The Parent Trap

No, I'm not talking about the Disney movie starring the young, innocent actress Hayley Mills,...later remade with the young innocent actress, Lindsay Lohan. I am talking about the problems your parents can create for you when they transfer assets to you (completely or partially) for their own estate planning purposes.

Parents often transfer assets (usually a home) to their children so the parents' estates may avoid paying back the value of Medicaid benefits (e.g., a nursing home stay) to the State after the parents pass away. This may sound good to some, but serious problems can arise if a child receiving assets becomes insolvent while the parents are still alive, and needs to file for bankruptcy relief.

The transfer increases the child's assets, which can compromise the child's bankruptcy case,...and the parents' estates. This is due to there being only a limited amount of exemptions available to shield assets in bankruptcy.

In a Chapter 7 bankruptcy case, too many assets can result in the sale of the non-exempt assets by the trustee assigned to the case. The fact that the child is only helping their parents will not matter to the United States Trustee's Office. What a tragedy it would be for Mom and Dad to lose their house (which they likely own debt-free) because of their child's bankruptcy, and subsequent inability to protect the house from trustee liquidation.

All too often, a child who is holding assets for a parent is forced into filing a Chapter 13 bankruptcy in order to protect the assets. As a result, the child must endure the more expensive and longer duration bankruptcy proceeding. In a Chapter 13 case, too many assets can result in higher Chapter 13 plan payments. Sometimes, the child cannot afford the higher Chapter 13 plan payment, and is prevented from filing altogether.

Parents who are contemplating a transfer of assets to their children would be wise to make sure their children are not highly leveraged or otherwise in financial distress. Children who are highly leveraged, in difficult relationships, uncertain about job security, etc. would be equally wise not to accept a transfer of assets from their parents.

An open and frank discussion of a child's financial situation with a qualified attorney prior to a transfer of assets from parent to child can avoid substantial harm to the parent's estate, and the child's chance for meaningful debt relief through bankruptcy.

Matthew S. Rousseau, Esq.
Morrison Rousseau, LLP
www.WorcesterBankruptcyAttorney.com