Category Archives: Alberts Law

Protecting Retirement Funds in Bankruptcy

Alberts Law, Debt Relief & Bankruptcy, ,

When you file for bankruptcy for consumer debt, everything that you own generally becomes part of your bankruptcy estate. The bankruptcy trustee in charge of the estate could sell these assets to raise funds to pay debts. However, most debtors will find exemptions under the Bankruptcy Code that will protect all, or at least most, of the property in their estate. Property that could not be exempted may remain in the estate because the trustee will look at the cost of selling it versus the amount that a sale would bring and decide to abandon or sell the property back to the debtor. On the other hand, the status of pensions, retirement funds, and similar accounts still is somewhat ambiguous in bankruptcy law.

Looking at the Bankruptcy Code, Section 541(c)(2) states that restrictions on transferring a debtor’s beneficial interest in a trust which are enforceable under applicable nonbankruptcy law will remain enforceable in a bankruptcy case. If the law shields a beneficiary’s interest in a trust from creditors, then the same protection applies during a bankruptcy.

In 1992, the U.S. Supreme Court decided the language in this  section applied to certain types of pensions. ERISA-qualified pension plans were found to be excluded from the bankruptcy estate because this federal law had an “anti-alienation” provision that protected pensions that are covered by ERISA.

Then, in 2005, the Bankruptcy Code was amended. Section 522 was revised to allow the debtor an exemption, usually without limitation, in most types of retirement funds. With this change, whether or not a pension is part of the bankruptcy estate ceased to be an important issue when attempting to protect such plans after a bankruptcy filing. Congress also added provisions stating that any amount withheld or received by an employee in retirement funds or employee benefit plans are not property of the bankruptcy estate.

This does not protect everything, however. If you file for bankruptcy while you are in the process of rolling over your pension funds into another plan, you leave yourself open to the claim that these funds were not in an ERISA-qualified plan when the bankruptcy was filed. Therefore, as the argument goes, your retirement funds should not be  excluded from your bankruptcy estate. This also shows the importance of timing when you decide to file for bankruptcy. Under this scenario, to avoid a possible problem, you could wait to file your bankruptcy case or undertake the rollover. By doing so, the bankruptcy case will be filed while retirement funds are in a qualified plan.

Non-ERISA plans face other issues. For example, the Supreme Court’s 1992 decision pointed to retirement funds that do not qualify under ERISA, determining that they are not entitled to its protection as a result.

Individual retirement accounts (IRAs) would be an example here. However, IRAs now qualify as exempt under subsections 522(b)(3)(C) and (d)(12) (with a $1,245,475 waivable cap for funds that were never rolled over from another plan) and may also be protected from alienation under state law. In addition, if a debtor cannot reach funds in a plan, the bankruptcy estate has the same limitation – it cannot have greater rights than the debtor. Therefore, with the already existing protections plus the expanded ones for retirement savings, a debtor will rarely lose retirement funds in a bankruptcy case.

Other types of plans may be considered spendthrift trusts, with the beneficiary having no right to access the funds whenever the individual so desires. Under the laws of most states, due to this limitation, the beneficiary’s interest in such a trust is protected from the person’s creditors. These trusts are excluded from the debtor’s estate under Section 541(c)(2). However, it should be noted that not all spendthrift trusts are protected under state laws – an example is the “self-settled” spendthrift trust created by its own beneficiary, which most states do not protect from this person’s creditors.

Finally, when possible, the debtor also must remember to list retirement funds, pensions, and similar trust interests in Schedule B of the bankruptcy schedules, even if they do not come into the estate. Any argument that the interest is outside the estate should be noted on Schedule B with a reference to subsections 541(c)(2) or 541(b)(7) of the Bankruptcy Code. In addition, nothing prevents a debtor from claiming on Schedule B that property is outside the estate but listing an applicable exemption on Schedule C in the alternative as a backup.

Changes in Your Family? Time to Revisit Your Estate Plan

Alberts Law, Estate Planning, , ,

After you get married, you might decide that you need an estate plan. Actually, an estate plan is important even if you aren’t married. Of course, whenever your circumstances change, you should revisit this plan to make sure it fits your current situation. Remember that an estate plan never should be viewed as if it were etched in stone. With major life changes, you must realize that your estate plan reflects a time that no longer exists, potentially making it more a part of your history than your future. We will focus on a Will that was drafted after you got married, only to be followed by a divorce, then remarriage, and additions (by birth or adoption) to your family after the second marriage.

When you have been divorced, you may receive a property distribution of assets that were acquired during the marriage that has ended. If some of the property is in investment funds or insurance policies or similar financial tools, you can name beneficiaries to receive these after your death. They do not go through the probate process (if you have a Will in place when you die) or estate administration (when you die without a Will). Instead, these go directly to the beneficiaries whom you chose. As a result, if you do not change your beneficiaries after you remarry, these assets are seen as separate from the property that would be in your second marital estate. They pass according to your previous designation of beneficiaries — you need to change your estate plan if you want a different result.

However, there are situations in which Pennsylvania law makes changes in your Will, even if you do nothing. For example, after a divorce, any provision regarding your ex-spouse no longer has legal effect so he or she would no longer be in your Will unless your estate plan incorporates language in your Will that divorce won’t alter that Will. Generally, the property that would have gone to the former spouse under the original Will becomes part of your intestate estate, to be distributed to your heirs as if you died without any Will at all. If you reside in Pennsylvania when you die, then Pennsylvania’s laws of intestate succession determine who receives what portions of this property — effectively, this becomes part of your estate plan since you didn’t revisit and revise it while you could.

Of course, you may remarry at some point, and — once again — the Pennsylvania legislature has made some decisions on your behalf, assuming that you have not changed your initial Will. The new spouse is in a position to receive a spouse’s intestate share that applies to your circumstances (such as whether there are stepchildren, for example).

However, if you revised your estate plan after your remarriage and gave a bigger share to your new spouse than she or he would receive under Pennsylvania intestacy law, then the surviving spouse gets the larger share. Some people have a new Will drafted that, through its language and the circumstances at the time that it was created, was made in contemplation of a marriage that actually taken place at that point. Then, the spouse, once the marriage occurs, would receive the share that your estate plan dictated. There is a potential exception  to this because the surviving spouse under Pennsylvania law can elect against the Will, in which case this person might be able to inherit approximately one third of your estate.

Assuming that your new relationship yields new children, whether by birth or adoption, this can impact on your existing estate plan. For example, unless the Will clearly demonstrates that these kids were omitted from your estate plan intentionally, they should receive their intestate share, as defined by Pennsylvania law, of your remaining estate after the surviving spouse’s share is deducted from the estate. The remaining estate would be equal to the shares that the children would have received if you had died unmarried and had no Will.

This can get quite complicated, obviously. In addition, many people have other things on the agenda when they have an estate plan created. People often seek to limit the so-called death taxes owed to state and federal governments. You could take the chance that your original estate plan is good enough and never give it a second thought. If this is your approach, then the intestacy laws are ready to fill any gaps that may have developed during the changes that have occurred. However, situations and the goals of your estate plan can change over the course of a lifetime. While considering your mortality is not the most enjoyable experience, you can take comfort in knowing that you will have an estate plan that meets the needs of those whom you want to take care of even when you no longer are around to do so.

The Impact of Substance Abuse in a Social Security Disability Case

Alberts Law, Social Security Disability, ,

A person cannot be found disabled by the Social Security Administration due to substance abuse, whether it involves drug addiction or alcoholism. However, a person can be disabled despite the use of drugs or alcohol. The key legal issue is if substance abuse is a “contributing factor material to the determination of disability.”

 

Another issue with substance abuse involves the mindset of some Administrative Law Judges, who often do not want to find someone who uses drugs or alcohol disabled. Deciding that a person who has a history of using drugs or alcohol is not disabled regardless of any others facts in a case is a misapplication of the law, but it can occur.


This is a bigger problem when the history of substance abuse is more recent or ongoing. However, even if drug abuse or alcoholism is ongoing, you still could be disabled if you have other impairments that prevent you from working. It is the impact of substance abuse on your other impairments that must be considered under current Social Security law.

 

During a hearing, an Administrative Law Judge (ALJ) goes through five steps in evaluating your disability claim. In most cases, if you are found disabled due to physical or mental impairments resulting in limitations that make full-time work of any kind impossible, then you are entitled to disability payments. However, when alcohol or other drugs enter the picture, you may be found to meet the definition of disability during the five-step sequential evaluation, but you face an additional question that could prevent you from receiving those disability payments: Is substance abuse a contributing factor that is material to the finding that you are disabled? What this really is asking is whether you would be unable to work on a full-time basis if you stopped using drugs or alcohol. As long as your work-related limitations that remain after the impact of any substance abuse is removed make you unable to work, you are disabled.

 

According to the Code of Federal Regulations, when substance abuse is involved, the ALJ at your hearing has to look at your current physical and mental impairments that caused limitations in your ability to function at work and then decide which of them would continue to exist even if you stopped using drugs or alcohol. If at least one impairment remains that causes limitations that are disabling, then you are disabled regardless of the impact of substance abuse on other impairments. If no limitations from any of your impairments remain that would leave you unable to work after the impact of the use of alcohol or other drugs is removed, then substance abuse is a contributing factor material to the determination of disability — this means is that you cannot be found disabled.

 

It is important to note that the cause of any of your impairments does not matter. For example, you could have cirrhosis of the liver due to alcoholism, and the cirrhosis may prevent you from being able to work. If you no longer drink, then there is no need to consider the impact of continued use of alcohol. You could be found disabled by the Social Security Administration despite the fact that substance abuse caused the disabling condition.

 

However, when you have a potentially disabling condition but your substance abuse is ongoing, the situation becomes more complicated. The general belief is that you would bear the burden of proving that, even if you stopped using alcohol or other drugs, you would be disabled. This makes the determination of disability difficult under these circumstances.

 

Ultimately, not using drugs for a period of time is the strongest proof that substance abuse is not the reason that you should be found disabled. There is no “bright line” test for how long would be long enough. Of course, the longer the period involved, the better for your case because there will be more evidence of your actual condition without the effect of any continuing substance abuse. This helps to eliminate speculation and guesswork regarding the impact of alcohol or other drugs. If you remain incapable of working after you have been clean for some period of time, your case becomes much easier to prove. You would be wise to consider this before you apply for disability. Remember, if you really believe that you are disabled and that substance abuse does not contribute to this disability, you do not want to give the Social Security Administration an excuse to deny your claim.

The Need for an Estate Plan

Alberts Law, Estate Planning, ,

Everyone needs an estate plan. Due to the range of decisions and situations that such a plan can cover, you shouldn’t let a lack of property or wealth keep you from addressing this. An estate plan generally includes a number of documents, and only some of these focus on transferring wealth when you die.

 

Of course, one of the essential pieces is a Last Will and Testament. This is important for certain transfers of property but also can deal with other topics, such as burial arrangements. The second essential part of your estate plan is a Durable Power of Attorney, although it basically is effective only while you are living. You could choose someone to make financial decisions or, at least, handle your financial affairs, such as paying bills, when you are unable to do these things. A Medical Power of Attorney can provide authority over some medical decisions when your medical condition prevents you from speaking for yourself.

 

A final essential element in every estate plan is commonly known as a Living Will (or Advance Directive). It permits you to make decisions regarding the medical treatment and care that you would want when you can no longer communicate your wishes and are not likely to recover in the opinion of doctors who have examined you while you have been in this condition. You could name a surrogate decision maker, but – if a decision is covered in the Living Will – you can require that your surrogate follows your wishes.

 

The need for a Power of Attorney and a Living Will may be more understandable than the need for a Will if a person has does not own much. However, your Last Will and Testament can provide valuable information, regardless of the size of your estate. You may have items that have sentimental value to family members or even a small amount of cash that you want a particular person to have after your death. A Will can be used to make your intent clear. It also can provide other information; for example, you can name the person you want to handle the necessary activities that follow a person’s death, including handling taxes and your final expenses. You also must remember that, while your Will can make your wishes clear, the necessary person has to have access to it in order for it to be effective.

 

While a Will is important in transferring ownership of property to others, an estate plan can use other methods to do this. Each possibility has positive and negative points that are best reviewed with a professional. One method is to set up a joint account with the right of survivorship, which avoids the probate process but not necessarily the so-called death taxes (such as Pennsylvania’s inheritance tax). Other assets, including a life-insurance policy, can name beneficiaries so probate again can be avoided. Another possibility with life insurance is to use it to fund a trust as part of your estate plan.

 

Trusts of various types can be used for a variety of purposes. There are trusts that are intended to reduce the tax bill for your estate and for others – this is a complicated area that’s beyond the scope of this post, but it may be a realistic consideration depending on your circumstances. An example is a “credit-shelter” trust that a wealthy spouse might want to shield a surviving spouse’s estate from a large federal estate tax bill later on.

However, trusts are not just a tool of the rich and can be created for purposes that don’t focus on protecting wealth. For example, you may have a child who receives Medicaid (or, as it is known in Pennsylvania, Medical Assistance), which limits income and resources that your child can have while retaining eligibility. You could decide to disinherit your child to avoid the loss of these benefits, but you might consider a “supplemental needs” trust in your estate plan. Basically, this does not permit payments that would replace government benefits but can pay for other things to supplement what your child receives from public sources. A carefully drafted trust would make this possible.

 

Estate planning can even take place through gifts while you are alive and through post-mortem planning, such as a disclaimer by a beneficiary or an heir of something that she would receive so that it goes to someone else. Disclaimers often are used based on tax implications. With the numerous potential aspects of an estate plan, a person often benefits from consulting with a professional about the available options. Even the seemingly simplest estate can benefit from a review of an individual’s objectives and the consideration of ways that you might be met.

 

For the moment, there is one final thought to keep in mind. You never should view an estate plan as a final product. With time, changes occur in a life. The purpose of the plan may change if you get married or divorced, for example. Laws also change, and your plan may no longer meet your tax-planning goals when new tax laws are passed. An estate plan should be reviewed every few years, at least, so that it remains relevant to your current circumstances. No matter how simple or complex an estate plan may be, you need to make sure that it is one that you can live with as time goes by.

Proposed Regulations About Adverse Evidence

Alberts Law, Social Security Disability, , ,
[Note: After this post was written, the regulation requiring notice of all evidence, in its entirety, related to whether or not the claimant is blind or disabled became reality. It officially went into effect on April 20, 2015.]

 

Recently, the National Organization of Social Security Claimants’ Representatives printed an article that detailed regulations being proposed by the Social Security Administration that would require a person applying for disability to disclose all evidence related to the determination of disability. Adverse evidence could not be screened out. While this has been discussed for years, such a regulation seems likely to be adopted in some form in the near future.

The idea behind this is that a person should not be able to pick and choose only the most favorable evidence to submit in a case. If you have applied for disability and provide evidence, you cannot edit what you have submitted under the current regulations. Pulling out only favorable information would not be permitted. If a document with helpful information also contains adverse evidence regarding your claimed disability, you would have to include everything in order to get the favorable facts into your disability file.

What is proposed is that, when you submit evidence from a source, you have to submit all of the evidence from that source. Instead of requiring that each report or medical test be entered into your file without anything edited from it, the new regulations would require that you must introduce everything from that source’s records about you whenever you add evidence from a new source. While the idea is to prevent the hiding of adverse evidence that will have a negative effect on your case, this also opens the possibility that a great deal of irrelevant information will have to be reviewed by the SSA. For example, even the most routine medical tests during a hospital stay would be in your file, which could lead to more important data virtually being buried.

In addition, the proposed regulations would require you, after applying for disability, to either inform the SSA about or actually submit all evidence that you know that exists and relates to whether or not you are disabled. The present regulations state that you have to bring to the attention of the Social Security Administration everything that shows that you are disabled.

The wording of both versions seems to suggest that the SSA will follow up on your information and get the records if you do not. However, nothing in either version states that it has to do this, even though the regulations have included the requirement that the Social Security Administration is to work to develop the record for your case. Will the SSA pursue this obligation more thoroughly when you disclose adverse evidence that may prove that you are not disabled? There is no way to know this at the moment. However, in what is supposed to be a non-adversarial process, the proposed changes would give you the obligation of providing evidence against yourself.

Also, there are changes in the role of an attorney or anyone who is representing you in your case. Your representative would have to help to obtain the information that you would be required to submit under the new regulations. The use of “help” seems to suggest that your representative would have an active role in the development of factors in your favor as well as those that are adverse to you. Potentially, this might lead some claimants to withhold information from representatives in an attempt to prevent adverse evidence winding up in the file. The regulations now state that the representative is to obtain and submit evidence that you want to have in your Social Security file – the proposals would introduce a definite change in the process, and these changes could have unwanted consequences regarding your disability claim.

None of this is to suggest that adverse evidence should be hidden so that individuals who actually do not qualify for disability end up being found disabled. On the other hand, the implications of major changes in any system should receive strong consideration before those changes are put into effect to determine if the “new” system presents an overall improvement upon what currently exists.

Responsibility for Inheritance Tax

Alberts Law, Estate Planning, Probate & Estate Administration, , ,

In Pennsylvania, inheritance tax basically is a tax on your right to receive property of someone who has died. The tax rate is based on which class of beneficiary that you are in. For example, the spousal rate currently is zero percent while transfers to brothers and sisters face a tax rate of 12 percent. Because inheritance tax is assessed on a “transferee” having the right to receive property and the amount of the tax is calculated based on this person’s relationship to the decedent, an argument could be made that transferees, who are the individuals receiving the property, should be taxed. This also is reality, although they usually do not file returns or pay the tax directly to Pennsylvania.

According to Pennsylvania law, the estate’s personal representative (who also is called the administrator or the executor) must file the inheritance tax return that would include property of the decedent over which he or she had control, as well as any other property of which the personal representative has knowledge and that will be subject to inheritance tax when it is transferred. Simply put, the personal representative has the primary responsibility to file the return.

However, complications do arise. If the personal representative does not file an inheritance tax return or does not include property that you received as a transferee, then you are responsible for filing a return regarding that property and also for paying the inheritance tax. Remember that, ultimately, inheritance tax is based on a person’s right to receive estate property, and rights come with obligations. You have the responsibility to pay the inheritance tax on this property when the personal representative fails to do so. For example, a personal representative could exclude a beneficiary in the inheritance tax return when the property was owned jointly with the right of survivorship by the decedent and someone other than a spouse. The personal representative can fill in a circle on the return which states that the survivor, who automatically becomes owner of the entire amount, is to be billed separately by Pennsylvania’s Department of Revenue. The survivor needs to file a return and pay the inheritance tax on the portion that had been owned by the decedent.

The usual situation will involve the personal representative writing the check for the amount of inheritance tax owed, though. While the inheritance tax statute places the “ultimate liability” for payment on the transferee who receives the property, Section 9144 (entitled “Source of payment”) of Pennsylvania’s Fiscal Code, also specifies that the inheritance tax generally is to be paid by the personal representative from the residuary estate (which is what remains after all debts, expenses, claims, and testamentary gifts have been paid out).

If the personal representative does not pay the inheritance tax, then anyone receiving the residuary estate is supposed to pay it. Ultimately, if none of these individuals makes the payment, anyone who received property from the estate will be liable for paying the inheritance tax on the value of what she or he received. This is why you are said to have “ultimate liability” regarding anything that was transferred from the estate to you.

Because the possibility of receiving property from an estate often seems to bring out the worst in people, you might want to consider eliminating as many potential controversies involving the estate that you eventually will leave. An estate plan can be used to make clear how any inheritance tax on your estate is to be paid. This is why a Last Will and Testament commonly includes a clause directing how the inheritance tax, as well as other costs that can typically arise when a person is dying and other common costs after death, are to be handled by the individual who will be in charge of the estate. Setting forth your clear intent regarding payment of inheritance tax ensures that one possible estate controversy is eliminated. At the very least, this shows how good estate planning can prevent a hard time from becoming even harder for your family and friends.

The Impact of Current Resource & Income Limits on SSI Recipients

Alberts Law, Social Security Disability, , , ,

Supplemental Security Income, often referred to as SSI, is a federal welfare program that focuses on assisting the elderly and disabled who do not qualify for benefits under the various programs that are comprise Social Security. SSI recipients can receive a monthly income equal to the Federal Benefit Rate. This currently is less than 75 percent of the federal poverty guidelines. While that is not much, it at least is subject to cost-of-living adjustments. Meanwhile, much of this program seems completely frozen in time.

Because the SSI program is basically a welfare program, it has strict limits on earnings and resources that permit eligibility for these benefits. During 2013, Representative Raúl Grijalva of Arizona introduced legislation to raise resources that are counted when determining financial eligibility for SSI as well as the monthly exclusions of both unearned and earned incomes (“income disregards”) by approximately 550 percent. While this proposal may sound excessive, it is not so extravagant when viewed in the context of history of the program.

The starting point for Supplemental Security Income dates back to the presidency of Richard Nixon, who signed legislation creating the program in 1972. Since that time, the National Senior Citizens Law Center estimates that the cost of living has grown by more than 5-and-a-half times the amount from 1972. Meanwhile, the rate of growth of countable resources, as well as both types of income disregards, has been anemic, at best.

Countable resources did experience a growth spurt in the latter half of the 1980s. When the program began, these resources, which generally consider bank accounts, cash, and similar types of property, could not exceed $1500 for an individual and $2250 for a couple who both received SSI. This was true from 1974 through 1984 before these amounts were permitted to grow. In fact, for a five-year span from 1985 into 1989, the level of countable resources increased, reaching $2000 for individuals and $3000 for a couple receiving SSI. This amounted to the resource level – so long stagnant – increasing by one third in half of a decade.

However, an even more noteworthy situation has occurred during the 25 years that followed. Countable resources have remained at the 1989 level. Due to this, SSI recipients often are unable to afford to have cars and other common household equipment repaired because repair costs have advanced with the times — liquid assets such as savings accounts need to be tapped to pay for these. Meanwhile, a person on SSI continues to be allowed have relatively small amounts of such resources for emergency expenditures. People on SSI have little room to maneuver when unexpected problems arise because their incomes generally are far below the poverty level while lack virtually any resources to have the flexibility needed to handle emergencies.

The income disregards tell much the same story. In fact, these situations have been even worse over time. In a month, a person who receives SSI can receive unearned income, such as dividends, interest, or capital gains, totaling $20 before this type of income would result in a dollar-for-dollar deduction from SSI. While there was the brief five-year period when countable resource amounts did increase, the unearned income disregard of $20 today is the same amount as the unearned income disregard established at the program’s inception in 1974. Assuming that the cost of living has jumped 550 percent during this time frame, this means, relatively speaking,  that the unearned income disregard has plummeted to a level that is roughly equivalent to $3.64 in 1974, based on the cost of living from that year to the present time.

As for the earned income disregard, it may be $65 per month instead of $20 per month, but it did not have to climb to that level. Again, today’s amount equals the value from 1974, four decades ago. It should be noted that the earned income disregard can be as much as $85 if there is no unearned income and that earned income above the disregarded amount reduces SSI benefits by 50 cents for every dollar earned. However, this does not change the basic fact that recipients of SSI have fallen even farther behind the rest of the population in keeping pace with the cost of living.

What can be gained by raising the threshold levels mentioned here? It would not be a forced transfer of wealth but, instead, would allow SSI recipients to actually be able to use their resources and any additional income to help themselves. At the very least, providing fair increases in the current levels for countable resources and income disregards can offer new, if only modest, possibilities to those who are forced by law to remain deeply impoverished to do more for themselves while not taking anything away from others, an idea that would seem worthy of consideration.

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.