IDENTIFYING INCENDIARY ASSET PROTECTION STRATEGIES · Since Wanda's income is so low, she can increase the Protected Resource Amount. The entire value of the farm is also protected.2

IDENTIFYING INCENDIARY ASSET PROTECTION STRATEGIES

MARILYN G. MILLER Attorney at Law

P.O. Box 917 Dripping Springs, Texas 78620

State Bar of Texas ANNUAL MEETING: ESTATE PLANNING CLE

AN ELDER LAW PRIMER June 23-24 2005

Dallas

CHAPTER 2

MARILYN G. MILLER ATTORNEY AT LAW, JD LLM CELA

P. O. Box 917 • Dripping Springs, Texas 78620 • (512) 894-0319 • Fax (512) 894-4010

EDUCATION University of Missouri – Kansas City, Missouri

Master of Laws, Taxation, 1983 Awards: Arthur Mag Fellow of Law 1982-1983

University of Kansas – Lawrence, Kansas Juris Doctor, 1981 Bachelor of Science, Education, 1976 PROFESSIONAL PROFILE

Solo practitioner with offices in Dripping Springs (main) and Austin (satellite.) Board Certified in Consumer Bankruptcy by the Texas Board of Legal Specialization since 1992 Certified Elder Law Attorney by the National Elder Law Foundation. The American Bar Association and the Texas State Bar recognize the certification but Elder Law is not an area of specialization in Texas. Member of the College of the State Bar of Texas since 1992. PROFESSIONAL BACKGROUND Bankruptcy: Law Clerk, US Bankruptcy Court, Western District of Missouri 1981-1982. Private practice representation of debtor clients in Chapters 7, 11 and 13 since 1984. Probate: Representation of Executors and Administrators of independent and dependent probate estates. Also representation of Guardians of incapacitated persons. Practice includes appearances in Travis, Hays, Blanco and surrounding counties. Litigation: Litigation experience in all levels of State and Federal Courts. Past clients include the Texas Department of Insurance Liquidation Division and Jo Ann Howard, Receiver, in claims litigation for insolvent insurance companies. Administrative: Appearances before Administrative Law Judges in cases involving Medicaid long-term care benefit denial. Also represent clients in administrative matters with Social Security Administration.

ADMITTED TO PRACTICE

State Bars of Texas and Missouri, licensed to practice in all courts United States District Courts for the Western, Northern and Southern Districts of Texas United States District Court for the Western District of Missouri United States Fifth Circuit Court of Appeals United States Tax Court

OTHER ACTIVITIES

Board of Directors Helping Hands, Inc Board of Directors, Chairman, Hill Country Cottages, Inc Board of Directors United Way of Hays County Board of Directors YMCA of Austin Metropolitan Board 1988 - 2005 Adjunct Professor Texas State University Department of Finance and Economics, Advanced Financial Planning Founding director and past president of Texas Chapter of the National Academy of Elder Law Attorneys Municipal Judge, City of Dripping Springs, Texas

Identifying Incendiary Asset Protection Strategies Chapter 2

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TABLE OF CONTENTS

I. OVERVIEW ........................................................................................................................................................... 1 A. Don't lose sight of the forest while looking at the trees................................................................................... 1 B. If I save it here, can I keep it there? ................................................................................................................ 1 C. Check for family skeletons.............................................................................................................................. 1

II. CASE STUDY: WANDA GOODHEART ............................................................................................................ 1 A. Address her primary fear first.......................................................................................................................... 1 B. Next, the creditors. .......................................................................................................................................... 2

1. Budget and payments............................................................................................................................... 2 3. The Moral of the Story. ........................................................................................................................... 2

C. Estate Planning for Wanda .............................................................................................................................. 2

III. OTHER GENERAL ISSUES................................................................................................................................ 3 A. Debt Resolution and Management: ................................................................................................................. 3

1. Don't pay off credit card debt with home equity loans. ........................................................................... 3 2. Check out debt consolidation and counseling services carefully. ........................................................... 3 3. Avoiding bankruptcy doesn't necessarily insure a "good credit" rating. ................................................. 3 4. Check the statutes of limitations on collections. ..................................................................................... 3 5. Reverse Mortgages .................................................................................................................................. 3

B. Trusts:.............................................................................................................................................................. 4 1. Medicaid Considerations: ........................................................................................................................ 4 2. Other Considerations: .............................................................................................................................. 4

a. Estate and Gift Tax ......................................................................................................................... 4 b. Irrevocable Life Insurance Trusts. ................................................................................................... 5

3. Advantages: ............................................................................................................................................. 5 4. Disadvantages:......................................................................................................................................... 5

C. Transfers with Retained Interests .................................................................................................................... 5 1. Medicaid Considerations: ........................................................................................................................ 5 2. Other considerations: ............................................................................................................................... 6 3. Advantages: ............................................................................................................................................. 6 4. Disadvantages:......................................................................................................................................... 6

D. Annuities, Life Insurance and Retirement Accounts....................................................................................... 7 1. Annuities.................................................................................................................................................. 7 2. Life Insurance .......................................................................................................................................... 7 3. Retirement Accounts: .............................................................................................................................. 7 4. Medicaid Considerations. ........................................................................................................................ 7 5. Advantages: ............................................................................................................................................. 7

E. Disclaimers...................................................................................................................................................... 7 1. Medicaid Considerations. ........................................................................................................................ 8 2. Creditor avoidance................................................................................................................................... 8 3. Best Advice: Avoid the problem if possible............................................................................................ 8

IV. CAVEAT TRANSFEROR...................................................................................................................................... 8 A. Fraudulent Conveyances and Preferential Transfers generally ....................................................................... 8 B. Preferential Transfers: Bankruptcy Code §547 ............................................................................................... 8 C. Texas Uniform Fraudulent Transfer Act ......................................................................................................... 9 D. Fraudulent Transfers: Bankruptcy Code §548................................................................................................. 9 E. Discharge in Bankruptcy ................................................................................................................................. 9 F. Remember, the Government makes the rules................................................................................................ 10

V. CONCLUSION ..................................................................................................................................................... 10

EXHIBIT A ...................................................................................................................................................................11

EXHIBIT B ................................................................................................................................................................... 13


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EXHIBIT "C" ................................................................................................................................................... 14

EXEMPTION COMPARISON CHART............................................................................................................. 15


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IDENTIFYING INCENDIARY ASSET PROTECTION STRATEGIES (Avoiding the fire while escaping the frying pan) I. OVERVIEW

Much of the practice of law falls under the umbrella of "asset protection" or "asset preservation." Estate planning, real estate, probate, even civil litigation is designed to either increase asset holdings or prevent or minimize asset loss. We should take pause, however, when a client comes into our office and announces, "I want to protect my assets." Often this request is triggered by an event that has left the client overwhelmed, financially, emotionally or both. Sometimes it's triggered catastrophic events that have happened to others and have caused the client to consider his or her future position. But in an effort to fix the most pressing problem at hand, it is all too easy to create or aggravate another.

Gloria Steinem is credited with observing that "Rich people plan for three generations, poor people plan for Saturday night." We see more and more often families that are faced with issues that weren't part of the typical estate planning discussion fifteen or twenty years ago. No one thought much of long stays in the "rest home" or stepchildren acquired with a second marriage or the financial consequences of new life sustaining, if not life-enhancing, technology. They panic. They make bad decisions. Or no decisions. They just know that their assets are in danger of being depleted and they need advice on how to prevent or minimize that. Part of our population that planned for and anticipated a financially comfortable future for themselves and their loved ones is now facing an uncertain Saturday night. A. Don't lose sight of the forest while looking at

the trees The client has a stated objective, namely

protecting assets, but in order to help him or her achieve that objective the attorney needs to get a lot of information. Protection from what? Protection from whom? Is the threat real or perceived? If real, is it immediate, or is it somewhere in the future? If it is perceived, is there something that can be done to help change that perception and ease the client's fears? If it is the future, can we help plan around it? After this is determined, however, planning to resolve the difficulty should not be done without the "big picture" in mind. Actions taken to ameliorate one set of concerns can drastically impact other planning areas. A careful analysis of the client's needs and motives enables you craft an appropriate solution.

B. If I save it here, can I keep it there? More of our older clients today are faced with

financial concerns in more than one area. Some of those clients who paid cash for years, have now turned to credit cards to fill the gap between virtually negligible cost of living increases in fixed incomes and the skyrocketing actual costs of living. At some point they not only need to choose between "eating and buying medicine", but also what, if anything, to pay their unsecured creditors. Add to this the cost of health care and the specter of long term nursing home care. An additional hurdle we as planners face is that the older client population often feels a passionate obligation to pay their debts and a strong aversion to bankruptcy. Problems can arise when the nature of exemptions in different areas are ignored, as are the implications of "planning oriented" transfers. C. Check for family skeletons

It is a rare client in this situation that comes right out and confides in you any unattractive family circumstances. The client may be embarrassed or doesn't believe that such information is necessary to his or her situation. Quite the contrary is true. The advisor needs to know which family members may be trusted to be stewards of assets if transfers are part of a plan, or which family members may need to be protected from themselves or others. Sometimes you only get hints of this information indirectly in the course of a conversation ("Yes, Billy finds El Reno lovely this time of year") so it's important to listen carefully what the client says - and perhaps what she doesn't - and to be ready to go outside your list of standard questions. II. CASE STUDY: WANDA GOODHEART

Consider the plight of Herbert and Wanda Goodheart set out in Exhibit "A." The couple was doing fine until Herbert had a stroke. He is now unable to work the farm, and the main source of income is gone. They cannot now pay their debts, which were manageable before. He is facing the real possibility of long term nursing home care. Wanda's biggest concern, and main focus of her visit, is what will happen if Herb goes into a nursing home. (Warning! Wanda's daughter, Darla, has devised a plan of her own that you must address - Darla's plan is free, yours will cost money.) Of secondary importance is how will she get her children's "inheritance" to them like their father wanted? She also worries about her spendthrift son and her disabled daughter. Where do you start? A. Address her primary fear first.

Wanda's biggest concern is that if Herbert goes into the nursing home the "state will take my house and all my assets." Not exactly. In 2003 the Texas


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Legislature came into compliance with federal law and enacted legislation to implement a program of recovery from the probate estates of certain Medicaid recipients. That program is applicable to those individuals who file applications for assistance on or after March 1, 2005. Under those rules (at least as of the date of this writing) the homestead will not be available for recovery if there is a surviving spouse living there.1 So for the foreseeable future, Wanda's fears about the house can be put to rest.

Under the Medicaid rules, the Herb and Wanda can likely keep most of their assets if Herb needs long term nursing home Medicaid benefits. See Exhibit "B". Since Wanda's income is so low, she can increase the Protected Resource Amount. The entire value of the farm is also protected.2

B. Next, the creditors. 1. Budget and payments

Herb and Wanda's combined income is no longer adequate to make the creditor payments in addition to the expenses of living. The only way to keep up creditor payments after using the checking account and Herb's brokerage account is to dip into exempt assets.3 If they dribble out monthly payments the interest continues to run and they lose more of their savings in the long run. If they pay off all creditors at one time, including the equity loan, they will need to use $323,000 of their assets, $283,000 of which would have been exempt from execution by judgment creditors under Texas law. Accessing some of that money will generate income taxes and perhaps some penalties, leaving them with even less.4

As a practical matter, creditors (except the IRS) can get to very few of their assets. Even the Social Security payments may be exempt if they are kept in a separate account. 42 USC §407. However, if not paid the debts keep growing, the aggressive, harassing collection efforts will begin - and continue - and those increased debts may be left for resolution in probate. Judgments may be taken and liens filed, including liens on the 25 acres of non-exempt farmland. Additionally, the creditors will proceed at random, on a "first come first served" basis regardless of the nature of their debt. 1 Other exemptions are available, but are not relevant for the purpose of this discussion. 2 For a comprehensive analysis of this subject, with forms and practice tips, see H. Clyde Farrell's Financing Long Term Care in Texas, updated annually and available from the author. 3 For the time-being we're leaving Herb's real estate note for a source of monthly income. It is also non-exempt from creditors, but its value to the couple as an interest bearing asset right now is worth more than its value in liquidation. 4 The home equity loan should also be examined to make sure that the proper procedures were followed; if not, it may also be avoided.

2. What about bankruptcy? 5 Herb and Wanda might consider filing a Chapter 7

bankruptcy to discharge some of the unsecured debt.6 Because they live in Texas and have a homestead, they would be wise to use Texas state exemptions. Non-exempt assets will include 25 acres of the farm, cash in the bank, the real estate note and Herb's brokerage account. The Trustee will take charge of these assets to pay the creditors. In the process, the credit card debt, the signature loans and probably personal liability for the 1987 income taxes will go away. The §941 tax is a "trust fund tax" that is not dischargeable in bankruptcy; it will be paid as a priority debt by the Trustee before the other debts. The important difference between allowing the bankruptcy trustee to liquidate the assets and allowing creditors take at random is that under the Bankruptcy Code creditors get paid according to statutory priorities. After the available assets are distributed by the Trustee the remaining debt is uncollectible. Our clients are left with no tax liability and no unsecured debt after the bankruptcy.

3. The Moral of the Story.

Filing personal bankruptcy leaves the client with more assets on which to live and a fresh start into an uncertain future. C. Estate Planning for Wanda

Wanda desperately needs some good estate planning documents. (Ethics admonition: Because Wanda and Herb likely have different plans for the disposition of their estates, Herb should have separate representation.) She needs a Will with some testamentary trusts. The farm is probably valued as "agricultural" for property tax purposes. The advisor should get an idea of the true fair market of the property at its highest and best use because this is the value from which the Internal Revenue starts for estate tax purposes. If that value is $10,000 per acre, Wanda may have a taxable estate, and appropriate planning done.

If she wants to provide financially for Herb after her death and assure that he retains Medicaid eligibility for long term care, she should leave his bequest in a trust with special needs provisions (see below). Similarly, Darla's share should be placed in a special needs trust in the event that needs public assistance in the future. Wanda should definitely put Melvin's share in a trust with spendthrift provisions.

5 The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, effective October 17, 2005, will change many things, including the availability of some current pre-bankruptcy planning strategies. Stay tuned. 6 Because of the precarious nature of Herb's capacity, it would be advisable to have him execute a special Power of Attorney for Bankruptcy. See Exhibit C for sample form.


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Check signature cards and account agreements carefully to make sure that the property goes through the probate estate according to the terms of the Will and not by right of survivorship, lest the entire plan fail.

Wanda should also have Powers of Attorney that give her agent the ability to carry out any planning contingencies if she is unable. The bare-bones Statutory Durable Power of Attorney may be insufficient in many respects and should be customized accordingly. Have her carefully consider who should be the agent under this document; it may well not be Darla and it is definitely not Melvin.

Finally, it may be prudent to consider a Marital Property agreement where she and Herb specifically identify, and partition if necessary, separate and community assets to minimize future family disputes over probate estate property.

III. OTHER GENERAL ISSUES A. Debt Resolution and Management:

Individuals often grasp at any straw in the hope, no matter how vain, that they can work out of their financial problems. The following are some general, although not universal, thoughts for those dealing with overwhelming debt:

1. Don't pay off credit card debt with home equity

loans. Converting unsecured debt to secured debt is not

always a good idea because by doing this the short-term debt that is dischargeable in bankruptcy is converted to a long-term debt that is not. Moreover, often this does not address the root of the financial problems and the unsecured debt, like the Phoenix, will rise again. Before advising this option, sit down with the client and make them do a realistic budget.

2. Check out debt consolidation and counseling

services carefully. These services are springing up like mushrooms

on a rotten log. Many make promises that are not possible to keep. Many charge a handsome fee regardless of the results, even those that hold themselves out as "non-profit." Some are under investigation by the IRS and the attorneys general of several states. And the client's credit often suffers more under these plans simply because the debts are not being paid in full. Under the new Bankruptcy Abuse Prevention and Consumer Protection Act (the "Bankruptcy Act") credit counseling by an approved nonprofit service is a prerequisite to filing. Discharge will be conditioned on the debtor completing an approved instructional course concerning personal financial management. If the client is not considering filing bankruptcy, at a minimum you should suggest that the client use a service where the creditors pay the

fee. Reputable services will also advise the client when the cause appears lost, even to the point of suggesting that they get advice on filing bankruptcy.

3. Avoiding bankruptcy doesn't necessarily insure a

"good credit" rating. The client is often no worse off after filing

bankruptcy than he is with a no pay/slow pay credit history. Although a bankruptcy filing is unquestionably a blot on a credit record, lenders sometime prefer to see applicants with discharged debt and a fresh start than with a great deal of debt that can't be handled.

4. Check the statutes of limitations on collections.

Sometimes creditors just get tired and go away. Generally, there is a four year limitation on collection of debts in Texas7, meaning that if the creditor hasn't brought suit within that time, collection is forever barred. If your client is "judgment proof" and doesn't mind the calls and letters, waiting it out is one option. On the other hand, "bad" debts are often bundled and sold, meaning that the collection efforts may begin again with someone new. That doesn't mean that there is a new statute of limitations, however, and collecting after that time by any means other than gently convincing the debtor to pay voluntarily is a violation of federal and state collection laws. 5. Reverse Mortgages

Cash poor, equity rich senior homeowners in Texas have the option taking equity out of their homes without the obligation to repay on a monthly basis. For this purpose a "senior" is a person aged 62 years of age or older. This is known as a reverse mortgage. The borrower typically chooses from three payment options: a) one lump sum cash payment. b) equal monthly payments for as long as both borrowers live in the home, or c) equal monthly payments over time. Borrowers are required to attend financial counseling from a HUD-approved credit counseling agency before closing. Repayment is not required until the borrower (or both borrowers if husband and wife) move, sell their home, or are deceased; however the borrower remains responsible for property taxes, homeowners insurance and upkeep on the house while they live there. When one of the repayment triggering events occurs, the lender may foreclose on the property. If the heirs want the home, they may pay off the loan.

Home reverse mortgages aren't for everyone. A good place to get more information is the Office of Consumer Credit Commissioner, on line at www.occc.state.tx.us.

7 Tx. Civ. Prac. and Rem. Code §16.004(a)(3)


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B. Trusts: It is not uncommon for a client to come into our

office and ask for a "living trust" because someone somewhere said that such a trust will "protect assets and save taxes." While that is certainly true in some limited sense, it's not usually what the client has in mind. Trusts in Texas are governed generally by the Texas Trust Code (Subtitle B, Title 9, Tx. Prop. Code) and specifically by the trust agreement. The parties to a trust are a) the "Grantor" or "Settlor" - the one who establishes and most often funds the trust b) the "Trustee" - the one that holds legal title to the assets in the trust (the trust "corpus" or principal) and c) the Beneficiary - the one for whose benefit the assets are held. A revocable trust, as the name indicates, can be undone by the one that set it up. The grantor typically has unfettered access to income and principal. Irrevocable trusts contain provisions that prevent a Grantor from undoing or changing the trust later. Some amendments may be allowed under certain circumstances, but generally, the terms and conditions are fixed. Depending on the reason the trust is established, the grantor may or may not retain an interest in the principal; more often at least an interest in income is retained by the Grantor. Objective: Protection for client

As a general rule, an individual cannot shield his assets from his own creditors by transferring those assets into trust. Tx. Prob. Code 112.035(d). (See also the new Bankruptcy provisions regarding fraudulent transfers of assets into a trust, at Section IV D, below.) There is no income tax advantage to a revocable trust, and no estate tax advantages that are not also available with proper testamentary planning. A well considered trust arrangement can, however, be used to help the client maintain a continuity of care and management of assets if capacity is an issue.

Objective: Protection for the next generations

If the client's objective is to protect his assets from a spendthrift child and that child's creditors, then a living revocable trust may be just the ticket. Assets can be left to the management of a trusted individual after the death of the client (or during the lifetime of the "generous" client) and provide the beneficiary with a means of secure support. The beneficiary is unable to assign or otherwise alienate the trust corpus, and the Trustee is prohibited from making distributions to the beneficiary's creditors.

If the beneficiary is disabled, then the trust may be structured as a Special (or Supplemental) Needs Trust. Some governmental disability programs have financial eligibility criteria. Trusts with standard language that directs payment of income to the beneficiary or that allows principal distributions to the beneficiary under

"ascertainable standards" clauses are considered available to the beneficiary and will disqualify that person receiving from needs-based public benefits. Special Needs Trusts limit the trustee's ability to make certain distributions if the beneficiary is eligible for those needs-based benefits. Disbursements for food, clothing and shelter are forbidden, but the trustee may pay for "quality of life" items, like a telephone or vacations or movie passes.

1. Medicaid Considerations8:

Prior to the Omnibus Budget Reconciliation Act ("OBRA") 1993, one of the Medicaid planning techniques was to transfer assets to an irrevocable trust, where the grantors retained rights over principal and interest until the grantor needed public benefits (a triggering event). OBRA '93 changed the rules. Not only are these trusts generally considered fully available to the Grantor, but also the lookback for penalty purposes was extended from three to five years when trusts are involved. Additionally, the penalty is imposed on transfers both in and out of the trust. There is no transfer penalty for Medicaid eligibility purposes for transfers to a revocable trust because the property continues to be controlled by the individual. It's a "non-event."

It is important to know what happens to the trust upon the disability of one or both of the Grantors of a revocable trust. Often when a grantor becomes incapacitated that Grantor's share of the trust becomes irrevocable. This is the desired result for estate planning because it assures that the incapacitated individual's wishes are carried out. But what if that individual, or more likely the individual's family on his/her behalf, wants to apply for Medicaid? The Grantor's share of the trust assets will have to be depleted before benefits can be sought. Even if incapacity doesn't trigger irrevocability, there may be no one with the authority under the trust instrument to revoke the client's share. and that authority may not be delegable to an agent under a power of attorney.

2. Other Considerations: a. Estate and Gift Tax 9

The unconditional transfer of assets for less than fair market value triggers the issue of federal gift taxation. Transfers of property valued less than $11,000 are excluded from taxation (the "annual exclusion amount".). Anything over that amount must

8 For the purposes of this paper, the discussion of "Medicaid eligibility" is focused on long term care assistance. 9 By and large, this paper blissfully ignores the potential effects of EGTRRA after 2010. Except for those planning to protect their assets from other's creditors, most of our clients' needs in this area are immediate and real concerns about estate tax consequences are secondary, at best.


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be reported on an IRS form 709 and the amount of tax comes off of the donor's unified credit. Gifts to an irrevocable trust are subject to these rules. If the trust is properly drafted, a portion of the gift may qualify for the annual exclusion, but often the entire gift is taxable. In smaller estates where no death tax is anticipated this may not be a bad result. But the gift tax does not go away in 2010 as does the death tax and there may be unintended tax consequences if the donor lives that long.

b. Irrevocable Life Insurance Trusts.

One use for an irrevocable trust is to purchase and/or hold life insurance policies. It is an estate planning tool that has been used for many years. The idea is to place the value of the insurance (usually term) outside the estate of the insured, while providing liquidity for the probate estate and the insured's survivors. The trust needs to be funded either initially or on a regular basis with enough funds to pay the insurance premiums. If the client lives in a community property state, care needs to be taken to fund the trust with separate property of the insured. Whether an existing policy is transferred or the trust initially purchases the policy, it is important make an effective shift under state law from one spouse to the other of the non-insured's community interest in the property before that property is transferred into the trust. Otherwise, the non-insured spouse will have an interest in the trust and the tax benefits may be lost.

3. Advantages:

• Transferring assets to trusts, irrevocable or revocable, allows the grantor to control the ultimate disposition of the assets.

• Trusts are effective asset management tools. If there is a need to provide for future management of assets for an incapacitated person, a trust may be the answer.

• Individuals can safely transfer assets for the benefit of minor, incapacitated or spendthrift beneficiaries and protect the assets from attachment by their creditors.

• Trust assets pass to the beneficiaries outside probate, which can be an advantage in states that have complicated and expensive probate proceedings.

4. Disadvantages:

• A Grantor can have no interest in the income or principal of an irrevocable trust if Medicaid eligibility is eventually desired or if estate tax benefits are planned.

• The look-back period for calculating penalties for Medicaid eligibility is expanded from three to five years.

• Transfers to "grantor trusts" are not protected from the grantor's creditors during the grantor's lifetime. In fact, there is authority in Texas for the proposition that a homestead transferred to a living trust for estate planning purposes may lose its exemption protection from creditors. In re Robinson, 180 BR. 174, 175 (Bkry E.D. Tex. 1995); but see In Re Robert D. Perry, Debtor, Robert D. Perry, Appellant, v. Dennie & Ellen Dearing, Appellees, Cause No. SA-01-CA-0566-OG, 289 B.R. 860 (1997).

• By by-passing the probate process assets lose certain probate protections and could be pursued by the grantor/decedent's creditors.

C. Transfers with Retained Interests

Clients usually understand that they must dispose of their property when they decide to engage in "asset protection" planning. Often this is done by transferring ownership of the property while retaining the right to control the property while the transferor is alive. This is the principle behind the use of trusts (see above.) It may also be accomplished with outright gifts or partial transfers.

When property, particularly real estate, is transferred subject to a retained interest in the grantor, the retained interest is known as a "life estate." The interest transferred is the "remainder interest." This creates an expectancy in the holder of the remainder interest, but an expectancy that has a value and may be traded like any other property interest.

Sometimes financial accounts are partially given to others under a joint tenancy arrangement. This can also carry a right of survivorship so that the account passes automatically upon the death of one of the holders and bypasses probate. This designation does not create an immediate gift, but a gift is made any time a joint tenant withdraws money that he did not contribute to the account.

1. Medicaid Considerations:

The uncompensated transfer of a remainder interest in real estate triggers a period of ineligibility for Medicaid purposes. Texas looks at the value of the interest transferred, i.e. the remainder, to determine the ineligibility period. For instance, if Molly, female aged 84, transfers her house, valued at $150,000, to her son, Max, retaining a life estate. Molly's life expectancy is 7.09 years; the actuarial multiplier to value the remainder estate is .63002. So the remainder value is $94,573. The penalty is $97,573 / $2,908 = 32

http://www.TexasBarCLE.com/CLE/PMCasemaker.asp?table=US_bankruptcy&volume=180&edition=B.R.&page=174&id=62603_01



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months. Note: The penalty divisor is subject to change annually.

2. Other considerations:

• Estate and Gift Tax: Since the retention of an interest prevents a completed gift for tax purposes, the transferee/remainderman will get a step up in tax basis at the time of the death of the transferor. A gift tax return should be filed on any gift in excess of $11,000 per donee.

• Rights and Responsibilities. "Life Estate" is not defined by statute, but rather is a creature of common law. Consequently, it is prudent to be precise in the rights, duties and responsibilities of the life tenant and the remainderman. Consider the following:

Is there a mortgage on the property? If so, who is responsible for payments? What happens if the Life Tenant goes into a nursing home or is unable to make the payments? (This could also cause income complications if the Life Tenant applies for Medicaid benefits.) Does the Life Tenant reserve a power of appointment? Who pays taxes? Insurance? What if Life Tenant is unable to pay? If the Life Tenant makes improvements to the real estate does, does the benefit inure to the remaindermen or is Life Tenant's probate estate entitled to reimbursement? If there are other beneficiaries of the client's probate estate that do not participate in the real estate transaction, is the benefit to the remainderman an advancement on an inheritance? Is the life tenancy abandoned if the Life Tenant loses capacity and moves into a nursing home or assisted living facility? If the life tenancy abandoned is it therefore terminated? Does this create a transfer of a property interest that is a taxable event, or that delays or causes a termination of government benefits? Who gets the insurance proceeds if the property is destroyed?

What is the duty, if any of the life tenant to the remaindermen? It appears to be that of a fiduciary.

Subject to certain statutory exceptions if the life tenant of a legal life estate is given the power to sell and reinvest any life tenancy property, the life tenant is subject, with respect to the sale and investment of the property, to all of the fiduciary duties of a trustee imposed by the Texas Trust Code (Subtitle B, Title 9, Property Code) or the common law of this state. A life tenant may retain, as life tenancy property, any real property originally conveyed to the life tenant without being subject to the fiduciary duties of a trustee; however, the life tenant is subject to the common law duties of a life tenant.

And so it goes. 3. Advantages:

• Provides non-testamentary transfer of an asset while preserving the step-up in tax basis.

• Provides protection from collection for debts incurred after the transfer and from probate creditors.

4. Disadvantages:

• The gift is irrevocable. If the transfer is made to a child who promises to take care of the client and that child fails to honor the promise, the transfer can't be undone, absent fraud and then probably only by court proceedings. Also, if the initial transferor dies before the client, the property may end up in the hands of less than desirable individuals.

• A period of Medicaid ineligibility is incurred. • If the Life Tenant has a spouse, that spouse

likely has a statutory and constitutional life estate after the death of the client. Remainder beneficiaries may need to wait to realize their interest.

• If the client retains any interest in the property there is a chance that it may be subject to estate recovery in the future. Our best guess at this time is that Texas will not pursue non-


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probate assets; however, other states do so and we could see this in the future.

• A joint tenancy designation creates an ownership interest in both tenants. If the party that originally makes the designation changes his mind, the joint tenant has to agree. The funds may also be available to the joint tenant's creditors. Alternatives may be to make a "pay on death" designation if bypassing probate is the goal, or simply adding the party as a "convenience signer" if a second signer is what is needed.

D. Annuities, Life Insurance and Retirement

Accounts. 1. Annuities.

Annuities are essentially contracts where an individual pays money to another individual or entity, in exchange for a promise to repay the money over a period of time, under certain conditions. The market is saturated with an abundance of products, an analysis of which is beyond the scope of this discussion. Suffice it to say that the buyer needs to exercise caution when purchasing one of these products.

Article 21.22 of the Texas Insurance Code provides that annuities are exempt from execution, attachment, garnishment or other process, fully exempt from being seized, taken or appropriated or applied by any legal or equitable process or operation of law to pay any debt or liability of the insured or of any beneficiary, either before or after said money or benefits is or are paid or rendered, and be fully exempt from all demands in any bankruptcy proceeding of the insured or beneficiary. While the law recognized private annuities, these are not exempt; only policies issued by commercial insurance companies. There is a specific exception from exemptions for conveyances in fraud of creditors.

2. Life Insurance

The cash value of life insurance is protected under provisions of the Property Code from attachment by creditors. A debate has raged for years whether life insurance is a wise investment when considering return on one's money, but most other investment vehicles don't offer creditor protection. The true insurance component, or the purchase of term insurance, can provide liquidity to an estate that has been otherwise stripped of available assets and can provide the inheritance that so many of our clients want to leave their children. But premiums for term insurance become staggeringly expensive for older individuals, if they're insurable at all, so this is often not an option for most individuals.

3. Retirement Accounts: Retirement accounts are exempt from attachment

by general creditors under state (Texas Property Code) and federal (IRC §403(b) and ERISA) laws. The Supreme Court has found them exempt, subject to certain limitations, under the Bankruptcy Code. Rousey v Jacoway, No. 03-1407, (decided April 4, 2005.) The available cash value is, however, a countable resource for Medicaid purposes, unless the fund is unavailable except as a loan (for instance, if the owner of some retirement plan is under age 55 ½.) Those under 55 ½ also pay a penalty for early withdrawal of the funds. 4. Medicaid Considerations.

Not all commercial annuities are exempt from consideration as a resource for Medicaid eligibility. To qualify as an exempt asset/resource for Medicaid purposes the annuity must be an immediate single premium annuity that pays out principal and interest over a time period no longer than the actuarial life expectancy of the annuitant. It must also be irrevocable. Only the community (noninstitutionalized) spouse has the unfettered right to name a survivor beneficiary; a recipient of Medicaid benefits may exempt the annuity from consideration as resource only if the State of Texas is named as a remainder beneficiary up to the value of the benefits paid.

Cash surrender value of life insurance is countable for Medicaid purposes.

The cash surrender value of retirement accounts is also countable, except as noted above. NOTE: At one time the Texas Department of Human Services let a client deduct twenty per-cent that is required to be withheld from retirement distributions when calculating available resources of a client. That is no longer the case. Be sure the client makes the estimated tax payment before spending the withdrawn money if a tax liability is anticipated.

5. Advantages:

This is one of the only ways to exempt cash from creditors under Texas law.

6. Disadvantages:

All of the investment options listed above put assets beyond the immediate reach of the client. Some cannot be accessed for long periods of time without substantial penalties. E. Disclaimers

Federal and most state laws allow an estate beneficiary to renounce, or disclaim, their inheritance if certain criteria are satisfied. Estate planners know that disclaimers can be an effective post mortem strategy allowing flexibility for the survivors in


8

positioning assets. To be effective a disclaimer must be made in writing within nine months of the date of death and the disclaiming party must have received no benefit from the disclaimed property. But what if the beneficiary has creditor problems or Medicaid benefits? Can disclaimers still be used effectively?

1. Medicaid Considerations.

It is a well settled rule that a disclaimer is a transfer for the purposes of determining eligibility for Medicaid benefits. A penalty period will be incurred and eligibility lost or delayed.

2. Creditor avoidance

Texas law does not prohibit a debt-ridden beneficiary from disclaiming his interest in an inheritance. If executed properly a disclaimer is effective as of the death of the decedent and relates back for all purposes to the date of death of the decedent and is not subject to the claims of any creditor of the party disclaiming. Texas Probate Code §37A. It has been held, therefore, that it is not a transfer in fraud of creditors because if properly made the debtor never had an interest in the property to transfer. For bankruptcy purposes, in the Fifth Circuit pre-petition disclaimers have been held not to constitute a fraudulent transfer for bankruptcy purposes, under 11 U.S.C. §548.

If, however, the debtor becomes entitled to the inheritance within 180 days after the bankruptcy petition has been filed, the power to disclaim is a right of the bankruptcy trustee. Needless to say, this fiduciary of the bankruptcy estate will take the windfall for the benefit of the creditors. If this happens to your client, it may be possible to dismiss the bankruptcy altogether, or to convert it to a Chapter 13.

3. Best Advice: Avoid the problem if possible.

Planning attorneys, whether for the indebted individual or for an individual with insolvent or otherwise financially troubled beneficiaries, need to discuss the implications of receiving property from a decedent's estate. If the client is the insolvent party, suggest that the matter be discussed with possible benefactors. If the client is the potential benefactor, consider disinheriting or setting up a testamentary trust for any beneficiary that is known to be in financial trouble.10 Boilerplate language can be added to a Will to the effect that any bequest to an individual that has filed for protection under the Bankruptcy Code, 11 U.S.C. §§101 et seq. within 181 days after decedent's death shall lapse and that individual be considered to 10 Disinheritance may seem cold, but also seems to be the surest way to make sure that the benefactor's money doesn't go to creditors, or spent in turnover litigation by an aggressive bankruptcy trustee.

have predeceased the testator. Likewise, a Special Needs Trust in the Will can prevent the loss of otherwise available assistance and make the inheritance last longer for the benefit of the disabled person. IV. CAVEAT TRANSFEROR

As in any endeavor, in asset protection planning timing is everything. Anytime planning involves transfers for little or no consideration care must be taken to assure that the client does so prudently (if such a thing there be), and that we advise even our best of intentioned clients of possible consequences of their actions. We must also be sensitive to the reality that transfers for "estate" and "tax" planning have an air of legitimacy and respectability, while transfers for "asset protection and preservation" in connection with Medicaid or bankruptcy planning are denounced as cheating and fraud, and may be more carefully scrutinized.

A. Fraudulent Conveyances and Preferential

Transfers generally The law presumes that a minimum of resources

are necessary for an individual or a family to maintain a minimum standard of living. These basic assets are exempt by law from attachment by creditors. Each state law is different; Texas is an "exemption rich" state. The law also presumes that an honest debtor should be allowed to emerge from bankruptcy with those basic assets that are afforded by the exemption laws. To that end, the law allows a certain amount of planning to transform non-exempt assets to exempt ones. Clients may do this before consulting you, having consulted instead any number of self-help resources and well meaning acquaintances. In those cases you can only try to minimize any damage that has may already have been done by the "generous" planning, and try to advise on applicable statute of limitations and consequences of additional actions, including filing bankruptcy.

If, however, the client comes to you for advice on what to protect and how, keep in mind the old maxim that "pigs get fat and hogs get slaughtered." It is ever so true in this area of planning. B. Preferential Transfers: Bankruptcy Code §547

A "preference action" is an action under 11 U.S.C. §547 to recover any payment to a creditor that was made within ninety days of filing of a petition in bankruptcy, unless the creditor is an "insider" in which the case the time is extended to one year. The transfer must have allowed the creditor or insider to receive more than would have been received by another creditor in the same situation. The transfer need not be fraudulent to fall under this section. If your client borrowed money from Aunt Tilly and then pays her


9

back from the tax refund right before filing a petition in bankruptcy, the trustee is entitled to get the money from Aunt Tilly and spread it among all of the creditors - Tilly included, of course.

This raises a red flag for planners. It is natural for clients to want to omit family member creditors from bankruptcy schedules and to fail to list the preferential payment on the Statement of Financial Affairs. But these actions amount to filing a false statement in connection with the bankruptcy and may lead to the denial of a discharge or, worse, constitute a bankruptcy crime. Further, the trustees ask the debtors under oath at the first meeting of creditors if all the debts, including those to family members, have been listed. An answer in the negative may be perjury. Ask these questions in your office, more than once, and insist on full disclosure. Otherwise you could end up as an accessory to the crime. C. Texas Uniform Fraudulent Transfer Act

Chapter 24 of the Business and Commerce Code contains the Texas Uniform Fraudulent Transfer Act. Generally, transfers of an interest in property may under certain conditions constitute a fraud on present or future creditors. Note that no fraud is committed if one transfers an asset that is exempt under applicable non-bankruptcy law; no harm, no foul. Texas Business and Commerce Code §24.002. Compare this to the Medicaid rules where, although not fraudulent, an ineligibility penalty attaches even if exempt assets are given away.

Texas Property Code §42.004 also contains provisions relating to conversion of non-exempt assets to exempt assets. This section provides that " [i]f a person uses the property not exempt under this chapter to acquire, obtain an interest in, make improvement to, or pay an indebtedness on personal property which would be exempt under this chapter with the intent to defraud, delay, or hinder an interested person from obtaining that to which the interested person is or may be entitled, the property, interest, or improvement acquired is not exempt from seizure for the satisfaction of liabilities". Note that in both of these sections intent is an element of the offense; but that intent is presumed and if questioned, it is up to the transferor to show otherwise.

D. Fraudulent Transfers: Bankruptcy Code §548

Under certain circumstances a trustee in bankruptcy may pursue assets that have been transferred by the debtor. A fraudulent conveyance action is based on a "conveyance or transfer of property or the incurring of an obligation within one

year11 before the filing of the petition for less than fair consideration with the intent to "hinder, delay or defraud" creditors, or a conveyance or transfer of property or incurring of debt for less than reasonably equivalent value and the debtor was either insolvent at the time of the transfer, or became insolvent as a result thereof." This concept is extremely broad and covers every mode of parting with an interest in property. Courts have found that divisions of property under a divorce decree can constitute a fraudulent transfer within the meaning of the statute, as can the formation and funding of a corporation.

The Bankruptcy Act has added a new §548(e) to the Fraudulent Transfers and Obligations of the code that reads, in pertinent part:

"In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition if ---

(A) such transfer was made to a self-settled trust or similar device;

(B) such transfer was made by the debtor;

(C) the debtor is a beneficiary of such trust or similar device; and

(D) the debtor made such transfer with actual intent to hinder delay or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted." (emphasis added)

E. Discharge in Bankruptcy

Bankruptcy laws were enacted to give the honest debtor who has no reasonable prospects of repaying his creditors the chance to start fresh, free from prior debts. General principles of equity apply to the bankruptcy process, and one who seeks protection must play fair. Certain obligations are not dischargeable as a matter of public policy. These debts are considered on their individual merits, apart from the bankruptcy as a whole. If one debt is found to be non-dischargeable, it doesn't necessarily affect the rest of the debts. On the other hand, if the petitioner commits an offense against the system, the discharge of all of the debts may be denied. Only the honest debtor is entitled to relief.12

11 11USC §548(a)(1) is amended by the Bankruptcy Act to extend the look-back period for fraudulent transfers to two years, effective 1 year after enactment. 12 Under the worst case scenario, certain actions may be prosecuted as bankruptcy crimes. If the attorney is found to


10

A discharge may be denied when a debtor engages in pre-petition planning that is too aggressive, fraudulent, or when the debtor lies to creditors. If a debtor enters into a forbearance agreement relating to the collection of a debt or the taking of a judgment using the promise of future payments, and then files bankruptcy, any protective transfers made between the time of promise and the filing of bankruptcy may be deemed fraudulent. Aggressive planning may lead to denial of a discharge where the debtor goes beyond invest in exempt assets suited for maintaining "modest" daily needs for shelter and sustenance, or to maintain a degree of personal economic security by continuing to carry on a past trade or business. If the debtor instead uses the exemptions to store cash pending a discharge in bankruptcy, or if the court finds conduct that can be characterized as fraudulent with respect to creditors, then that debtor may end up with his goods, but without a discharge. See Tx. Sav. Ass'n. v. Reed (In Re Reed) 700 F2d 986 (Cir. 5, 1983); In re Johnson, 124 B.R. 209 (Bankr. D. Minn 1991). F. Remember, the Government makes the rules

Certain old income tax liability may be dischargeable in bankruptcy, but as a general rule income taxes survive bankruptcy. Liability for "trust fund" taxes, those taxes that are withheld from an employee's paycheck, never go away. Additionally, there is almost nothing that the Internal Revenue Service can't attach; the debtor will get some exemptions, but they are extremely limited. Publication 1494 (Levy on Wages, Salaries and Other Income); Internal Revenue Code Title 26 Subchapter F, Chapter 64, Subchapter D, Part II, Sec 6334. It is also important to know whether a lien has been filed. Unlike mere mortal creditors, the IRS lien may attach to the homestead, and they will foreclose if necessary. V. CONCLUSION

These are increasingly complex and stressful times for our clients. With a lot of compassion and patience, an appreciation for their apprehension and a good grasp of the options available, we can fashion solutions that address their concerns without fear of them ending up as toast in the future.

have advised the offensive conduct, that attorney may also be subject to prosecution. Under the Bankruptcy Act an attorney found to have violated Bankruptcy Rule 9011, relating to verification of pleadings, may also be subject to civil sanctions.

http://www.TexasBarCLE.com/CLE/PMCasemaker.asp?table=US_5thcircuit&volume=700&edition=F.2d&page=986&id=62603_01




11

EXHIBIT A

Wanda Goodheart (age 66), a good friend of your for many years, comes into your office with her daughter, Darla. Wanda’s husband, Herbert (age 69), has just suffered a stroke and will be discharged from the hospital to go back home within the next week or so. Although Herbert has made good progress and is not mentally incapacitated, his future is uncertain, and the possibility of long-term nursing home care is not out of the question. He is no longer able to operate the farming operation, and the couple's income will drop dramatically in the future.

Herbert and Wanda have been married for 7 years; the second marriage for both of them. Herbert has 3 children, Wanda has 4. Wanda was widowed about 15 years ago and most of her assets stem from the efforts of that marriage. Nearly all of the children are scattered across the country. Herb’s children all live in New England, and are comfortable, both financially and personally. Wanda’s twins, Treva and Trella, are doctors in Minnesota, each is married with children and each is financially comfortable. Wanda’s son, Melvin, who now goes by his stage name of “Rafael”, lives in Los Angeles and works in the film industry. He doesn’t come home often, but Wanda has been sending him money on a regular basis for years because he always seems to be low on cash. Darla lives close and visits often. She has three children of her own and doesn’t work outside the home because of a medical condition that prevents her from maintaining substantial gainful employment. Wanda confides that Darla's marriage is on the rocks and may not last another year.

Wanda is beside herself. The ladies at Bingo have been telling her that the State will come in and take all of her money and her house to pay for the nursing home and she’ll be out on the street. Darla has been surfing the Web for information on this sort of thing and has found what she feels to be a pretty neat plan. First they would give Darla the house to protect it from the State (she’ll let Wanda live there as long as she wants to). Wanda’s separate property would be given to her four children; of course, they would save it for Wanda’s use. All of the rest of the property would be transferred into a “Loving Trust” with Wanda as the beneficiary, like they heard about at the presentation at the funeral home last fall. Voila! According to Darla, Herbert then qualifies for Medicaid benefits, and all of the assets are preserved for Wanda. Of course they come to you for help in accomplishing this scheme and Wanda wants to hear any advice you may have.

The basic cost of living is about $1,500 per month. Herb’s pension is $850 per month and his social security is $425. He receives $150 on a promissory note from the sale of his portion of his family’s farm. Wanda’s social security is $450.

Although their incomes are modest, they have what they thought would be a tidy nest egg, consisting of separate and community property. It breaks down as follows: Community: Working farm (homestead) 225 acres $ 455,000 Cash in the bank $ 10,000 Automobile (hers) $ 14,000 Truck (his) $ 23,000 Herbert’s separate property: Real estate note (10% interest) $ 30,000 principal balance IRA (Beneficiary is his estate) $ 170,000 Brokerage account $ 30,000 Wanda’s separate property: Deferred Annuity (purchased with inheritance prior to marriage) $ 350,000 UNSECURED DEBT Credit Cards and signature loans $ 160,000


12

Income Tax (Herb’s from 1987) $ 68,500 941 Tax (Herb’s from 1987) $ 30,000 SECURED DEBT Home equity loan $ 65,000 (Farm equipment either leased or fully encumbered - will be returned or repossessed if no payments) Wanda doesn’t have a Will. Herbert’s Will, drafted before the marriage, leaves all of his property in trust for his former wife with the remainder to his children. From what you can tell Herbert does have testamentary capacity and the capacity to execute other documents.


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EXHIBIT B Summary Medicaid Resource Analysis

Asset Medicaid Exemption

Farm Yes 225 acres, regardless of value Household goods Yes Farm equipment Yes, if used to produce income. This may be problematical here if the farm no

longer produces income. Cash No - may be part of PRA Automobile Yes Truck Yes as second vehicle if used in business or to transport handicapped person Real estate note (H) No - may be part of PRA IRA (H) No - part of the value of Herb’s IRA can be protected if it's cashed and the balance

transferred to Wanda. The amount available will be reduced by the income taxes due. May be part of PRA.

Brokerage acct (H) No - may be part of PRA Deferred Annuity (W) No - may be part of PRA or annuitized Real Estate Note No - may be part of PRA to generate monthly income Social Sec Income Income

Summary Medicaid resource analysis. (Assume no bankruptcy has been filed). If Herb wants to become eligible for Medicaid, Wanda can keep 1/2 of the assets only up to $95,100 unless she can increase the Protected Resource Amount (PRA). Herb can have up to $2,000. For applicants entering a skilled facility after September 1, 2004, the "Income First" rule applies, meaning that Herb must give his income to Wanda before she can calculate an increased PRA. Wanda's income will be $1,725 (ignore for the sake of brevity any deductions that may be taken out), the Minimum Monthly Needs Allowance currently is $2,377.50 per month; Wanda is $652.50 short of that number. Figure the new PRA (assume 1 year CD rate of 1.6%): $652.50 x 12 = $7,830. $7,830/.016 = $489,375. All but $2,000 worth of assets must be out of Herb's name by the end of the first year of eligibility. NOTE: For Medicaid proposes a mere change in title is sufficient. The couple need not recharacterize the assets as Wanda's separate property. The couple's total countable assets are $590,000, so $100,625 must be "spent down" before Herb will qualify. Herb's IRA needs to be cashed to transfer it out of his name. The value of Herb's IRA will be automatically reduced by withholding taxes. (Don't forget to pay any additional income taxes if necessary.) They may pay off the second mortgage, make repairs to the house and purchase other exempt assets, like pre-paid funeral plans. They should pay any past-due federal taxes. They still have credit card debt, and they may pay creditors or not, as finances allow. Since creditors exist, any gifts to others would be subject to recovery under the Fraudulent Transfer Act and should not be advised. Wanda might also see if part of her existing annuity can be converted in whole or in part to an "immediate annuity" that would qualify as exempt under the Medicaid regulations.


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EXHIBIT "C"

SPECIAL POWER OF ATTORNEY FOR BANKRUPTCY DEBBIE DEBTOR

I, Debbie Debtor, my social security number being 123-45-6789, appoint Andrew Agent, II, currently of Austin, Texas, as my agent (attorney-in-fact) to act for me in any lawful way with respect to the filing or continuation or bankruptcy proceedings on my behalf. The powers granted under this Special Power of Attorney include, but are not limited to, the following:

1. Consultation with legal counsel regarding the filing or defense of any proceedings under Title 11 of the United States Code (the “Bankruptcy Code”).

2. The commencement of a case under any appropriate chapter of the Bankruptcy Code. 3. Attending the first meeting of creditors, and any continuations thereof, and answering questions

regarding my assets and liabilities. 4. Providing additional information to the Trustee as required. 5. Responding to motions or adversary proceedings filed in my bankruptcy case. 6. Filing motions or initiating adversary proceedings on behalf. 7. Entering into agreements settling any dispute that may arise, if my agent believes it to be in my

best interest to settle. The authority herein granted is intended to clarify and expand the powers granted to my agent under an existing Statutory Durable Power of Attorney, and is in no way intended to revoke any powers granted under that document. If the agent named above dies, becomes legally disabled, resigns or refuses to act, I name the following (each to act alone and successively, in the order named) to act as successor to that agent: Brandon Debtor; Mary Tudor. Signed this the day of , 20 .

Debbie Debtor

STATE OF TEXAS COUNTY OF TRAVIS This document was acknowledged before me on the day of , 20 by Debbie Debtor.

Notary Public, State of Texas

EXEMPTION COMPARISON CHART - OVERVIEW

Asset Texas Federal (Bkry) Medicaid IRS

Homestead

Unlimited as to value 10 acres urban;100 acre (individual)/200 acre (family) rural. Tex. Prop. Code Sec. 41.002

$18,450 - 11 U.S.C. Sec. 522(d)(1) [includes burial plot]; NOTE: After October 17, 2005, State law exemptions are available only to debtors who have resided in the state for 730 days prior to filing. May not exempt more than $125,000 under state law homestead exemption acquired within 1215 days of filing of the petition, subject to certain exceptions.

Unlimited value homestead (contiguous acrerage)

Principal residence exempt, except in exceptional circumstances. IRC Sec. 6334(a)(13)(A), (B); See IRB-2005-13 Reg. Sec. 301.6334-1(* 1999 dollars to be indexed for inflation*)

Home furnishings, household goods, wearing apparel, appliances, books, animals ,musical instruments

$30,000/$60,000 limit for personal property exemption. Limits on specific farm animals exempt. Tex. Prop. Code Sec. 42.002

$9,850 total /per item limit of $475 - 11 U.S.C. Sec. 522(d)(3)

Generally unlimited value for a couple; items of unusual value (antiques, fine china not used in daily living) limited to $5,000.

Wearing apparel (except luxury items) IRC Sec.6334(a)(1); fuel, personal effects, livestock and poultry, total not to exceed $6,250. IRC Sec. 6334(a)(2)

Motor Vehicles

1 vehicle per person with a driver’s license subject to $30,000/$60,000 limit for personal property exemption. Tex. Prop. Code Sec. 42.002

1 vehicle $2,950 - 11 U.S.C. Sec. 522(d)(2)

One vehicle regardless of value. Second vehicle exempt if required for work or to transport handicapped person.

Not exempt

Farming and ranching vehicles

Unlimited number subject to$30,000/$60,000 limit for personal property exemption.Tex. Prop. Code Sec. 42.002.

Not specifically exempt (tools of the trade?)

Exempt if used in client's trade or business, essential for client's self-support.

SeeTools of the Trade, below

15



Guns

Two guns, subject to $30,000/$60,000 limit for personal property exemptions. Tex. Prop. Code Sec. 42.002.

Not exempt Not specifically exemptArms for personal use - IRC Sec 6334(a)(2), subject to $6,250 total.

Jewelry

Not more than 25% of $30,000/$60,000 limit for personal property exemption. Tex. Prop. Code Sec. 42.002

$1,225 - 11 U.S.C. Sec. 522(d)(4)

One wedding ring and one engagement ring, regardless of value; remainder falls within Personal Property

Not exempt unless part of wearing apparel

Tools of the trade

Tools, equipment, books and apparatus, including boats and motor vehicles used in a trade or business/must be specifically adapted $30,000/$60,000 limit for personal property exemption. Tex. Prop. Code Sec. 42.002

Implements, professional books or tools of a trade$1,850 - 11 U.S.C. Sec. 522(d)(6)

Exempt if used in client's trade or business, essential for client's self-support.

Books, tools of the trade (business or profession) of a value not greater than $3,125. IRC Sec. 6334(a)(3)

Life Insurance

Unlimited as to both cash value and proceeds of policy; debtor must be an insured or a beneficiary. Tex. Ins.Code Art. 21.22, Sec. 1.

$9,850 as to cash values - 11 U.S.C. Sec. 522(d)(8). To extent reasonably necessary for policy proceeds - 11 U.S.C. Sec. 522(d)(11)(C)

Life insurance with a death benefit and cash value of not more than $1,500; unlimited term (but if over $1,500 lose cash value exemption)

Not exempt

Professionally prescribed health aids

Unlimited - Tex. Prop. Code Sec.42.001(b)(2)

Unlimited - 11 U.S.C. Sec. 522(d)(9) Unlimited Not exempt

Social Security*, unemployment, local public assistance benefits, veteran's benefits, disability, illness or unemployment benefits.

Not specifically exempt *42 USC 407 specifically exempts Social Security benefits, preempts state law; needs to have been segregated.

Exempt. 11 U.S.C. Sec. 522(d)(10)(A), (B) and (C). * Social Security subject to offset for federal non-tax debt under the Debt Collection Improvement Act of 1996. First $750 per month is exempt from levy.

Counts as income

Generally exempt IRC Sec. 6442(a)(4) [* Social Security payments subject to 15% offset for unpaid taxes under Federal Payment Levy Program; Taxpayer Relief Act of 1997, authorized by IRC Sec. 6331(b)]

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Alimony, maintenance and support.

Exempt - Tex. Prop. Code Sec. 42.001(b)(3)

Exempt - 11 U.S.C. Sec 522. (d)(10)(D) Counts as income

Amount needed to pay is exempt from levy; amount received not specifically exempt.

Certain railroad and miltary service annuity and pension payments

Not specifically exempt Not exempt Counts as income Exempt -IRC Sec. 6334(a)(6)

Retirement Plans

Unlimited as to tax qualified retirement plans. IRAs exempt only to the extent of deductible contributions. Tex Prop. Code Sec 42.0021(a) and (b)

Exempt to the extent reasonable necessary; plan may not be set up by an "insider"; plan must be tax qualified. 11 U.S.C. 522(d)(10(E)

Not exempt in Texas. Counts as a resource if available to the owner without taking out a loan.

Not exempt

Awards under crime victim's crime reparation laws Not exempt Exempt - 11 U.S.C. Sec 522

(d)(11)(A)

Counts as income or resource, depending on terms of payment

Not exempt

Payments on account of wrongful death if debtor was a dependent.

Not exempt Exempt - 11 U.S.C. Sec. 522(d)(11)(B) Counts as resource. Not exempt

Personal injury awards, not including pain and suffering or pecuniary loss.

Not exempt Exempt up to $18,450 - 11 U.S.C. Sec 522 (d)(11)(E) Counts as resource. Not exempt

Payments for loss of future earnings. Not exempt

To the extent reasonably necessary, exempt under 11 U.S.C. 522(d)(11)(E)

Counts as resource. Not exempt

17



Wild Card Not available

$975 plus up to $9,250 if no homestead or no equity in homestead - 11 U.S.C. Sec 522(d)(5)

Not available Not available

Current wagesUnlimited so long as they are still "current" Tex. Prop. Code 42.001(b)(1)

Not exempt Counts as income during month of receipt

A weekly amount equal to the sum of the annual standard deduction plus the total amount of personal exemptions, divided by 52. Additional exemption for taxpayers 65 and over. IRS Publiction 1494 (e.g. Taxpayer over 65, married, files jointly, paid monthly, keeps $1,532.67)

Unpaid commissions for personal services

Up to 25% of the $30,000/$60/000 personal property exemption

Not exempt Counts as income See "current wages", above

Burial plots Exempt under Tex. Prop. Code Sec. 42.001(b)(3)

11 U.S.C. 522 (d)(1) aggregate with homestead (see above)

Exempt in unlimited value for individual and immediate family.

Not specifically exempt

Burial funds Not exempt Not specifically exempt (counted with cash) Exempt up to $1,500. Not exempt

Undelivered mail Not exempt Not exempt Not exempt Exempt - IRC Sec. 6334(a)(5)

Certain payments relating to ADC and the Job Training Partnership Act.

Not exempt Not exempt Not exempt. Exempt IRC Sec. 6334(a)(12)

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Deferred Annuities Exempt -Tex. Ins. Code Sec. 21.22

Exempt only if on account of illness, disability, death, age or length of service. 11. USC. 522 (d)(10)(E)

Not exempt Not exempt

Education Accounts, Tuition Credit Accounts

Exempt - Tex. Prop. Code Sec.42.0022

After October 17, 2005, excluded from estate if placed in the account at least 365 days before the petition is filed, for the benefit of a qualified minor, not pledged as collateral for an obligation, not an excess of contribution as defined in IRC Sec. 529(b)(7), each account not to exceed $5,000. - 11 USC Sec. 541(b)(5) and (6), (e)

Not counted if contract is irrevocable. Transfer, however, is penalized.

Not exempt

Contributions to Qualified Benefit Plans

May be exempt - Tex. Prop. Code Sec. 42.0021

After October 17, 2005, excluded from estate if contributed to an employee benefit plan under IRC Sec. 414(d), deferred compensation plan under IRC Sec. 457, tax-deferred annuity under IRC Sec. 403(b) and health insurance plans regulated by state law - 11 USC 541(b)(7)

Counted as a resource if available without borrowing against account.

Not exempt

19

Documents

IDENTIFYING INCENDIARY ASSET PROTECTION STRATEGIES · Since Wanda's income is so low, she can increase the Protected Resource Amount. The entire value of the farm is also protected.2