Trust Drafting Chapters 6 and 7

Welcome to the exercise for Chapters 6 and 7. We're going to cover both [[creditor]] issues and [[Medicaid planning]] issues. You can do either one first, but please make sure to do both before finishing the exercise. [[creditor]] [[Medicaid planning]]

Jim is in a car accident. Worried about liability to the pedestrian he hit, he transfers all of his liquid assets to his brother. [[This is a good strategy]] [[This is an actual fraudulent conveyance]] [[This is a constructive fraudulent conveyance]]

Is Medicaid a [[state]] program or a [[federal]] program?

Sorry, that's incorrect. [[try again|creditor]]

Yes. It's done with intent to hinder, delay or defraud creditors. [[continue|creditor2]]

Sorry, that is incorrect. [[try again|creditor]]

Okay, what if your client, Jane, wants to transfer $20,000 to a trust for the benefit of her children. She has no other assets in the bank and $50,000 in credit card debt. But her intent is merely to provide for her children. [[This is fine]] [[It's still an actual fraudulent conveyance]] [[It's still a constructive fraudulent conveyance]]

Sorry, that's incorrect. [[try again|creditor2]]

Nope. There'sno intent to hinder, delay or defraud creditors. [[try again|creditor2]]

Yes. It could be a constructive fradulent conveyance. What does it depend on? [[Whether Jane was unable to keep up with her bills]] [[Whether Jane intended to declare bankruptcy to deal with the credit card debt]]

Yes, this would make her [[insolvent]]

No. Intent to declare bankruptcy is not a prerequisite for a finding of a constructive fradulent conveyance. [[try again|It's still a constructive fraudulent conveyance]]

Okay, we're setting up a trust. Bobby is a beneficiary of the trust but his Mom, Jane (the grantor) is worried about Bobby's creditors and potential claims to Bobby's assets by Bobby's estranged wife. Can Jane protect the trust assets? [[no]] [[yes, from the creditors; but probably not from Bobby's wife]] [[yes, from Bobby's wife; but probably not from the creditors]] [[yes, from both]]

Sorry, that is incorrect. [[try again|insolvent]]

Correct! [[continue|creditors2]]

Okay. We can. How? [[with a choice of forum provision]] [[with a grantor trust provision]] [[with a spendthrift provision]] [[with a discretionary distribution]]

Sorry, that is incorrect. [[try again|creditors2]]

Correct! A spendthrify provision takes the right to assign the right to the trust assets from the beneficiaries, thereby protecting the trust assets from the claims of the beneficiary's creditors. [[continue|creditors3]]

Well, that's part of it. Certainly, to protect from creditors, distributions to the beneficiaries should be discretionary and not mandatory. But there's a better answer. [[try again|creditors2]]

Jane has decided that she also wants to potentially benefit from the trust. So, she wants to be a potential trust beneficiary. [[no problem; let's do it.]] [[Jane, be careful. this could cause your creditors to be able to access the trust assets!]]

[[Jane, be careful. this could cause your creditors to be able to access the trust assets!]]

Yes. It can. In most stated, trust assets that can be distributed to the grantor are vulnerable to her creditors. Jane will most likely NOT have a problem if she lives in which state? [[New York]] [[Nevada]] [[California]] [[Georgia]]

Jane's got even bigger problems if she lives in New York. She has to live in New York. (heh; just kidding) [[try again|Jane, be careful. this could cause your creditors to be able to access the trust assets!]]

Correct. Nevada is a Domestic Asset Protection Trust state [[continue|creditors4]]

Incorrect. [[try again|Jane, be careful. this could cause your creditors to be able to access the trust assets!]]

Okay. Jane lives in Texas. So... [[tell her to move to Nevada and set up a trust]] [[tell her to set up a trust in a Domestic Asset Protection Trust State]] [[tell her to set up a trust in a foreign country that allows protection from the creditors of the grantor]]

Come on. You want your client to move 1,000 miles to make your job a little easier? Seriously? [[give her some better advice|creditors4]]

Okay. Let's do it. Just out of curiosity, why did you choose a Domestic trust rather than a foreign one? [[the DAPT state's judgments are entitled to full faith and credit in Jane's home state of Texas]] [[The DAPT makes is harder for the court to get jurisdiction over the trust than in the case of a foreign trust]] [[DAPT trusts are sanctioned by federal law]] [[I don't know. I just kind of guessed]]

Okay. Why did you choose a foreign trust rather than a Domestic Asset Protection Trust? [[Why not?]] [[because a foreign trust is simpler to administer]] [[to help prevent the beneficiary's creditors from getting jurisdiction over the trust]] [[because the DAPT is too costly to set up and administer]]

Yes! That's a good reason to choose a DAPT over a foreign trust. [[continue|creditor5]]

Actually, the foreign country would probably make it harder to get jurisdiction. [[try again|tell her to set up a trust in a Domestic Asset Protection Trust State]]

Neither type of trust is affected much by federal law. [[try again|tell her to set up a trust in a Domestic Asset Protection Trust State]]

Well, then think of a good reason now. [[try again|tell her to set up a trust in a Domestic Asset Protection Trust State]]

If we are setting up a Domestic Asset Protection Trust for Jane, which of the following is a BAD idea? [[make the trustee be a resident of the state in which we're setting up the trust]] [[put in a choice of law provision in favor of Jane's some state.]] [[use a bank located in the DAPT state]] [[have the trust hold an LLC set up in the DAPT state, which then holds the trust assets]]

Because you need a reason. Duh. [[try again|tell her to set up a trust in a foreign country that allows protection from the creditors of the grantor]]

No, it's probably more complex to administer. [[try again|tell her to set up a trust in a foreign country that allows protection from the creditors of the grantor]]

Excellent reason! It is probably harder to get jurisdiction over a foreign trust than a US based trust. [[continue|creditor5]]

The foreign one will be even more costly. [[try again|tell her to set up a trust in a foreign country that allows protection from the creditors of the grantor]]

No, that's a good idea! [[try again|creditor5]]

Yup. That's a terrible idea. Texas law would now apply, nullifying the whole point of the asset protection trust. [[continue|creditor6]]

No, that's a good idea! [[try again|creditor5]]

Excellent! You've completed the Chapter 6 material. If you haven't done the Chapter 7 (Medicaid Planning) material yet, [[please do so now|Medicaid planning]] If you've already done the Medicaid Planning material, please [[click here|finished]]

You have completed the exercise. Nice job! The code word for the weekly interaction requirement is: anachronism

It's both. It's funded about 50-50 and administered by the states under certain federal guidelines. [[continue|Med]]

Medicaid eligiblity is based on a person's [[income]] [[assets]] [[both income and assets]]

There's a better answer. [[try again|Med]]

Correct! Okay, so I huess our well-to-do client, Dirk, can never become eligible for Medicaid. Correct? [[right]] [[wrong]]

[[wrong]]

I guess Dirk can give away his assets and be eligible for Medicaid... [[tomorrow]] [[in three years]] [[in five years]] [[Never! Giving away assets to become eligible for MEdicaid is fraud!]]

Nope. There is a waiting period for many forms of Medicaid. [[try again|wrong]]

That was the old rule, but not since 2006. [[try again|wrong]]

Correct! [[continue|Med2]]

It's not fraud. It's a legitimate financial planning technique. [[try again|wrong]]

In a properly drafted Medicaid trust, the potential applicant is typically... [[the grantor]] [[the trustee]] [[a beneficiary]]

Correct! [[continue|Med3]]

Nope. You don't want to give the grantor too much power over the trust assets. [[try again|Med2]]

No. Except in the case of an "income only" trust, the grantor is not a beneficiairy, to ensure that the trust assets are not considered "available resources." [[try again|Med2]]

Which of the following is considered an "available resouce" for Medicaid eligiblity purposes? [[the principal of a properly drafted "income only" Medicaid trust]] [[the equity in the applicant's $500,000 personal residence]] [[the assets in an irrevocable burial trust]] [[the applicant's social security income]]

Incorrect. In an income only trust, the income is available since the grantor is entitled to it, but not he principal. [[try again|Med3]]

Nope. Equity up to $500,000 (or $750,000 in some states) is protected by federal regulation. [[try again|Med3]]

Incorrect. The irrevocable burial trust is an exception to the available resource rule. [[try again|Med3]]

Correct! Although not vulnerable to creditors, social security income is considered an available resource for Medicaid eligibility. [[continue|Med4]]

Jim has a house but need nursing home Medicaid. Which is the best strategy? [[give it to his "caregiver" child who lives in the house]] [[just keep the house since it's exempt from being an available resource]] [[put the house in a Medicaid trust for the benefit of his children]]

Yes! Then it's not an available resource and a transfer to a caregiver child does not create a period of ineligiblity. [[continue|Med5]]

It will be protected during Jim's life. But after his death, the house will be subject to a lien to repay the expenses paid for Jim's healthcare by Medicaid. [[try again|Med4]]

This will create a 5 year period of ineligibility. It may be the best option in some cases, but there's a better choice. [[try again|Med4]]

Which of the following should generally NOT be put into a Medicaid planning trust? [[the family home]] [[qualified retirement accounts]] [[stocks and bonds]] [[art work]]

This can be put into a trust to avoid a posthumous lien. [[try again|Med5]]

Correct! Putting an IRA into a trust would cause it to be taxable immediately. Also, an IRA (and the like) gets favorable Medicaid available resource treatment anyway. [[continue|Med6]]

Those are prime candidates for inclusion in a Medicaid trust. [[try again|Med5]]

Why not? Those are considered available resources. [[try again|Med5]]

Why might long term care insurance NOT be a good alternative to Medicaid planning? [[it cannot cover the high cost of a nursing home]] [[if you have long term care insurance, you won't be eligibile for Medicare since you already have insurance]] [[the premiums are high]]

It can, if the coverage is good enough. [[try again|Med6]]

No; there's no connection between the two. [[try again|Med6]]

Yes. Especially if you start late, long term care insurance premiums can be very high. [[continue|Med7]]

Excellent! You've completed the Chapter 6 material. If you haven't done the Chapter 6 (ceditor protection) material yet, [[please do so now|creditor]] If you've already done the Medicaid Planning material, please [[click here|finished]]