Thinking Of Transfering Your Parent’s Home To Avoid Creditors? Think Again.
There are many scenarios, but the creative client’s plan often looks like this:
Andy is a good son; an only child. He’s 55 years old, helps his 78 year old Mother Peggy with house chores since Peggy’s divorce some years ago, and Andy hangs out with her several times a week even though Andy lives about an hour and a half away and the drive after work is not easy.
Peggy’s home in Illinois is almost fully paid (she still has a mortgage of about $75,000 on the home worth roughly $300,000). But Peggy’s real estate taxes and homeowner and auto insurance have recently hiked up. Peggy is just barely making ends meet on her social security and few companies will hire her at 78 years of age.
Peggy has pushed her credit card balances to their limit; routine expenses and some trips to the Mall for clothes and such, but she has only been able to pay the minimum amount to keep the CC’s in place. Doctor visits are starting to be more frequent, making it clear that Peggy could soon be in serious debt with no way to get out other than by selling the Home and trying to find a new place to lease. That’s tough, because everywhere Peggy looks the rental rates have jumped significantly.
Peggy has been talking about bankruptcy — it looks like a good alternative based upon the late night TV ads. But Andy told his Mother that he heard that if Peggy files BK she would have a hard time getting future credit or a home equity line of credit. And he also explained to Peggy that filing BK might result in the loss of her the equity in the Home if the Bankruptcy Trustee requires her to sell the home to pay her creditors (this might not be the case in Florida or other states where there is a 100% homestead exemption in a home, but Illinois has a much smaller exemption).
Andy is right. If Peggy files BK or if she is sued by a creditor then the equity in her Home is at risk of being taken and sold for the creditors.
So Andy came up with a different plan…. Andy will “buy” the home from Peggy for a chunk of money, but it will be far less than the present value of the Home. Andy hasn’t figured out what to do with the mortgage and the real estate taxes that have accrued, or for that matter the insurance and even future upkeep.
Under Andy’s plan, Peggy will still live in the Home. Maybe she will pay a nominal rent if she can afford to do so. Andy tells Peggy that using this plan she can “protect” the value in her Home, and if Peggy gets sued later or really does need to later file BK the Home will no longer be taken because it will not be not be in Peggy’s name.
Sounds like a good strategy, right? Maybe. But it’s risky.
The Illinois Appellate Court reminded folks thinking about this type of work-around that there are big legal concerns when they try to move assets away from creditors in this way. On June 14, 2024, in the case of Pentagon Federal Credit Union vs Poorian, et al., found at 2024 IL App (1st) 221803, the Appellate Court reviewed a decision involving the transfer of a debtor’s assets to others and the timing of the transfers and the lawsuit to try to recover them.
Poorian was in the taxicab business and it turns out that after having trouble trying to restructure his debts with his credit union lender and seeing the writing on the wall Poorian transferred his interest in real estate and other property to some friends.
The credit union brought a lawsuit against Poorian and his friends looking to recover the transfers or the value of the transferred properties. The credit union used the law of fraudulent conveyances which provides a mechanism for reaching the value of the property transferred by a debtor so that it can be applied to pay the debt owed by the transferee former owner.
Years ago Illinois adopted the Uniform Fraudulent Transfer Act (the UFTA). The Act puts an important tool in the hands of creditors by allowing them to ask a court to void a transfer that was made by a debtor like Poorian for less than the fair value of the asset, or in situations where the transferee debtor’s transfers had the effect of causing him to become insolvent and unable to pay his debts as they come due. Fraudulent intent to avoid creditors is not always required under the UFTA.
The UFTA is found at 740 ILCS 160/1 et seq. The federal Bankruptcy Act has a similar fraudulent transfer statute and a BK Trustee may use either the state or the federal version where one or both are available as a tool for recovering property for the benefit of creditors in the BK case.
Poorian argued to the Illinois Circuit Court that as to some of the transfers he had made while he owed money to the credit union, the action to recover the property was too late. Poorian’s transfers were made years before they filed suit the lawsuit, he said, and since the credit union’s case was filed more than 4 years after some of the property deeds were executed they could not be reached. The Appellate Court got involved because the transfer deeds were not recorded in Cook County immediately after they were executed, and if the date of recording was the date of transfer then they were within the 4 year look-back rule of the Illinois UFTA. The credit union argued that the date of recording was the key, not the date when the deeds were signed.
As to other property transfers, Poorian and his friends argued that the transfers were clearly made longer than 4 years before the lawsuit was filed. The statute of limitations, Poorian and friends urged, was a complete defense to the credit union efforts to reach for the transferred property or its value.
The Illinois Appellate Court ruled in favor of the credit union. As to the argument that the transfer deeds were signed 4 years or more prior to the date when the lawsuit was filed, the Court held that it was the date of recording of the RE transfer deeds and not the date of execution of those deeds that is the key. There may be some exceptions, the Court noted, but the exceptions did not apply to the transfers by Poorian to his friends.
For the other property transfers the Court considered the credit union’s argument that although the property transfers were made 4+ years prior to the lawsuit, the transfers were fair game because they were not discovered by the credit union until a time within the 4 year period of the UFTA. The UFTA provides a ‘savings provision’ that gives the creditor the opportunity to reach a transfer if the creditor brings its lawsuit to bust the transfer not later than one year after the transfer was or could reasonably have been discovered by the creditor. The credit union succeeded in its effort here again. The Court held that the one-year period begins to run when the creditor knew or should have known of the fraudulent nature of the transfer.
There’s alot more to unpack. But you get the picture.
Timing is everything — particularly where the transfer of property is for less than its fair value (and particularly where the transfer is to a friend or family member).
So what is the concern for Andy’s plan to move Peggy’s home to his name?
The transfer of Peggy’s Home to Andy for less than its fair value may not be a problem if there are no creditors at the time of that transfer. But if Peggy is unable to pay off her credit card debts and one of those companies sues Peggy to recover the transfer or its value within 4 years after the Home transfer to Andy is recorded in the county records, the credit card company could be able to reach back and unwind the transfer. If Andy paid his Mom the fair value of the Home, there would be no fraudulent transfer discussion necessary, assuming that the value was in fact defensible. But where Andy’s plan causes a concern is that he was unwilling to pay Peggy the fair value of the Home at the time of the deed transfer.
To be sure, there are other considerations as well, and those issues require Andy and Peggy to have a talk with their Attorney:
Once Peggy transfers the Home to her son there may no longer be an opportunity to have a homestead exemption for real estate taxes (Peggy is no longer the owner and the Home is not Andy’s residence). And the same goes for the Senior Exemption or the Senior Freeze that may be available to Peggy for the Home in order to reduce her real estate taxes further.
Also, in Andy’s hands the Home is an investment property and not his principal residence. So it may be more expensive to bind homeowner’s insurance than it would otherwise be.
Another concern arises due to Peggy’s age. She is now healthy, but what if Peggy needs to seek Medicare eligibility in the future. The 60-month lookback rule for purposes of Medicare eligibility is often a topic in the paper, right? And for good reason. We are reminded that if Peggy needs to have Medicare pay for nursing home, medical and other out-of-pocket expenses, the transfer of her Home to Andy will be scrutinized and eligibility may be denied (or at least delayed) if Peggy’s application is less than 60 months following the recording of the Home transfer. A knowledgeable Attorney will be able to review your situation and your plan.
There are alternatives, but buying an hour or more of your Attorney’s time for a thorough review is money will spent.
Reach out to Marc Sherman to schedule a time to review the situation.
Marc is available by phone or by email at his contact information found here: https://mshermanlaw.com/contact/
