You are Not Your Brother’s Keeper. Tax Liens and Joint Ownership of Real Property.

I cringe (figuratively speaking) when I hear of individuals who include friends and ancillary family members as joint owners of real property. Such as joint tenants in common for owning grandmother’s old house, etc.

This is joint ownership of real property with the co-owners each named on the real estate deed.  Such as “John Smith and Jane Doe, as tenants in common.” Or, “John Smith and Jane Doe, jointly with right of survivorship.”

[There are exceptions to my concern in certain cases (i) for married couples as joint owners and (ii) in states with joint “tenancy by the entirety” ownership (Georgia does not recognize tenancy by the entirety).]

Because real estate ownership is governed by publicly-recorded deed and lien records, jointly-owned property is a lightning rod for the other co-owners’ debts, judgments, unpaid income taxes, estate tax liens, etc.

Let’s assume Bill owns Atlanta undeveloped land with his distant nephew Pete. Pete owns 10% with Bill as the other 90% joint owner (joint tenants in common, to be exact). This is undeveloped land that belonged to Bill’s grandparents (Pete’s great-grandparents). Bill and Pete rarely visit the property.  It is merely a long-term, passive asset.

Bill typically remains unfamiliar with nephew Pete’s ongoing financial and tax affairs and has no idea Pete has not been paying his (Pete’s) income tax. Unknown to Bill is that the Georgia Department of Revenue has been racking up recorded unpaid tax liens against Pete (called a recorded Fi-Fa), with Pete’s unpaid tax debt continuing to increase with interest and penalties.

Bill’s 90% share is now on the hook. Although technically Bill is not liable for Pete’s tax liens. Nor is the value of Bill’s 90% portion of the land technically available to satisfy Pete’s liens. The reality for Bill is that the entire land is burdened by Pete’s tax liens.

On the other hand, Pete essentially has no concerns about his unpaid taxes or these liens. Pete, 27 years old, works part-time, has no money, etc.

Bill’s unfortunate reality is that no buyer will touch this land until Bill clears these tax liens. The Georgia Department of Revenue also has been  consistent with extending the duration of its recorded tax liens (called an “entry of nulla bona”).

Bill’s land over the years has increased in value. This results in Pete’s 10% share also increasing in value to the extent Georgia will likely demand its full claim for the unpaid taxes, penalties and interest in order to release the liens. These surmounting Georgia penalties and interest have transformed what started as nominal unpaid tax amounts into substantial issues. Bill has a costly problem.

The moral of this blog post.

Don’t — without thoughtful deliberation — become your brother’s keeper. Talk to your lawyer first about co-ownership of property. Possibly use an LLC. Or, a recorded written joint property agreement that allows a co-owner to charge the other owner’s portion of the property for these kinds of liens. Good legal advice is also an investment in tranquility.

Preventive Planning and Jazz Guitar

Bear with me. There is a connection in this blog post between my reference to preventive planning and jazz guitar. I use the term “preventive planning” in reference generally to estate and asset-protection planning.

The top 1-percent. A roster of high net-worth clients is a badge of honor among estate and asset-protection planning lawyers. A plume signifying success, financial reward, larger law firm profits, etc. The work is high-end, interesting, technically challenging, and typically underpins the ever-increasing hourly lawyer rates for this market segment. I am fortunate to have a small share of these top 1-percent clients. But, I also have many clients in my own group.  That is, the other 99-percent of us.

A focus narrowly only on the top 1-percent fails to address how important it is for our remaining 99% group to address preventive planning. Most current marketing efforts (and the bulk of related articles, commentaries) for estate planning and asset-protection continue to address options for the top 1-percent group. I find few discussions of what we (and our families) — in the bottom 99-percent — ideally need for excellent, cost-effective preventive planning.

The probable absence of estate tax liability for most of us in this 99-percent group also helps push this preventive planning to an even lower place on our “to-do” list. No pressure. No rush. Do it later.

This next point is for our 99-percent group.

One of my high-priority, personal goals is to prevent me and my family from wasting valuable time due to problems caused by lack of planning, outdated, flawed or missing documents, failure of estate planning, absence of asset-protection, etc. Coupled with this threat of lost time, I prefer my family not expend their financial resources on lawyer fees to clean up an oversight or mess I might leave for my wife and kids.

Now, why jazz guitar? I have played guitar since college and presently take improvisational jazz guitar lessons. I am committed to squeezing in 45 minutes of evening practice each day, as though it also is a job. I guard this 45-minute time-slot zealously.

I would be extremely perturbed if issues were to arise from a lack of planning, etc., that steal away my (and my family’s) valuable time. But, I have my preventive planning in place. And it gives me great comfort knowing my family and I will not lose time in dealing with problems, etc. We also will likely not incur substantial lawyer fees to fend off and resolve future problems.

But, bottom line for this post, I am far more concerned about wasted time than money (for fees, etc.). One can always make more money. But, can never get back lost time.


Estate Planning. Give this PDF Memo to Your Clients

For many people the topic of estate planning is very low on the list of priorities. This is understandable. Estate planning is, by analogy, like flossing. We hear the admonitions to floss (or to get our estate planning in order), but who really buys into these pleas?

I also find surprising the number of families who end up later with no choice but to pay large legal (and litigation) fees to deal with an abundance of problems. Problems — both tax and non-tax — arising from aging, incapacity, and death.  Problems in many cases avoidable.

Lawyers reap the financial benefit of this family expense. Virtually a captive market.   The hourly fee clock ticks on, almost perpetually.

So, in line with my persistent efforts to highlight the need for estate planning (and asset protection planning), primarily for preventive purposes, here is a memo that might help you, your friends, and clients get moving on this task. Click here for my memo.


A Family Asset Protection Checklist (in pdf format)

The threat of uninsured risks includes, for example, old-age incapacity, predatory elderly remarriages, nursing home care, asset protection, divorce by our children, personal guarantees, bankruptcy.

This blog post includes my memo (link is below) for a family’s asset protection checklist.  Please forward a copy to your family members, friends and neighbors.

Click here for a pdf copy of my memo.

BDIT Trusts — “Mamas, don’t let your babies grow up to be tax lawyers.”

This is a tax lawyer, technically-oriented blog post.   It is about a trust known in the trust / tax world as a BDIT (a beneficiary defective inheritor’s trust).  What is a BDIT and as a practical matter when might one use a BDIT?  This “why” touches on income tax advantages and asset protection.

BDIT Example — Assume Anne wants to make gifts to her daughter so her daughter can have a long-term investment nest egg.  Anne also wants to use a trust to provide her daughter with strong asset protection for this gifted property  (against divorce, bankruptcy, personal guarantees, uninsured claims, etc.). Anne wants this trust to be taxed to her daughter at the daughter’s own lower income tax brackets (the daughter no longer falls under the kiddie tax rules).

A BDIT fits this bill.

Anne’s income tax rates are much higher than her daughter’s rates in the above BDIT example, plus Anne is already in the 3.8% Medicare investment tax bracket.  The daughter is not.  Overall Anne saves income and Medicare tax in this BDIT example with her daughter being taxable on the trust’s income and gains.

By contrast, if Anne funds a non-BDIT trust for her daughter, in general either Anne will pay the trust’s income tax at Anne’s own higher income tax rates, or the trust will pay the income tax under its more costly, compressed rate brackets.  This depends on the trust design for Anne.

Now, what about BDIT asset protection?

In this example Anne is funding the BDIT trust for the benefit of her daughter.  This means Anne’s BDIT trust is a “third-party” trust (the third-party is Anne).  This is compared to a trust the daughter creates and funds herself.  If the daughter funds the trust, instead of Anne, the daughter’s trust will be a “self-settled” trust.  That is, self-settled (funded) by the daughter.

Self-settled trusts (compared to third-party trusts) – as general rule – in many cases don’t provide asset protection.  This means the daughter cannot fund her own trust and then try to use the trust as a shield for asset protection purposes.  Whereas, the daughter is in a much better position to use Anne’s third-party funded BDIT trust as an asset protection shield.

I don’t discuss in this post how to design a BDIT.

But, with BDITs being relatively new in the trust world, and as with any trust subject to various trust, asset protection, lapsing withdrawal right, and tax laws, there is a vast array of differing views on how best to design the BDIT.

I enjoy digging into the nuances of how to optimize this BDIT planning.  And this is an example of a highly technical thicket of complexity that, throughout the years, makes me recall the old Willie Nelson tune, which I often sing under my breath with the lyrics slightly changed to “Mamas, don’t let your babies grow up to be tax lawyers.”

Borderline Incapacity; A Family’s Greatest Estate Planning Threat

Ponder, for a moment, who is the winner in this kind of litigation?

A family not willing to plan for incapacity may later find itself hemorrhaging from substantial legal fees and litigation costs.  I see nasty disputes arise when a family member becomes incapacitated, often the problem is Dad in his second marriage. I also remain steadfast with my belief that incapacity, especially borderline incapacity, is the greatest threat we all face in the context of our estate planning.

Here also is a difficult question. That is, who do we trust and who will we designate as the person or persons who will step into our shoes for overseeing our affairs and property if we become incapacitated?

These names (your agents under a power of attorney, trustees, executor) must be trustworthy, self-starters, financially well-versed, and non-procrastinators. Using your own family members is fine. But, you still need to consider these characteristics.

Here are some additional key comments:

  • The term “conservator” typically refers to an entity or individual appointed by a court to manage and oversee an incapacitated person’s property. By contrast, a “guardian” is an individual appointed by the court to oversee an incapacitated person’s emotional and physical well-being, care, education, health, and welfare.
  • But, the goal is to have documents in place now (often revocable living trusts) for the management and oversight of your property to stave off getting a court involved in the event of your incapacity.
  • This means you must now have sufficient written documents as part of your estate planning that help defend against a court stepping-in and mandating a conservatorship or guardianship on your behalf.
  • The lawyer assisting you with this defensive planning must know the relevant procedural, evidentiary, declaratory judgment, and other important court / litigation rules so as best to block a court from becoming the arbiter in determining your incapacity.
  • Absent this planning, a Georgia court (my law office is in Atlanta) overseeing the fray as to a person’s possible incapacity is required to conduct a court proceeding (e.g., a trial) to determine whether incapacity exists. The litmus test is whether the person lacks sufficient capacity to make or communicate significant responsible decisions about the management of his or her property.
  • And, here is the kicker. If the court concludes there is incapacity, the court is not bound to name a family member as the conservator or guardian of the incapacitated person. Instead, the court has the power to name any conservator or guardian the court concludes is in the best interest of the incapacitated person. This might end up being the local county administrator or some other entity or person completely outside the family circle.
  • As to a court’s power to choose, click here merely as an example of a Georgia case where the son, whose mother was found to be incapacitated by the court, lost in his effort to be named by the court as his mother’s conservator. This case is In re Hodgman, 269 Ga. App. 34, 602 S.E.2d 925 (2004). The local county administrator was appointed by the court as the conservator. The son unsuccessfully argued that his having already been named as agent by his mother in her financial power of attorney and in her health care directive supported a conclusion that the court was bound to name the son as the conservator.

I have no personal knowledge of the following Georgia case that I include here as an example of what you hope to avoid. Click here. This case is In re Copelan, 250 Ga. App. 856, 553 S.E.2d 278 (2001), and illustrates what appears to have been a very expensive, time-consuming, painful ordeal for the family and for the mother who ultimately prevailed against her children seeking to have her deemed incapacitated.  Note there was a jury trial at the superior court level that the mother lost; she then successfully obtained a reversal of the jury verdict on appeal.  My guess is the angst and litigation expenses for these family members were substantial.

Finally, the court in this Copelan opinion pointed out that one of the sons had left a voice-mail message with another sibling threatening their mother with “embarrassment” in the community and referring to a lawyer who was ” ‘chomping at the bit’ to take the case.”

Medicaid Nursing Home Planning. Who Needs it?

I ponder this nursing home question from time to time as I look around at my friends and family. My conclusion is a lot of families stand to lose financially (and unnecessarily) absent Medicaid planning.

The essential question starts with what demographic group needs to consider Medicaid nursing home planning? Is it only the poor who get (or should get) Medicaid benefits? Does anyone not in this poor group need even to think about Medicaid eligibility? As you read this blog post keep in mind the average monthly nursing home expense is in the $6,000 and up range in most states. Significantly more in certain areas, such as New York.

Here are five broad points to consider:

One is that preventive Medicaid planning significantly protects the continuing standard of living (e.g., economic) lifestyle of the non-nursing home spouse if the other spouse goes into a nursing home. This planning goes simply to getting the nursing home spouse in a position as soon as possible to receive government-paid Medicaid nursing home care, without depleting the family’s funds for the non-nursing home spouse (and any children who still are living at home, etc.)   The key point here is to have Medicaid planning already in place in the event of a head injury, stroke, accident, or other tragic event that might put one spouse into a nursing home much earlier than expected.

Two is that Medicaid has an extremely harsh 5-year rule essentially meaning Medicaid planning ideally needs to be in place at least 5 years prior to a need for nursing home care. The inter-vivos QTIP trust for a married couple, in my view, helps address this 5-year factor.  Below is how this 5-year rule applies.

Three.   Assume grandfather Bob makes a gift of $200,000 to his grandchildren to pay for their college. Two years later Bob falls and needs to enter a nursing home.

Assume Bob has few remaining assets, primarily as a result of this $200,000 college funding. Because Bob’s $200,000 transfer occurred within 5 years prior to Bob’s need to enter a nursing home, Bob is ineligible for nursing home Medicaid assistance for 26.6 months. This is the $200,000 divided by the average monthly Medicaid nursing home expense (assume $7,500 per month in this example; $200,000 divided by $7,500 = 26.6 months of ineligibility).

Also assume 4 years ago Bob funded an irrevocable gifting trust for his children and grandchildren with $1.5 million, in addition to the above $200,000 college funding.   His ineligibility in this second example is 226.6 months ($1,700,000 divided by $7,500 = 226.6 months of ineligibility).

By contrast, if Bob’s transfers had occurred simply one day outside the 5-year period, the transfers would not have been subject to the above Medicaid limitation.

Four, and this is important, all is not lost even if one fails to plan outside the above 5-year period. The available options, however, are limited, but still exist to help maintain the financial well-being of the other non-institutionalized spouse (and children). This means Medicaid should virtually be on everyone’s checklist, unless financial resources are substantial enough to remove all concern about a nursing home stay.

Five is that at a minimum families should consider Medicaid planning to keep the family home. Absent planning, the family home is protected from Medicaid / nursing home problems while at least one spouse remains living in the home. But, if a widow or widower vacates the family home in order to go into a nursing home, the home generally is subject to spend-down before Medicaid nursing home eligibility.  A transfer of the home within the above 5-year period will trigger the same ineligibility as in Bob’s case with his college funding and trust gift.

Divorce and Asset Protection Trusts

This post is not new news.   But, I had occasion a couple days ago to refer to the Delaware case below in my lawyering work.   I believe it provides some discussion points that many clients and practitioners may find important.  I purposely do not add my views or suggestions about these points.   They speak for themselves, at least to the extent of  being check-list items for asset protection planning.

This 2014 Delaware trust opinion involves a Delaware irrevocable dynasty trust created by a divorcing husband’s father, and including the husband’s sale to the Delaware trust of the son’s business, etc.  The sale was structured as a defective income tax sale [a BDIT sale for you tax readers].  The husband also is a beneficiary of the Delaware trust.

In the next sentence I include a link to a pdf copy of this 2014 Delaware Court of Chancery opinion in IMO Daniel Kloiber Dynasty Trust u/a/d December  20, 2002 C.A. No. 9685-VCL (August 1, 2014).   Click Delaware Case re Kloiber for a copy of the opinion.

At the time of this 2014 Delaware opinion the husband and wife were in the midst of a contested divorce in Kentucky. With the above trust purposely having been designed to exist only under Delaware law, during the course of the Kentucky divorce the husband — without success — asked this Delaware court for a restraining order to prevent his divorcing wife from pulling the Delaware trust into the Kentucky divorce arena.

The Delaware court’s comments I refer to below are in support of the court denying the husband’s request for the temporary restraining order. The Delaware court, therefore, did not have a judicial need actually to answer these jurisdictional questions. Rather the Delaware court’s Kentucky v. Delaware jurisdictional commentary helped the court support its denial of the restraining order request.

I make only the following three points for purposes of this blog post:

One is the Delaware court’s raising of the question that the husband as seller of his business to the Delaware trust is possibly deemed merely a third-party rather than a trust beneficiary (as to the sale). Accordingly, this sale to the trust and the husband as seller are possibly not matters limited to or bound by Delaware trust law.

Two is the Delaware court’s discussion about the wife’s claims against the trust (in the Kentucky divorce) possibly not being subject to or bound by Delaware trust law.  The Delaware court stated that the wife — at the time of the pending Kentucky divorce — was no longer a beneficiary of the Delaware trust because of the trust’s definition of a spouse, etc. The trust includes a “moving definition” of spouse that applied to cut this wife out as a trust beneficiary once she and her husband separated at the time of the divorce action. Therefore, the Delaware court suggested the wife arguably is merely a third-party not bound by Delaware trust law, who can assert her claims against the trust in the Kentucky divorce proceeding.

Three is the Delaware Court’s apparent, broad embracing of the constitutional Full Faith and Credit Clause in relation to the Kentucky divorce action and the wife’s fraudulent transfer claims against her husband in the Kentucky court.

Finally, I make clear here that I am not licensed as a lawyer in Delaware and, as with all my blog posts, my above comments are not legal or tax advice that a reader may rely on, particularly under Delaware law.



My Speaking Invitation for 2016

The purpose of this blog post is to offer my availability as a speaker on the following asset protection subject, beginning in 2016.  I can speak for continuing education purposes, CPA firms, financial planners, civic, church and neighborhood groups, schools, etc., ideally for audiences of 25 or more. My presentation is typically 60 minutes long, but can be adjusted as necessary.

Please contact me if you have an interest in having me speak about this important topic.


Supercharging Your Estate Planning with Asset Protection

By James M. Kane, attorney
Chamberlain, Hrdlicka, White, Williams & Aughtry

Key practical concepts and planning options that greatly enhance asset protection as part of your estate planning, including essential trust-design features, trustee powers, trust decanting provisions, inter-vivos QTIP trusts, tax-exempt retirement asset trust planning, joint property agreements, and Medicaid nursing home planning (this item especially for older parents).

Medicaid Nursing Home Planning. What is the Market?

I ponder this question from time to time as I look around at my friends and family. That is, what is the market and what demographic group needs to consider Medicaid nursing home planning? Planning in terms of helping insulate a family’s assets from being spent down to pay for nursing home care before qualifying for need-based Medicaid paid nursing home assistance. Medicare does not pay for nursing home care except for a short, limited post-hospital recovery period.

The average nursing home expense varies by location. Assume Georgia is $6,000 month and that you will stay in a nursing home for 5 years. This will require $360,000. If both spouses end up with 5 year stays, this is $720,000.

For many high-end clients this cost is not material and self-funding is the most reasonable and likely course of action.

But here is an example more broadly regardless of whether you feel you will self-insure or not. What if I fall on the sidewalk, hit my head, and end up in a nursing home for 20 years? My wife and kids will spend down easily $1.5 million or more of our family assets to cover my nursing home care. But, there are ways this family exposure can be limited. One is an inter-vivos QTIP trust.

And, on the other hand, if nursing home care is the result only of old-age, what — for many families who might have a net worth under $5.0 million — should they do for Medicaid nursing home planning, if anything?

The significant hurdle for this under-$5.0 million crowd is the severe Medicaid 5-year look-back penalty rule (that I will cover in my next blog post). What this means is that ad hoc attempts to transfer away assets to kids, etc., if the transfer occurs within 5 years prior to applying for Medicaid nursing home assistance, will result in an ineligible Medicaid penalty period.

So, last minute giving away of assets is no solution. This “giving away” look-back covers virtually any manner of reducing your assets, including gifts, paying grandchildren’s tuition, etc.

Fortunately, there are Medicaid planning options that are effective in helping these families retain assets. And, for most people in this under-$5.0 million range, a minimum Medicaid planning goal, in my view, should be to try and save the family home from being sold and spent down for nursing home care.