Medicaid planning often includes elderly parents transferring the title to their house to their kids, but retaining the right to own the property while they (the parents) are alive. When this happens, the parents have a "life estate" (that is, they own the house so long as they are alive) and the kids have a "remainder interest" or a "future interest" (that is, they own the right to own the house in the future, after the parents pass.)
The bankruptcy problem comes up when one of the kids holding the remainder interest files a bankruptcy. Now the bankruptcy trustee holds the future interest (see my blog of March 8, 2011 as to how the value of a remainder interest is calculated in bankruptcy.)
This issue comes up all the time, and is very painful. The parents deed the future interest in their house to their child years ago; the child probably has forgotten all about it. The child comes in for the bankruptcy interview and, with prompting, says "oh yeah, I remember something about that." Even worse is if the child remembers it after the bankruptcy is filed, when it is too late to do anything about it.
There are rarely good options in any case. The debtor can't just give the remainder interest back to the parent or transfer it to another sibling; a transfer without consideration (without money in return) is considered fraudulent and can be reversed by the trustee if a bankruptcy case is filed within two years of the transfer (under Bankruptcy code section 548.) In a New York bankruptcy, the trustee can use New York's Fraudulent Conveyance statute (debtor & creditor law sections 270-279) to avoid, or reverse, a transfer without consideration up to six years later, so giving back the remainder interest and waiting it out is unlikely to be a satisfactory solution.
The problem can be avoided back when the original life estate and remainder interest is created, by the parents reserving the power to appoint another remainder interest. I am definitely NOT an expert in estate planning, so all I will do is describe the process in general. Any elderly person who is considering transferring their house to the kids while reserving a life estate needs to ask the attorney doing the work "what would happen if one of the kids filed bankruptcy?" If the attorney does not know, find another attorney. If the attorney says "no problem", ask why.
By reserving the power of appointment, the parent (the grantor) reserves the right to switch who receives the remainder interest. So if the parents deed the house to their son Sam, while reserving a life estate, and if Sam runs into financial difficulty and needs to file bankruptcy, the parents can simply "reappoint" their daughter Samantha as the owner of the remainder interest.
As I understand it (and, again, Elder Law is not my area of expertise), the power to reappoint another will work for Medicaid planning purposes, so long as the power to reappoint does not include the parents themselves or their creditors (that is, the parents irrevocable transfer the remainder interest, but reserve the right to designate who gets it.)
For a general treatment on the power of appointment, you may want to review "The Remarkable Power of Appointment Device: Planning and Drafting Considerations" by Professor Ira Mark Bloom of Albany Law School, Dated May 22, 2012 (copywritten by Mr. Bloom.)
If you have already received a remainder interest an estate planning program by your parents or others, and you are considering bankruptcy, you will need expert advise as to wether and how you should file bankruptcy. You may contact me for a phone consultation, at no charge, concerning your options.