, how does this impact estate planning?

For anyone who was at least 55 years old and was on Medical Assistance (as Medicaid is called in Pennsylvania) after August 15, 1994, estate recovery is possible if the individual received nursing facility services, home and community based services, and related hospital and prescription drug services, as was noted in the previous post. This means that any estate planning must be handled prior to that point in time in order to avoid possible Medicaid Estate Recovery.

You need to focus on assets that DPW targets – in general, these are assets that are part of the “probate estate.” If something does not have to go through the process of estate administration in order for a beneficiary to become the new owner, then it should be free from estate recovery. A life insurance policy that names a beneficiary is an example. For a house to avoid estate administration and also to avoid estate recovery, you must plan carefully. If you are over 55 and receiving Medical Assistance (MA), you have options as long as you do not receive it for the three types of services mentioned above. You would need a deed that makes the property jointly owned by you and your beneficiary with rights of survivorship or that transfers the property entirely to the other individual.

(As an aside, if you would die within one year of this transfer, the entire value of the house would be subject to inheritance tax. In fact, if you transfer things that you own to an individual that have a total value exceeding $3000 during the year of your death, then Pennsylvania’s inheritance tax will apply.)

If probate property that is subject to Medicaid Estate Recovery is transferred, can anyone be held liable and forced to pay DPW’s claim?

The decedent’s personal representative – the estate’s executor or administrator (when there is no Will) — has a duty to make sure that DPW’s claim is paid after creditors whose claims have higher priority have been paid. Therefore, the personal representative will be personally liable for DPW’s claim when property subject to that claim is transferred without valuable and adequate consideration to an heir or anyone else with a claim of lower priority if DPW has not been paid when the transfer occurs. “Valuable and adequate consideration” is defined by DPW as a sale of property at fair market value by the estate’s personal representative to a party who is unrelated to the decedent or the personal representative. If this amount is obtained, then the personal representative would not be liable for payment of DPW’s claim.

As will be discussed briefly, DPW may postpone its claim under certain circumstances. However, the personal representative remains liable for transfers during this period. The personal representative must take steps to protect DPW’s claim. This may require a mortgage or other recorded encumbrance to be placed against real property in the decedent’s 威而鋼
estate on behalf of DPW. There also are provisions for perfected security interests to be placed against items of personal property worth more than $10,000 as well as cash (or cash equivalents such as securities) to have a total value exceeding $50,000 to be placed in trust, with DPW receiving the remainder at the trust’s termination up to the amount of its claim.

In addition, a person who receives property subject to a Medicaid Estate Recovery claim by DPW will be liable if the property’s fair market value was not paid for it. The transferee’s liability is the difference between the property’s fair market value and the amount of money received by the estate for the property. This person also must protect DPW’s claim during a period of postponement so that it is paid when the period ends.

When will a claim under the Medicaid Estate Recovery Program be postponed or waived?

Postponements can be requested under certain circumstances. For example, DPW will wait to collect its claim against a decedent’s home when any of the following reside there: a surviving spouse; a child who is “totally and permanently disabled” (as defined by the Supplemental Security Income (SSI) program); a surviving child is under the age of 21; or a sibling who has lived in the home at least one year before the death of the MA recipient and who also owns an equity interest in the property. When the last of these individuals has died, transferred the property, or left it, the postponement period ends, and the Medicaid Estate Recovery claim must be paid.

Undue hardship waivers are more complex so what follows is not an all-encompassing review. However, the most important difference between these and postponements is that a waiver means that DPW has relinquished its right to collect its claim against the estate forever.

The most common type of waiver probably involves a person who meets certain criteria relating to the primary residence of the decedent. First, the person must have continuously resided in the home for at least 2 years immediately before the decedent started to receive nursing facility services or for at least 2 years during which MA-funded home and community based services were received. Also, the person cannot have an alternative permanent residence. The third requirement is that the person provided care or support to the decedent for at least 2 years while MA-funded home and community based services were received by the decedent or for at least 2 years before the decedent received nursing home services and while the decedent needed care or support to remain at home for those two years.

Other sources of waivers involve income-producing assets that were the primary source of household income, without which gross family income would be less than 250% of the Federal poverty guideline — family farms and businesses are examples; payment of necessary and reasonable expenses to maintain the home while the decedent was receiving home and community based services or while the home was vacant when the decedent was in a nursing facility; and the administered estate of the decedent had a gross value not greater than $2,400 and  there is an heir.

 

Medicaid Estate Recovery is a complex area of law, and answers to these questions only touch its surface. For all of the needed details, you should contact an attorney familiar with this subject to protect the interests of all concerned.

Medicaid Estate Recovery in Pennsylvania

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In 1993, the federal government enacted a law requiring states to create estate recovery programs for repayment of long-term care costs covered by Medicaid (which also is known as Medical Assistance in Pennsylvania). How to do this was left to each state to decide, for the most part. As people are living longer, they often live their final days in nursing homes. Pennsylvania’s Medicaid Estate Recovery Program places an emphasis on recouping costs for nursing-home care, as well as home and community-based services that can be covered by Medicaid under a waiver authorized through the Social Security Act because these are provided to avoid having to place a person in an institution such as a nursing home. The third focus of estate recovery involves Medicaid payments for related hospital and prescription drug services that accompany the two other categories of services. The Medicaid Estate Recovery Program can be a major concern during the administration of an estate and could be an important consideration in estate-planning decisions, too.

Medicaid estate recovery targets estates of deceased individuals who received the services previously mentioned after they turned 55 and needed assistance from Medicaid to pay the bills. Pennsylvania generally requires repayment from these estates so the decedent’s personal representative (commonly known as the executor when there is a Will or the administrator when the decedent died without a Will) must be aware of this possibility.

The key here is whether or not the decedent was on Medicaid during the last five years of her or his life. If you are the personal representative and you know this was the case, then you must send a letter containing with specific information that the Department of Public Welfare (DPW) requires. Then, in general, DPW has 45 days to send you a Notice of Claim. Depending on the circumstances, the agency is not confined to making a claim regarding only the prior five years. If Medicaid paid for nursing-home services before this period, then DPW’s claim could go further back.

In addition, when you are the personal representative, you have to look at the 5-year period. You would have an ethical obligation to notify DPW if you are aware of Medicaid payments that actually occurred for the targeted services more than five years ago, as long as the individual was 55 or older period that period of time.

After DPW provide notice of its claim, you could appeal this at an administrative hearing. If the Department’s claim survives, then the recovery phase begins. It can make its claim against all property (both real and personal) that could be administered by a personal representative, even if the personal representative decides not to administer some of the estate’s property. So, if you are the personal representative, you cannot shield property that is in the estate by ignoring it.

On the other hand, most property that does not have to go through the estate process cannot be claimed by DPW. This would include property owned jointly with survivorship rights (or owned by spouses through a tenancy by the entireties). Life insurance that is paid directly to a named beneficiary also avoids the DPW claim, but the same policy – when payable to the estate – can be recovered. Assets in a testamentary trust, which is created by a Will, are subject to DPW’s claim; assets in a trust created by the decedent prior to the individual’s death escape the recovery program as long as they are not payable to the estate. This can be important to remember when an estate plan is being drafted.

Another point that you should remember if you are in charge of the estate is that DPW has a claim to estate property but does not have a lien against it through the Medicaid Estate Recovery Program. Anyone with a lien on property has priority versus DPW’s claim, which, unlike a lien, is unsecured. Among claims to payment from the estate, DPW’s claim only is in the third category, and that is limited to Medicaid payments made during the person’s last six months. Any other claims by DPW are relegated to the sixth payment class.

We have gone through some of the basics concerning Medicaid estate recovery. There are others that bear mentioning whether you are the personal representative in charge of administering an estate or you are a person setting up an estate plan that you want to provide as much to your chosen beneficiaries and as little to the government as possible. These factors raise such issues as the duty to protect DPW’s claim when the transfer of estate property is involved, the timing of transfers prior to going to a nursing home as well as prior to death, and the possibility of postponing or even waiving claims under Medicaid estate recovery when you would be an heir. I will touch on these topics next time. You should keep in mind that this can be a complex area of law so you probably should discuss them in more depth with an attorney if any of these subjects applies to a situation in which you are involved.

 

Credit Card Debt & the Statute of Limitations

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When a person owes credit card debts, but the amount to be paid has grown to a level that the person realistically cannot repay, the individual may experience overwhelming anxiety about what a creditor or debt collector might do. If you are in this situation, you cannot let anxiety keep you from looking at possible options. For example, with debt collectors purchasing older debts for pennies on the dollar, you have to view the possibilities with the credit card debt’s age in mind because you might be inclined to file for bankruptcy when the defense provided by the statute of limitations could be a better solution under the circumstances.

A statute of limitations exists for most civil and criminal matters in order to provide finality and to ensure that this will occur when evidence remains reasonably fresh. In Pennsylvania, credit card debt generally stems from an open-end, or revolving, account based on a written contract. This places the statute of limitations for such debt at 4 years. This means that, if you have not used a credit card during the last 4 years, you could use the limitations period as a perfect defense against an attempt by a creditor or debt collector to obtain and enforce a judgment against you.

You have to be careful, however. If you discuss the debt with a debt collector, for example, you must avoid reaffirming that you owe the debt, entering into a new payment arrangement, or – especially – making a payment on the credit card debt because you do not want to act in a way that actually starts the statute of limitations over again. The defense cannot protect you for at least another 4 years.

For this reason, you want to avoid talking with anyone attempting to collect an old debt. You do not want to do anything that would be seen as an acknowledgment by you that you owe the debt. You always should bear in mind that you do not have to speak with a creditor or debt collector, which is the safest course of action to take.

You could have an attorney speak or write on your behalf not to make a deal but to deal with the issue of the statute of limitations. A letter also can be written which communicates that you are not to be contacted and that doing so could result in a penalty being paid by a debt collector to you under the Federal Fair Debt Collection Practices Act. Pennsylvania has a similar law – the Fair Credit Extension Uniformity Act – that applies to creditors as well. It describes unfair and deceptive debt collection practices and sets forth the penalties that can be enforced against those engaging in these practices.

These and other laws provide some protection against harassment by creditors and debt collectors. However, even after the statute of limitations has run out your credit card debt, the debt still exists. You may find yourself receiving notice of a lawsuit to obtain a judgment for this debt. This is when you need to know what to do – after you have been served with the required notice, you probably should consult with an attorney to make sure that you are protected and, possibly, to pursue a claim for damages under the various laws that apply.

When this situation occurs, you no longer are safe if you do nothing. Because you owe the credit card debt, you will face a default judgment if you do not answer the other party’s complaint. You could lose things that you own when such a judgment is enforced. Also, judgments have a 5-year statute of limitations but can be revived before this period ends, potentially resulting in a long string of 5-year periods when you may face enforcement of the judgment.

However, instead of doing nothing, you need to have an answer to the complaint filed on your behalf in which the statute of limitations that applies to credit card debt is raised as a defense. As long as it applies and is raised in a timely manner after you receive the complaint, you have a perfect defense against the creditor or debt collector because, although the credit card debt exists, the other side waited too long to enforce the right to a judgment for that debt. This is the power of the statute of limitations.

I had mentioned bankruptcy earlier. Your factual circumstances will dictate whether or not it should be considered. When faced only with an unsecured debt, such as most credit card debts, that can be defended by the appropriate statute of limitations, you probably would want to delay taking the more drastic action of filing for bankruptcy. You do not want to file now because you have a perfect defense against the creditor or debt collector at this time. Also, you may need to pursue a bankruptcy in the future but could be prevented from doing so if you file when you would not gain more relief through bankruptcy.

In addition, you need to consider the statute of limitations regarding credit reports. The credit card debt can be reported for 7 years, even though it technically can be collected only for 4 years. Even so, a bankruptcy can remain on your credit reports for ten years after you file. This means that you should be able to clean up your credit reports sooner in this scenario by relying on the 4-year statute of limitations applicable to your credit card debt.

Of course, this is a brief look at some options that you have in handling your debts. Different situations will point to different courses of action. The defense provided by the statute of limitations may be the best solution when people attempt to collect credit card debt from you. To review and understand what you can do, you should contact an attorney when problems with debt need to be resolved.

When is a Power of Attorney in Effect?(Pt 2)

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In the previous post, I took a brief look at various powers of attorney found in Pennsylvania’s laws and discussed how and when they take effect. However, the issue of timing regarding when a financial power of attorney can be used often is something that the principal who would be giving the power wants to address in the document due to concerns such as loss of control and possible abuse. The topic of timing in combination with varied reasons for having a financial power of attorney is the subject of the second part of this discussion of powers of attorney in Pennsylvania.

As your power of attorney is being drafted, you and the attorney should discuss its focus or purpose as well as how to use specific powers to achieve this. There are situations that can be handled by a more limited power of attorney. This limitation may mean that it only can be used by your agent for specific periods of time. If not specified, Pennsylvania law presumes that a power of attorney is durable, however.

The term “durable” means that it is in effect and, technically, could be used by your agent from the moment when it is executed (or, to put it more simply, when it is signed). People often feel that this means that they are giving away the authority to handle financial matters, even though they are capable of doing so, and worry about the power being abused. This, in turn, can spark interest in limiting when the document will be effective. Such restrictions could make sense, depending on the purpose for this document.

A non-durable power of attorney can be used by your agent only when you are not incapacitated. This generally is when you least need to have one. As an instrument of estate planning, this would have little use because you would not need someone handling financial affairs to carry out the objectives of your estate plan while you are capable of doing so.

However, a non-durable power of attorney can be useful to give someone the authority to handle a transaction when you are not able to be present for some reason. The non-durability combined with the limited scope (for example, the authorization for an agent to complete the sale of a vehicle) can make this useful because, in the example, you can sell the vehicle even though you cannot be present and the document only exists until the specific transaction is accomplished.

In other scenarios, a durable power of attorney makes more sense. You might not like the sound of giving your agent the power to handle your banking transactions or to sell your real property (which might mean the house in which you are living). However, if you are handling your affairs, it would not be that easy for someone to take over. If the agent would try to do this, you can put an end to the attempt by revoking the power of attorney, which is easy to do. An agent who misuses this power can be subject to civil and criminal penalties, and you are likely to know if your agent is making such attempts.

For example, to sell your house, the agent would have to record the original of the document in the appropriate office in the county in which the property is located and would have to show the property to prospective buyers. Meanwhile, monthly statements from your financial institution would reveal any problems involving transactions that you did not authorize.

Also, your choice of the agent should reduce the likelihood of abuse of power – you need to trust the person you name as your agent. While this is no guarantee, you should not name someone as your agent if you have doubts about his or her trustworthiness. Instead, this would be a situation in which you might want to wait to get a power of attorney.

Some people prefer to have a “springing” power of attorney, which springs into effect when a specified event occurs. Often, the event involves the person becoming disabled or incapacitated because this is when someone would be needed to handle financial and other affairs. The potential for problems exists because you need a well-defined point at which the power of attorney springs into effect.

Disability and incapacity should be determined by medical professionals. There may not be a doctor available when this occurs so there could be a lag in time before someone can act as your agent. There also could be difficulty in getting a doctor to sign an affidavit acknowledging your condition. Then, if you no longer are disabled or incapacitated, you should get another affidavit stating this and making the springing power ineffective again.

In the end, a durable power of attorney usually is the best choice. The power is least likely to be abused when you can handle your own affairs, and you can easily revoke it during this time. Periods of disability or incapacity are when the power of attorney has the greatest potential for abuse, but the likelihood is limited when you take the time to choose someone you trust to be your agent. Finally, a financial power of attorney must have an acknowledgment signed by your agent detailing the responsibilities of an agent and noting the consequences of ignoring them, which helps to reduce any temptation that might exist.

When Is a Power of Attorney in Effect?(Pt 1)

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A Power of Attorney can be useful for numerous reasons. For instance, the importance of a financial power of attorney often is seen in estate planning but can come into play for other purposes as well. For this reason, it is the prime focus here due to the potential impact of its use, which makes many people reluctant to make this power durable (which will be defined below). Of course, there are reasons beyond financial matters for needing a power of attorney. Pennsylvania has statutes that encompass other types of powers of attorney and that address when these powers are in effect.

For example, under Pennsylvania law, a “mental-health power of attorney” gives you the opportunity to choose someone (known as your “agent”) to make a wide range of treatment decision if you are experiencing a mental-health crisis. However, the same law also limits the lifespan of this document to two years from the date that you sign it into effect (unless you revoke it sooner or it is in effect when the two-year mark is reached). Within this time period, this power of attorney can be used by your agent when an attending physician determines that you are not capable of making decisions regarding mental-health treatment. When the attending physician decides that you can make these decisions once again, then your agent ceases to have authority.

A “health care power of attorney” is more common and often is combined with the financial power of attorney in an estate plan. Pennsylvania has a set of laws focusing solely on this legal tool and defining when it is legally relevant. A health care power of attorney is valid until you revoke it, unless you have specified a time when this document no longer is valid. It should be noted that, while it may be valid, this does not mean that it can be used by your agent named in the power of attorney at all times. Instead, it only becomes effective when the attending physician finds that you lack capacity to make these decisions and ceases to have power when the attending doctor finds that you are able to make health care decisions again.

Meanwhile, powers of attorney that deal with financial matters tend to have more variations and need to be drafted carefully to meet your objectives, leading to careful consideration of how and when they can be used. In the list of statutory powers regarding a power of attorney, you currently will find 22 powers, of which 19 are financial in nature. These range from transactions involving tangible personal property to investments in stocks, bonds, and other securities to disclaiming of an inheritance.

The potential scope and consequences of these powers can cause a principal, who is the person giving authority to her or his agent, to be hesitant to want a power of attorney in the first place. This is when you need to look at the flexibility of this document to see if one can be drafted to meet your needs and protect your peace of mind.  In the next post, a closer look at financial powers of attorney and when you might want them to be in effect for your agent’s potential use will be undertaken.

Habitability & Residential Leases, Pt 2

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Now that we will looked at what the implied warranty of habitability is in residential leases, we should look at your options for enforcement of this right. Court cases have stressed that the landlord must be aware of the circumstances before you take action to solve the problem. Because the stakes are so important (having a place to live and living in a place that is safe, sanitary, and healthy), you should provide notice to the landlord in writing. You need to describe the problem, request that the landlord fixes it, and state what you will do if the repair isn’t made. In your notice, you need to give the landlord a reasonable amount of time to make the repair.

Although a “reasonable amount of time” is hard to define, the deadline depends on how urgent the repair is. For example, a lack of heat in the middle of winter probably needs to be handled sooner than an infestation of cockroaches that’s limited to one room since bitter cold generally would be a bigger threat to health. You also need to keep a copy of the writing that you give to the landlord, and you should consider sending the letter to the landlord by certified mail, return receipt requested, in an attempt to get additional proof that you provided notice.

If the landlord lets a reasonable deadline pass without making a repair that involves habitability of your rental unit, then you can take the action that you stated in the writing to the landlord. As for what you might consider, there are some common options. ”Repair and deduct” often is a good choice. Find someone who is qualified make the necessary repair and pay for the reasonable cost of this work. Then, when you pay your rent, you deduct this cost from the rent and include documentation of the cost of the repair with this payment — provide the landlord with a copy and keep the original bill.

You might try for a court order requiring the landlord to make the repair, or you might decide to sue the landlord for rent that you paid for uninhabitable portion of your unit after the landlord knew of the breach of the warranty of habitability. Violations of the housing code that a county inspector found serious enough could give you the option of being protected by the Rent Withholding Act, but the remedies from the breach of the implied warranty usually are more comprehensive, making them more helpful.

Two final options merit mention. If a place is completely uninhabitable, then you could give notice to the landlord and move. This is risky because the landlord may sue you for breaking your lease. As mentioned before, this is why you need evidence that you should begin collecting when you have reason to believe at least some of the rental unit is uninhabitable for safety or health reasons. Photos and witnesses can help you make your case. Copies of all correspondence with the landlord about the problem should be saved as well. Proof that the landlord did not make the necessary repairs within a reasonable time also is important.

In addition, having estimates from a professional regarding the cost of the repairs can be useful as well. If you have to go to a hearing, you should ask whether the person who gave the estimate is willing to attend. She or he may not come for any number of reasons, but there is no harm in asking.

The last option to be discussed here is similar to the Rent Withholding Act’s escrow account for certain housing code violations but is a more flexible remedy for most tenants: rent abatement, in which at least a portion of the rent is placed into a separate financial account until the situation is resolved. You could attempt to estimate the portion of your residence that was not habitable and put this part of the monthly rent into the account while you take action to get the problem cleared up. You could place all rent into the account – if you do, do not touch these funds until the inevitable lawsuit is finished since you may have to pay at least some of this money to the landlord depending on the case’s outcome.

Just remember that the implied warranty of habitability always protects you in a residential lease situation, no matter what the landlord says or tries to do. Use it when you have a good reason to do so but also remember that it only applies to serious problems and not, for example, to a faucet that leaks a little. When it does apply, it can be a powerful tool providing powerful options against a bad landlord. However, you should be careful that a court is likely to see a habitability issue before you do anything. For this reason, you should consider consulting with an attorney before you act.

Habitability & Residential Leases, Pt 1

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In Pennsylvania, whenever you rent a residence – whether it is an apartment, a house, or even a mobile home – you are protected by an implied warranty of habitability. The lease can be in writing or it can be a verbal agreement – the warranty will exist. Furthermore, your landlord cannot get you to waive this right in a residential lease because it automatically exists even if it is not expressed in the lease or a landlord expressly attempts to get rid of it. It protects you, as the tenant, from being forced to live in a place that is not safe, sanitary, and healthy. This is a powerful weapon against so-called slumlords, but, like all weapons, you must understand its purpose and how to use it for it to be useful.

The implied warranty of habitability was established by the Pennsylvania Supreme Court in the case of Pugh v. Hughes in 1978, and it is through court decisions that its meaning has developed. The basic idea is that a lease is a contract, which provides obligations for landlords and tenants. A tenant is supposed to pay rent, and this action requires the landlord to provide a safe and healthy place in which the tenant lives. If either party to the lease fails to live up to her or his obligation, then the other party cannot be forced to do what would be required here – these are considered to be mutual obligations because the failure of one to live up to the responsibility relieves the other of his or her obligation.

The idea sounds straightforward but becomes more complicated as you look at the details that come along with it. Tenants who do not pay their rent face eviction. Landlords who do not make repairs do not necessarily breach their obligation to provide a habitable residence for their tenants. Habitability goes to the ability to live in a place without some type of danger to the welfare of tenants due to the condition, which was under the landlord’s control. In other words, if you caused the problem that made the condition of your residence (or some part of it) a danger to safety or health, then you cannot blame the landlord for breaching the implied warranty.

Habitability refers to livability. Examples of conditions that can prevent a place from being livable include a lack of running water, the absence of heat in the winter, the presence of rats or cockroaches, and a leak in your ceiling. However, you must keep in mind that habitability is not an all-or-nothing thing. A ceiling leak that leaves the bedroom unusable does not necessarily make the rest of an apartment or house unlivable. As we will see later, this is a factor that can affect your options when you deal with the landlord and, potentially, with the legal system.

If at least part of your residence cannot be used due to the landlord’s lack of upkeep while you have remained current with your rent payments, you are in position to move forward with enforcing the implied warranty. At the same time, you must be sure not to move to soon in implementing one of the options that a breach of the warranty would provide – there are steps to take in order to protect yourself from an action by the landlord, such as eviction, while you act to protect your rights.

When you decide that the place that you rent has some area that is not habitable due to conditions like the examples listed earlier and that the landlord is at fault, you need to do what you can to protect yourself from the landlord blaming you. You want to have evidence that the problem exists, which becomes particularly important if you end up in the legal system by your choice or your landlord’s choice. Evidence can be in the form of photos, for example. Having witnesses who would be willing to describe what they have seen also can be beneficial. You could have an inspector from the county check for housing code violations. Whether or not you take actions like these before the next step really is up to you, but you definitely would work on these and other actions if you are headed toward the legal system. The step that you must take before you pursue any options is notifying the landlord so we will look at this prior to considering your remedies and other matters in the second part of this post.

Income Tax: Priority Debt in Bankruptcy?

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The general rule for income taxes owed to federal, state, and local governments is that they will not be discharged in a Chapter 7 bankruptcy – you will owe them after your bankruptcy ends because they often are classified as priority debts. However, as with all generalizations, there are exceptions. We will look at both the general rule regarding priority debts as well as some exceptions. Also, the way that these taxes are handled in Chapter 13 bankruptcies will be mentioned briefly.

The first point to remember is that we aren’t looking at taxes for which a lien exists. For example, if the IRS files a federal tax lien against you for income taxes that you did not pay, there are no exceptions because this makes the tax debt into a secured debt that must be paid.

When there is no lien, any income taxes that you owe are unsecured debts. While the general rule with unsecured debts is that they are dischargeable in Chapter 7 bankruptcies, general rules – while not made to be broken – do bend at times under our laws. There are a number of unsecured debts that have been classified as priority unsecured debts. These must be paid prior to other claims, which is why they are termed “priority debts.” Although the nondischargeability makes them look like secured debts, this category of debts has no collateral protecting the creditor. However, their payment is considered more important than most unsecured debts, which is why this category exists.

Income tax debts – when not secured by liens – belong to this select group of unsecured debts given priority in bankruptcy. I had mentioned that income taxes generally are not discharged but need to explain when they are given priority. First, taxes on income for a year that ends no later than the date that you file your bankruptcy petition “for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition” are given priority. When these words from the Bankruptcy Code read very carefully, they basically mean that, if you fail to file a tax return that was due within three years before you filed for bankruptcy, you face a priority debt for any taxes that you owe for that tax return.

A second factor also can create a priority debt. The tax liability must have been assessed by the government within 240 days of your bankruptcy filing. When an “assessment” is made is defined by federal and state laws, but this date is when the amount of taxes that you owe has been determined by the government. In addition, if an offer in compromise existed or was pending during the 240 days, then the length of time that the offer existed is added to this period, along with an additional 30 days. In addition, there also are times when a bankruptcy previously filed during this time frame can extend the period for filing a new bankruptcy beyond the 240 days.

A third way that income tax debts can become priority unsecured claims is when you don’t file a tax return when it was due, which usually is April 15th of the following year for individuals. If the tax return was not filed, you cannot get the tax debt discharged in a Chapter 7 bankruptcy. You also can’t get the debt discharged if you failed to file the return when it was due and only filed it fewer than two years before filing for bankruptcy. In addition, if you filed a false return or simply attempted to evade paying your taxes, then you have created a priority debt. Income taxes that are assessable after a bankruptcy is filed will remain after the bankruptcy ends, as well.

As for interest and penalties on any income tax debts, you should expect these to be nondischargeable, too. On occasion, a tax penalty might be discharged if it is found to be punitive, which basically means that the penalty is so excessive to be a punishment instead of reflecting the cost of investigating and the loss based on what you did (or didn’t do), for example.

Although this is a somewhat simplified version regarding how income tax debt becomes a priority debt, some exceptions that will allow these debts to be discharged need to be noted. An income tax debt that is more than three years old with a return filed when it was due can be discharged. Another exception is when a return was filed late but was filed more than two years before the bankruptcy was filed – this debt may be dischargeable. In addition, any assessment of your tax liability by any of the taxing authorities (federal, state, or local) that occurred more than 240 days before you filed for bankruptcy can lead to a discharge of the tax debt. As mentioned earlier, older income tax debts are much less likely to be classified as priority debts.

Income tax debt also has implications in Chapter 13 bankruptcies. To summarize Chapter 13’s treatment of income tax debts, a lien again creates a secured debt, and this must be paid. Without the lien, an income tax debt can become a priority debt when it falls within the criteria outlined for a Chapter 7 filing. Although interest could be dischargeable, it is likely to remain when the tax debt has priority status. Likewise, penalties on these debts are nondischargeable to the same extent as they would be with Chapter 7. Therefore, your Chapter 13 plan would have to account for making payment of these debts.

Finally, it should be remembered that, when only one spouse owes the tax debt, a married couple’s property owned by the entireties is protected in a bankruptcy. In addition, this applies to the property of a spouse who does not owe taxes and is not part of the bankruptcy filing. And there is a last word of caution that anyone with income tax debts needs to remember: you can’t get around the priority nature of income tax debts by paying them with credit cards or other types of debt instruments – your new debt will be nondischargeable, even though your tax debt is gone.

As this brief look at priority debts that involve income taxes owed to federal, state, or municipal governments illustrates, this can be a difficult area of the law to navigate successfully. Of course, the same can be said of bankruptcy in general. This is why, if you are thinking of filing for bankruptcy, you also should think of discussing the possibility with someone who has experience helping individuals through this process. You do not want to get yourself into a situation that might do you more harm than good in the end.

Duties of a Representative Payee

Alberts Law, Social Security Disability, ,

A representative payee appointed by the Social Security Administration only has authority over the beneficiary’s funds that come from Social Security Disability (SSD) or Supplemental Security Income (SSI) and is appointed when the SSA decides the person cannot manage their funds. This means that your authority begins and ends with these payments – you are responsible for acting in the best interest of the beneficiary when using the funds. You also have no control over money from any other source so you cannot affect how it is used.

You must consider the SSA’s guidelines for spending priorities when using the beneficiary’s funds. You first have to look at the beneficiary’s needs for personal maintenance, which include housing, medical care, food, clothing, and personal-care items. Also, you must know the individual’s reasonably foreseeable needs in determining how to use these payments. Both of these point out that a representative payee needs to have contact with the beneficiary in order to have enough information to make reasonable decisions.

Those considerations apply to both SSD and SSI while a few other areas, such as providing for legal dependents, apply only to SSD. Any funds that remain should be saved or invested and, any account must show that you hold any funds for the sole benefit of the disability recipient. An added responsibility with SSI is that you must limit how much is saved because countable resources, including funds in savings accounts, cannot be more than $2000 for an individual.

Conserving some funds may be difficult, but it can be vital to provide some safety net when unexpected needs arise. The basic rules for SSD payments are that the SSA’s preferred investments are US Savings Bonds and other low-risk investments; also, payees should look to the laws of their states regarding investing funds held by in trust by trustees for guidance. After savings reached $500, a payee is to place additional savings in interest-bearing accounts. For SSI, this threshold is set at $150.

Whether the beneficiary receives SSD or SSI, you as the payee have another option for deciding how to use the conserved funds – you also can look to the state’s law regarding how trustees are supposed to make investment decisions for guidance. This points out that, like a trustee, a representative payee is a fiduciary, who must exercise a high standard of care in managing the funds of another.

In Pennsylvania, trustees follow the Prudent Investor Rule so payees can follow this, too. This permits investment in every kind of property and type of investment, including mutual funds, considering factors like the needs of the beneficiary for current and future distributions and current income and resources. Pennsylvania also requires a fiduciary to diversify investments unless reasonably determining that not diversifying is in the beneficiary’s interest.

With SSD and SSI, the requirements for handling the recipient’s funds tend to be similar, but the SSI program is a federal welfare program with additional restrictions. The monthly SSI benefit amount is below the poverty level, and the program’s main purpose is helping the beneficiary meet daily living expenses. As savings increase, the SSA may question if these needs are being met or if the beneficiary might have additional income or resources that could affect eligibility. If conserved funds are at least 3 times SSI’s Federal Benefit Rate for the year, you probably should expect the agency to look into the reasons. You may face being replaced as the payee and, possibly, be found to have misused benefits that you would have to repay. Generally, the SSA wants $9 of every $10 received for the beneficiary spent to meet basic needs.

While you have similar investment options with SSD and SSI, the resource limit of $2000 for an SSI recipient means you must track the value of countable resources because the SSA reviews this for financial eligibility. You need to know which resources are counted and which are excluded, too.

Low-risk investments that are preferred investments of conserved SSD funds can be made with conserved SSI funds. However, any interest, which would not be much, could cause problems. When an SSI recipient receives unearned income, the first $20 from any source is not counted. After this, monthly SSI is reduced by $1 for every $1 of unearned income. Then, in the month after the interest income is counted, what remains is added to the countable resources. Depending on how close a person is to the resource limit of $2000 for individuals (and $3000 for couples), the small return on investment could be big enough to push them over the resource limit.

Therefore, a payee must know how to convert a countable resource into an excluded one. There are a number of possibilities, but the SSI program’s rules and regulations are complicated. For example, you could set up a burial fund for the SSI beneficiary. This amount is kept separate from other funds and is to be used only for burial expenses. If the amount that used for this purpose is no more than $1500, then this would not count among resources that determine SSI eligibility, and interest earned is not counted as income. You also might purchase a burial space for the individual because this is not a countable resource.

Next, you might look at insurance. If you buy burial insurance, you would not cause a problem because this has no cash surrender value so it is not counted as a resource. However, if life insurance is purchased for an SSI recipient (who would be the policy owner), you face headaches. Any cash surrender value makes this a resource. Circumstances determine if it will be a countable resource. The basic rule is life insurance policies with face values totaling no more than $1500 will not have their cash surrender values counted as resources.

The burial fund that you established two paragraphs ago to exclude resources will be affected. While the face values of the life insurance results in its cash surrender value being excluded as a resource, the part of the amount in the burial fund now will be counted. Because the cash surrender value of the insurance has been excluded, the $1500 exclusion for the burial fund is reduced by the face value of any life insurance policy of the beneficiary.

Potential landmines like this exist for a payee, especially with SSI. You have to do your homework or consult with someone so you know what you can do and its impact. You also need to discuss possible decisions with the beneficiary to get input whenever possible. If you do not talk with the person receiving the disability payments, forgetting your duty to act in that person’s interests, the Social Security Administration may make you an ex-payee. This should give you an idea of the both importance of the representative payee and of making sure you know what you can and cannot do when you accept this position.

Responsibilities of the Trustee of a Trust

Alberts Law, Probate & Estate Administration, ,

Depending on the size and the purpose of a trust, the grantor (sometimes called the settlor) who established the trust may decide upon a relative or a close associate to act as the trustee of that trust. If you are chosen to handle this responsibility, you need to understand what you will be required of you before you take on this role.

The basic reason why a trust has to have a trustee is because the document that the grantor used to create the trust will convey that person’s intention(s) regarding how the assets in the trust are to be used on behalf of its beneficiaries. Some trusts are created to minimize taxes and preserves more assets to pass to the ultimate beneficiaries; the so-called “generation-skipping” trust might be used to accomplish this.

Other people may want to take care of needs of a child who has a disability which entitles the child to certain types of government assistance. However, direct payments from the trust could reduce this assistance while payments for financial or health needs might take the place of items that the government, otherwise, would have provided. To prevent these possibilities, the grantor might establish what is known as a “supplemental needs” trust for the child. Whatever the intention stated by the grantor in the trust document, the trustee must understand it, must understand how to manage the trust’s assets to carry it out, and must be willing to do so.

You generally have to follow the directions of the trust’s creator. You only have discretion to make decisions that are permitted in the trust instrument. A supplemental needs trust would give a trustee a certain amount of discretion, but you have to read the document to be sure. Other trust instruments can contain very specific criteria for the manner in which the principal and interest that comprise the trust’s assets are to be distributed. If language regarding discretionary decision making is nowhere to be found, then you have no authority to deviate from the grantor’s instructions.

In addition to the grantor’s intentions, a trustee must remember that the role always carries fiduciary duties. This means that you must act for the benefit of others, who are defined by the grantor’s intent in setting up the trust. Among those duties are good faith, candor, and loyalty.

There also is the duty to treat beneficiaries impartially (unless the trust’s language expresses a different intent), as well as a duty to balance the interests of the lifetime beneficiaries with those of the remainder persons (who would receive what remains in the trust at its termination). You have to keep beneficiaries updated periodically with an accounting of the trust’s performance. Meanwhile, as a fiduciary, you must avoid self-dealing in addition to conflicts of interest that could undermine your ability to act in the best interests of beneficiaries. Trustees can be held liable when fiduciary duties are breached.

For trusts governed by Pennsylvania law, trustees must understand the Prudent Investor Rule, which was enacted in 1999. Its general rule is as follows: “A fiduciary shall invest and manage property held in a trust as a prudent investor would, by considering the purposes, terms and other circumstances of the trust and by pursuing an overall investment strategy reasonably suited to the trust.” The Prudent Investor Rule also defines permissible investments of a trust and considerations when making investment and management decisions.

This law does allow you to delegate investment and management decisions if someone with skills comparable to yours might do so. You will not be responsible for your agent’s investment decisions when you can show that you used reasonable care, skill, and caution in selecting the agent and you have reviewed periodically the agent’s performance and compliance with the terms of the delegated duties. Any trustee without sufficient investment experience would be wise at least to consider seeking professional advice when investing the assets of the trust so that distributions can be made and expenses can be paid while taxation of the trust is minimized to the extent possible. Obviously, the job of a trustee is not an easy one.

As you undertake these and other actions as a trustee, you generally are entitled to some compensation, defined in the trust instrument, as well as reimbursement for legitimate expenses. Again, you are a fiduciary so you must act in good faith and not inflate these expenses, for example. You always face being held accountable for your actions and could end up being ordered by a court to repay improper payments. If you go too far, the court could remove you as the trustee.

While all of these factors may make being a successful trustee an impossible task, you should remember that many trusts exist and each has, at least, one trustee. The vast majority of trustees handle the role without great difficulty. You simply must understand what is expected of you and know how to carry out your obligations. If you have doubts, you should consult with an attorney with experience in this area to discuss what you need to do to be a successful trustee.