Case Illustrates Hidden Danger Of Fund Transfers

It’s a cautionary tale, and proof that it’s rarely possible to have your cake and eat it, too.

A recent court ruling taught a Virginia woman a harsh lesson about trying, basically, to scam the system. The woman sought to be able to qualify for Medicaid by transferring a large sum of money to her daughter, but then sought to say the money was actually still hers when the daughter declared bankruptcy.

The case was recently summarized on the website elderanswers.com.

“In 2002, Dorothy Stutesman transferred $142,742 to her daughter, Holly Woodworth, so that she would not have assets in her name if she ever needed Medicaid,” the account states. “In April 2010, Ms. Woodworth transferred the money to a trust designed to protect the assets from creditors. The entire corpus of the trust was used to purchase an annuity to benefit Ms. Woodworth. In February 2011, Ms. Woodworth filed for bankruptcy. The bankruptcy trustee sought to void the trust, arguing it was a fraudulent transfer under bankruptcy code. Ms. Woodworth did not dispute that the transfer was fraudulent, but she argued that the property was never part of her estate because she was holding it in trust for her mother.

“The U.S. Bankruptcy Court for the Eastern District of Virginia enters judgment for the bankruptcy trustee, holding that Ms. Woodworth clearly had complete ownership of the funds. According to the court, ‘Ms. Stutesman can’t have it both ways; she can’t part with title for purposes of Medicaid eligibility, and at the same time claim that she retained an equitable title to the asset. To allow this kind of secret reservation of equitable title would be to sanction Medicaid fraud.’ ”

While transferring funds to relatives as part of sound financial planning can be a worthwhile practice, quite obviously it includes some risks that older people need to consider beforehand.