Len Tillem & Rosie McNichol's Column of the Week
Mother passed away two months ago. We just found the deed to the house. All five names were on the deed - mom and the four kids. When we sell the house do we have to pay capitol gains tax? If so how much?
Dear Judy,
Will you have to pay capital gains tax? Probably not. The IRS recognizes "grantor retained interests." Even though you and the other three children were named on the deed, your mother retained full use and enjoyment of the property until her death and didn't even tell her children that they were added to the title to the property. That causes the entire property to be subject to federal estate tax. Even though no tax may be due because your mother wasn't worth more than $3,500,000, the estate tax exposure triggers a cost basis adjustment in the property.
The cost basis should now be the value of the property on your mother's date of death. That's the amount of money you can sell the home for without having to pay tax. You and your siblings will have to pay 15% federal capital gains tax and California income tax on what you get above that amount. Please note that this income tax would be paid in California even for siblings who live in other states. An out-of-state sibling would have to file a California Non-Resident Income Tax Return, form 540-NR.
But we're jumping the gun here. You can't sell the home until your mother's name is removed from the deed. Examine the deed. Does it name all five of you as "joint tenants" or "joint tenants with right of survivorship?" If so, then the home was held in joint tenancy and will not be subject to probate. To remove your mother's name from the deed to the home, you will have to record an affidavit of death of joint tenant together with your mother's death certificate. You will also have to submit property tax paperwork to the County Assessor so the home won't be reassessed under Proposition 13.
Don't try this at home. It's easy to make mistakes with deeds unless you know what you are doing, and if you make a mistake with the property tax paperwork you could trigger a reassessment that would cost your family thousands of dollars.
Your mother did what's called "poor man's estate planning." Instead of creating a trust to avoid probate, she put the names of her four children on the home. It may work out alright, but that depends on the details. If the deed to your mother's home is not a joint tenancy, then it's a "tenancy in common." If this is the case then your mother's one-fifth share of the home will be subject to probate administration. If her share is worth under $100,000, there won't have to be a full probate, but a Probate Referee appraisal and a court petition will still be necessary.
There are other potential drawbacks to what your mother did. If she was on Medi-Cal benefits then her one-fifth interest in the home is subject to a Medi-Cal estate recovery claim, whether or not the home was titled in joint tenancy. Also, the home was subject to judgment liens and creditor claims of all four children from the date your mother recorded her deed. If one of the children is disabled then his or her eligibility for public benefits may be at risk due to this inheritance. Those are just a few examples. Your mother may have inadvertently done things right - or at least right enough, but it's best to create an actual estate plan with an estate planning attorney and not to rely on chance.
Len & Rosie
Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at (707) 996-4505, or on the Internet at www.lentillem.com. Len also answers legal questions each weekday, 1-2 PM, and Sundays, 4-7 PM, on KGO Radio 810 AM.
0 Comments | Add Comment Elder Abuse
I am trustee of my fathers trust. He is still alive, but he is living in a residential care facility. Can I sell his home, or even buy it for myself? Or do I need to wait until he is longer with us?
Sherry
Dear Sherry,
It is certainly possible for you to sell your father's home to raise money for his care. You can even sell the home to yourself. But you have to be careful. As trustee, you owe your father a fiduciary duty of competence and loyalty. Simply put, everything you do as trustee is supposed to be for your father's benefit, not for your own.
So while you can sell yourself your father's home, you have to pay a fair market price for the property instead of giving yourself a sweetheart deal. If you buy your father's home for less than what it's really worth, you can get sued by your father or someone acting on his behalf for a breach of fiduciary duty or even financial elder abuse.
You could even get sued by your brothers and sisters, because the fiduciary duty your owe your father as trustee passes to all of the trust beneficiaries upon your father's death. Understand that as a trustee, you can be made to account for everything you do with your father's assets, both during his lifetime and after his death. If you want to play it safe, you should build an understanding among you, your father, and all of his other beneficiaries.
But that's not all. Know tax consequences of selling your father's home. If you sell the home while your father is alive, there will be capital gains tax. While your father can deduct the first $250,000 in capital gains from taxation if he has lived in the home for two of the last five years, this deduction may not be enough to prevent your father from having to pay tax on his capital gains. But if you sell the home only after your father's death, there will be no capital gains tax due at all because of the step-up in cost basis the home will enjoy on his death.
Selling his home now will also make it more difficult for your father to qualify for Medi-Cal benefits should he need nursing home care, because a sale of the home would turn an exempt asset (the home) into non-exempt cash that counts against Medi-Cal's $2,000 resource limit.
Sometimes it isn't so easy. As a trustee you need to walk a careful path that will protect your father and his interests while protecting yourself from potential liability. If you do want to proceed with buying your father's home, you really need to review the matter in detail ahead of time with a trusts and estates attorney.
Len & Rosie
Dear Len & Rosie,
My aunt is 88-years-old. She has become deeply involved in the sweepstakes scams and no amount of discussion or persuasion will convince her she has not won a million or more dollars. Other family members, friends, her bank's manager, and the local police have also talked with her. She continues to send several checks a day to these people in the amount of $20 or more. She buys unneeded junk at premium prices and magazines which she does not read. She gets over ten of these letters a day.
She now gets phone calls asking her to wire $15,000 to some address and to be sure not to tell any of her relatives. The manager at her bank fortunately did convince her not to send the money. Someone saying she is from Publishers Clearing House has been calling telling her she is coming with balloons and flowers and will stay with her all day to help her manage all the money she has won. Is there some way for me to stop these sweepstakes mailings to her?
James
Dear James,
The next time you see one of the normal sweepstakes letters, not the illegal scam letters your aunt receives daily, read it closely instead of throwing it away. Sweepstakes solicitations are written to confuse people into believing that they have already won. The fact that you may not have the winning entry is buried in the fine print. People susceptible to undue influence fall for these letters, and wind up buying magazine subscriptions in the mistaken belief that doing so increases their chances of winning. Even "legitimate" sweepstakes solicitations take advantage of the elderly and naive.
Illegal scam sweepstakes letters take this a step further by proclaiming outright to be the winning entry, leaving out the disclaimer in the fine print. Instead of asking the elderly to buy a magazine subscription, the letters request a modest "processing fee". Most people see right through this and throw away the letters, but many elderly persons buy into it, because there are enough legal sweepstakes out there to make them believe that the one they received is for real. Anyone like your aunt who sends a check gets put on a "sucker list" and is targeted by many different scammers all selling the same false promises.
You should contact the Postal Inspector's office of the US Postal Service and let them know what is going on. There is little you can do to stop your aunt's mail. The best way to protect her may be to take away her checkbook and take over the management of her finances, either with a power of attorney or trust, or even by filing for a conservatorship if your aunt is not willing to help you protect herself.
Len & Rosie
Dear Len & Rosie,
I am one of nine children. Our father is deceased, and mother has severe dementia. There is a family trust and a bypass trust, with the three oldest sons as trustees. Can I request an outside audit to see what is going on with the family money?
Trish
Dear Trish,
Years ago, your parents created an A/B trust. When your father died, the B trust (the bypass trust you mentioned) should have been funded with your father's half of your parents' assets, up to amount that passed free of estate tax in the year of your father's death. Everything else should be held within the A trust (the family trust). Your rights with each of these trusts are different.
You are probably not entitled to an accounting of either trust. Unless the trust says different, you are entitled to an accounting only if you are, right now, entitled to distributions from the trust. Chances are, both trusts exist solely for your mother's benefit until her death.
For the B trust, while you're not entitled to an accounting, you should be entitled to general information regarding the assets owned by the trust and how the trust is performing. But the trustees do not have to tell you anything at all about the A trust, because only your mother has a right to that information while she is still alive.
You have options. If you believe that your brothers are mismanaging the trust, you can petition the court on your mother's behalf to demand an accounting. You can do this only if your mother gave you a power of attorney while she had the ability to make decisions, or if you are appointed by the court as the conservator of her estate.
The other option is to wait until your mother's death to demand an accounting. Your mother's right to an accounting passes to her children and the trust beneficiaries upon her death. After your mother's death, it is possible for you to force the trustees to account for every thing they have done with the trust's assets for the entire time they have served as trustees.
That's the legal answer. What you really ought to do is to sit down with your family and discuss the issue like rational adults. Do not accuse your brothers of doing anything wrong unless you have a good reason to believe they are taking advantage of your mother. Hopefully your brothers will see that you are only trying to look out for your mother the same as them and be a little bit more open with information about your mother's finances.
Len & Rosie
Dear Len & Rosie,
My mother-in-law Hazel, passed away recently. Her daughter, my sister-in-law, was put on her bank account and a mutual bond fund when Hazel could no longer manage things on her own. She withdrew all of the money out of the account even though Hazel had a will splitting her estate fifty-fifty with her children.
Please warn your readers about this happening to them. Our case is in court now, but we have to prove Hazel's intent that everything be divided equally. Our case looks really weak, but if at least I can spread the word. You never know what a sibling might do when a death occurs. Parents need to know to be very specific when making out their wills.
Sharon
Dear Sharon,
Experience has lead us to expect the worst from people when a parent or other relative whose estate they have an interest in dies. In most cases, children get along well with one another and are happy to cooperate to make things fair. But more often than we would like to acknowledge, otherwise normal, kind and caring people become crazed and turn on their siblings like wolves fighting over a bone.
It is unfortunate that we cannot assume the good intentions of our children. The best way to make sure our assets are divided the way we want upon our deaths is to create an estate plan, either a revocable trust or a will, that clearly and concisely spells it out. Hazel this this, but there was a glitch. She had a will that divided everything up equally. But she made a mistake when she put her daughter on her bank accounts as a joint tenant. Joint tenancy property does not pass through probate, no matter what the will says. Your sister-in-law was well within her legal rights in keeping the money with only a "Sorry, Charlie" to your husband. Her morality is different question.
How could this have been avoided? The easiest way would have been for Hazel to put both of her children on her bank accounts instead of just her daughter. Or, she could have added her daughter to her bank accounts using the bank's power-of-attorney forms. This would have allowed your sister-in-law to pay her mother's bills without becoming a joint owner of her mother's bank accounts. If Hazel owned enough assets that avoiding probate was important to her, then she should have created a trust.
Adding children to your accounts as a joint tenant is a cheap and easy way to avoid probate. But in Hazel's case, it backfired. You can be sure that your lawyers will earn more money in this lawsuit than they would have earned in probate fees if Hazel's estate had been subject to probate. Its a hard lesson to learn, Sharon, but maybe you'll get lucky and win in court. Good luck.
Len & Rosie
Dear Len & Rosie,
My mother has been diagnosed with the early stages of Alzheimer's disease. I am her only child. It has been twelve years since her trust was written. I have concern's that a family member has influenced her to change the trust to her benefit. I can't remember the name of the original attorney who drew up the trust. Is the trust part of public records? If they are, can I review them? If I am able to find the attorney who drew up the trust, can I call them up and ask for a copy of the trust? Can I ask if it has been changed? If the trust has been changed. What are my legal options?
Annie
Dear Annie,
Trusts are not public documents. They are not recorded anywhere. However, you may be able to identify the attorney who prepared your mother's trust by examining the deed to her home. Get a copy of the current vesting deed (the last recorded deed) to your mother's home from the County Recorder or a title company in the county where you mother's property is located.
Many attorneys prepare and record deeds for our clients. When we do so, we have the deeds sent back to our office from the County Recorder so we can make sure that the deeds are properly recorded. So if the name of your mother's attorney is on the deed, you can contact him or her. Also, lawyers are frequently also notaries. You can check the California State Bar attorney search page age www.calbar.ca.gov to see if the notary is an attorney. The State Bar webpage will also provide you with the address and telephone number of the attorney.
Unfortunately, this may not solve your problem. Your mother's lawyer is not going to provide you with a copy of your mother's trust or answer any of your questions while your mother is alive and has not be deemed incapacitated. The attorney owes your mother a duty of confidentiality, so he or she won't answer your questions unless your mother is incapacitated and you are named within the trust as her successor trustee.
Talk to your mother about this. An early diagnosis of Alzheimer's does not mean she is incapable to talking to her attorney and asking him or her to provide you with a copy of her estate planning documents. If your mother is incapacitated, the lawyer should provide you with the information you need unless your mother changed the trust and named someone else as successor trustee. If this is the case and you suspect foul play, you may want to see an attorney and consider filing for a conservatorship over your mother.
Len & Rosie
Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at (707) 996-4505, or on the Internet at www.lentillem.com. Len also answers legal questions each weekday, Noon-12:45 PM, and Sundays, 4-7 PM, on KGO Radio 810 AM.
0 Comments | Add Comment Community & Separate Property
My boyfriend and I are registered domestic partners. He is a widower, and I am a widow. Shortly after we meet he made out a living trust leaving everything to his son and two grandchildren. We live in his home which is part of the trust. If he dies do I get thrown out on the street? Do I have any recourse? I give him money every month which he deposits into his banking account. I am afraid that if he dies, I will be homeless.
Carmen
Dear Carmen,
In general, the only rights you have with respect to your domestic partner's estate are those created by contract. In 1976, in the famous "Marvin v. Marvin" case, the California Supreme Court held that agreements for support between unmarried couples were valid, enforceable contracts. That means if your partner promise to provide for you for your lifetime in return for your companionship and support, then you can hold him to his word.
But that's easier said than done. An agreement for support should be in writing, because if your partner dies before you, his son and grandchildren aren't going to want to give you anything. In their eyes, you won't be the woman who loved and supported him in his declining years. To them you're just a gold-digger. Marvin agreements are also difficult to prove. In 1976, Michelle Marvin won the right to sue Lee Marvin for support, but in the end she still lost because she was unable to prove an agreement for support actually existed.
There is another way you may have a claim against part of your partner's assets upon his death. Last July, new changes to the way estates without wills are distributed. Domestic partners registered with the California Secretary of State are by default entitled to a share of their deceased partner's separate property just like a surviving spouse (usually one-third or one-half of the separate property). Unfortunately, this law probably does not apply to you, because your partner likely signed a pour-over will when he created his trust, and this would certainly not apply to any assets held within your partner's trust.
What you really need to do is to discuss your concerns with your partner, and try to get him to see the need behind making some provision for you upon his death. It could be a simple as a house trust allowing you to live in his home until your death, with you paying all of the expenses. It would not be too difficult to create an estate plan for your partner that provides for you while protecting the inheritance of his descendents.
Len & Rosie
Dear Len & Rosie,
My wife and I are both in our 50's. We are in the middle of buying a new home, and we plan to retire in a few years. We do not have a trust, and our wills are fifteen years old and out-of-date. Our net worth is now about $1.65 million. How should we hold title to our new home? We don't think we should want our two children on the title at this time.
Dan
Dear Dan,
You have good instincts. It is almost always a bad idea to add your children to the title of your home. If your children are on title and you ever want to sell your home or borrow against it, you'll have to ask them, hat in hand, to sign your home back to you. They may refuse. Even worse, if one of your children goes bankrupt, gets sued, or owes back child support, you may wind up with liens on your home of which you can be sure your children will not help you remove.
Sometimes it is useful to transfer property to children, or into irrevocable trusts in a child's name as trustee, especially if you are on Medi-Cal benefits or will likely need long term nursing home care. But it is important to understand that giving your home away means giving up control of your most important asset. This is not something to be undertaken lightly, and should be done only when you are willing to allow your children to make the decisions.
You and your wife should probably title your new home as "husband and wife, as community property with right of survivorship." This will allow your home to avoid probate and benefit from a full step-up in cost basis on the first death of you or your wife. But that will not avoid probate on the surviving spouse's death. You need a trust to do that.
If the total value of the surviving spouse's estate is worth the $1.65 million that the two of you own total, a lucky trusts and estates attorney is going to earn a probate fee of $29,500. Probate fees are set by statute and are based on the gross value of the decedent's estate (before loans and expenses are subtracted). And most of the time, the estate's attorney will also earn "extraordinary" fees, for doing "extra" work such as getting a court order authorizing the sale of your home during the probate. Creating a trust now will be more expensive than making new wills. But since assets held in trust avoid probate, your children will save both time and money after you and your wife pass away.
Len & Rosie
Dear Len & Rosie,
My husband is a beneficiary of his mother's trust. He will not receive his share outright. Instead, she is leaving him his share in a trust that continues until his death. Then, the trust goes to our children, leaving me nothing. I have been with my husband for 38 years and some of my husbands siblings have been married as many as four times. I don't understand why she is treating me this way. Is this legal?
Louise
Dear Louise,
A fundamental rule of law is that blood is thicker than water. Most of the time, parents do not make any provision in their wills or trusts for their sons and daughters-in-law. There are, of course, happy exceptions to this rule and one would hope that your mother-in-law would reward your 38 years of fidelity by cutting you in for a share if your husband dies. But that's her decision to make.
There are many reasons why your mother-in-law wouldn't want to leave assets to your husband outright. Depending on how wealthy she is, and how wealthy you and your husband are, it may make sense to leave assets in a trust that will pay out to the grandchildren so that her assets will not be hit with an estate tax double-whammy - being subject to estate tax both on her death and on her son's death.
Or maybe your mother-in-law doesn't want to look down from heaven and see a son or daughter-in-law driving a Lexus that she bought and paid for. Keep in mind two things. First, your mother-in-law does have the right to do what she wants with her assets. She doesn't have to leave anything to an in-law, despite the length of your marriage. The bottom line is that your mother-in-law doesn't have to be fair about it. Second, if your mother-in-law were to die without a will or trust, and your husband was already deceased, then your husband's share would pass to his children by default. You would still get nothing.
Maybe your mother-in-law is treating you the same as her other in-laws because she does not want to be perceived as unfair. We do not recommend that you outright ask her to cut you in for your husband's share. That could make her angry enough to disinherit your husband outright. If your husband agrees with you, what he ought to do is to speak to his mother about his concerns for your financial security after his death, and maybe he'll be able to convince his mother to let you benefit from the income earned by the trust until your death, after which everything would still to go her grandchildren.
Len & Rosie
Dear Len & Rosie,
I was nineteen years old in 1940 when we married. After more than 64 years of marriage I woke up one morning and my husband was gone. He had died peacefully, they said, in his sleep. It is still hard trying to go on without him. But an insurance company has made my life a living hell. Seven years ago we bought an annuity with $80,000 of our savings hoping for a better return than our bank accounts. But when I notified the insurance company of my husband's passing they said I no longer have any rights under our contract. They said IRC section 72(s) mandates that the beneficiaries we had named are now the owners of the annuity. The IRS representatives say they have nothing to do with this kind of annuity. I appealed to the California Insurance Commissioner. They said that the insurance company properly responded to my complaint and that the commission would do nothing further. I need to get my $80,000 plus interest back as was our intent to do before my husband passed away. Can you help me?
Virginia
Dear Virginia,
The federal statute the insurance company cited has to do with the requirements that annuities must meet in order to qualify for tax-deferred status. All it really means is that if the annuity was already making payments to your husband, then it can continue to do so on the same schedule. If the annuity was deferred (not making payments) then it must be distributed within five years, unless the surviving spouse was named as the annuity's designated beneficiary.
Clearly, your problem is that the annuity was in your husband's name alone, and for some reason he named someone other than you as beneficiary. The insurance company is saying that the annuity must be paid out to the beneficiaries named by your husband. They may be half right.
If the annuity was purchased with community property, and if you did not sign a spousal waiver on the annuity beneficiary forms, then half of the annuity belongs to you. You may have to sue the insurance company and the beneficiaries to get it, but you should win. However, your husband's half of the annuity will still pass to his designated beneficiaries unless they agree to turn it over to you.
On the other hand, if the annuity was purchased with your husband's separate property, assuming he had any after 57 years of marriage, or if you signed off on his choice of beneficiaries when the annuity was purchased, then there is little you can do. Your only option at this point would be to sue the insurance agent who sold you and your husband the annuity for negligence on the theory that he or she didn't fill out the beneficiary forms the way the two of you wanted. The chances of winning such a case are not so good.
You should sit down with a lawyer and review the annuity contract. If you do have a right to half of the annuity you need to get a letter in to the insurance company as soon as possible, because it will be a lot harder to get your share of the money from the beneficiaries once they get their hands on it.
Len & Rosie
Dear Len & Rosie,
I have just discovered that my husband put our three properties into a revocable trust. In December, 2002, he put them into a trust and now only his name appears on title. Does this mean I am no longer a joint tenant? Does this mean upon death or divorce I would not have a claim to the properties? I suspect he is leaving everything to his daughter from a previous marriage. He and I have been married for 18 years. I am upset and do not want to confront him until I know what this all means.
Sue
Dear Sue,
The deeds that you acquired are the "current vesting deeds" to each of your properties. These deeds are simply the last recorded deeds in the chain of title to each property. While the deeds now say that the properties are in your husband's trust, this does not mean that you no longer own any interest in these properties. You need to dig deeper.
If the properties were titled in joint tenancy before your husband signed and recorded the deeds, then only his half of each property was transferred to his trust. You should still be on title to half of each property. but the joint tenancy was severed by your husband. If your husband dies before you, his half of each property passes in the manner provided by his trust. If you die before your husband, then your half of each property passes in the manner provided by your own will or trust. If you do not have one, get one.
You and your husband have a classic blended family. It is easy to understand that he wants to protect his son's inheritance. If you were to inherit everything upon your husband's death, it isn't unthinkable that you would disinherit his son and leave it all to members of your own family. You need to talk to your husband about this. It would be very smart for you to acknowledge that his son ought to inherit his half of the properties, at least after the surviving spouse's death.
You also need to come to terms with your husband over what will happen to your home when one of you dies. The last thing you should want is to have to move after your husband's death because his son wants to sell the home. Hopefully, you can convince your husband to leave you his half of your home, or at least a right to live in until your death, in return for you doing the same for him in your own estate plan.
Len & Rosie
Dear Len & Rosie,
I have been married for more than two years. My parents have died recently, and I have inherited their home. I want to remodel the house with money that I had saved up prior to getting married. If I do any remodeling work with my own money, does the house become community property? What can I do to make sure that it doesn't? Also, if I put more money into the accounts that I had prior to marriage, do those accounts become community property?
Gina
Dear Gina,
The basic rule of marital property is simple. Everything either you or your husband acquire during your marriage as a result of your labor is community property owned equally by both of you. And naturally, everything you acquire with community property is community property. Your separate property consists of everything you owned prior to your wedding, and anything you may receive as a gift or inheritance.
So the home is yours, and yours alone. But you can change that, either on purpose or by mistake. It is perfectly OK for you to take your separate property savings and remodel your home. That's using separate property to improve separate property, so there's no harm in doing that.
What you have to be careful about is mixing up community property with separate property. Your paycheck is community property, and so is his. If you deposit your paycheck into the accounts that hold your separate property savings, then you have commingled assets. Doing so does change your separate property inheritance into community property half owned by your husband. What it does mean is that if you and your husband were to get divorced, the burden of proof would be on you to show what portion of the commingled funds is 100% yours.
If you use community property to remodel your home, the home will still remain your separate property. Mostly. If you divorce, your husband will have a community property claim against part of the property, roughly corresponding to the community property used to fix up the home.
So be careful. Keep your separate property separate. Keep anything you owned prior to your marriage and your inheritance within accounts that are completely segregated from anything you and your husband own and you should be safe.
Len & Rosie
Dear Len & Rosie,
My mother is a very healthy 79-year-old who plans on getting married this summer. Her husband to be is also in good health. He has told her that he will put his house into trust for his children when he passes away but she will be able to live there until her death. He does not want her to contribute any money into the up keep of the house. Is there anything my mother needs to do before getting married to protect her assets and make sure she will always have a home to live in? His children like her and said she can live there until she wants to leave. I'm concerned that they may change their minds after their father is gone.
Karen
Dear Karen:
A first marriage is usually all "yours, mine, and ours" in which a couple pledges their fate together for better or worse. But this is a second marriage, and no matter how well your mother gets along with her future step-children today, if her new husband dies first, your mother will be the only thing standing between them and their inheritance.
Your mother and her fiancee should consider entering into a prenuptial agreement. It isn't wrong for your mother to trust her husband's children, but it's best to play it safe. A prenup shouldn't be needed to protect your mother's separate property. Everything she brings into the marriage will remain her sole and separate property if she does not commingle her assets with those owned by her new husband. And since both of them are retired, there should be no community property to speak of.
So why a prenup? One can guarantee your mother's right to reside in her husband's home after his death. If he breaches the agreement and dies first after having failed to provide your mother with a life tenancy, house trust, or right of occupancy, she can sue his estate or trust, or even his children, to enforce her rights under a prenuptual agreement.
If they decide to enter into a prenup, they each need their own separate and independent attorneys. These days, a perfectly valid prenup can be thrown out by the court if each party did not have their own attorney to advise them as to what rights they gave up by signing it.
In addition to the prenup, both your mother and her fiancee should update their wills and trusts after the wedding. A surviving spouse is automatically cut in for a share of the dead spouse's trusts and probate estates, unless the estate plan is amended to take the new spouse into account and spell out exactly what the new husband or wife (or registered domestic partner) should or should not inherit. Alternatively, your mother and her fiancee can amend their estate plans now in "contemplation of marriage" to identify what inheritance rights they will have with respect to one another.
The point here is that both of your families will be better off if your mother and her fiancee enter into this new marriage with a plan, instead of leaving everything to chance and hoping for the best.
Len & Rosie
Dear Len & Rosie,
Can I leave my property to my adult son and leave out my husband? Could my husband change this after my death? I am afraid that if I leave it to my husband he will disinherit my son and give everything to this children.
Becky
Dear Becky,
You are dealing with a problem common in "blended" families; second marriages with one or both spouses having children from prior relationships. On one hand, you and your husband are likely to want to provide for one another, especially if you have been married for a very long time. On the other hand, you don't want to look down from heaven to see your step-daughter driving a Lexus paid for with your money while your son gets nothing.
There are several ways to accomplishing your goal of protecting your son's inheritance. You can create your own estate plan, either a will or a trust, that leaves all of your assets, or a portion of them, directly to your son upon your death, whether or not your husband is still alive. You can even leave your son your half of the community property. If you decide to do this, it is important that you understand that everything you own in joint tenancy or in community property with right of survivorship with your husband will go to him if you die first. If you have any jointly held property, you need to transfer your half to your trust, or you need to sever the joint tenancies so your half will pass through probate to your son under the terms of your will.
If you want to provide for your husband too, your estate plan can hold your assets in trust for the benefit of your husband for his lifetime, passing them on to your son only upon your husband's death. Your son can be the trustee of this trust, which will put him in a good position to protect his inheritance after your death.`
Another alternative is for you and your husband to enter into a binding agreement about how all of your assets, and his, will be divided upon your deaths. You can make a "contract to devise property" under which you promise to leave everything to one another, and also promise to leave half to his children and half to your son upon the death of the survivor between you.
Keep in mind that if you create your own trust and put your assets into it, chances are your husband is going to find out. Do not try to keep this a secret. You will be better off if you discuss your concerns with your husband and agree to create an estate plan that works for your entire family.
Len & Rosie
Dear Len & Rosie,
My mother-in-law wants to quitclaim her house to my husband, but she doesn't want my name placed on the deed. I guess she is afraid that in a divorce I would take half of the house. We have two young children and another house in both my husband's and my name so I'm not really bothered by this development. Should I be? Should I request that my children be put on the deed? Is this possible?
Mary
Dear Mary,
You should not be upset by this. Blood is thicker than water, as they say, and remember that the home is your mother-in-law's property, and she has the right to do with it as she pleases. The overwhelming majority of parents giving property to their children do not cut their children's spouses in for a share.
By default, anything you or your husband acquire during your marriage is community property. The principal exception to this rule is that gifts and inheritances are separate property. If your mother-in-law turns her home over to your husband, it will belong to him and him alone. Once your husband owns the home, he can transmute it into community property. Whether or not to do this is his choice and you should respect whatever decision he makes, just as you would want him to respect the decisions you make with regards to your own inheritance.
The children should not be put on the deed to the home, mostly because it would make the home subject to reassessment under Proposition 13. Transfers of property between grandparents and grandchildren can avoid a property tax reassessment, but only if the intervening parents (you and your husband) are already deceased.
The only thing about this plan that may not be such a good idea is that it is probably a bad idea for your mother-in-law to give her home away while she is still alive. She will lose control of her home. The step-up in cost basis that would otherwise happen on her death will also be lost, so your husband would have to pay a great deal of capital gains tax if he were to ever sell the family home. But if he were to inherit the home after his mother's death, the cost basis would be the property's date-of-death value and your husband could sell the home upon his mother's death and pay no capital gains tax.
Here's the best part: When you tell this to your mother-in-law, she'll see you as a loyal wife trying to safe her husband money instead of a greedy daughter-in-law trying to get her mitts on what's not hers. Before your mother-in-law signs over her home, both she and your husband should understand all of the tax consequences to doing so.
Len & Rosie
Dear Len & Rosie,
I recently married a man twenty-four years my senior. My husband is very active and healthy. If something was to happen to my husband and he does not have a will, am I protected as his wife with his assets are not in joint tenancy? He thinks he doesn't have to make a will, because California is a community property state. He has seven grown children. My concern is that without a will his children may take action against me after my husband's death. What are my rights as his wife if he passes without a will?
Alessandra
Dear Alessandra,
As a rule you should review and update your estate plan when there is a significant change in your family situation, such as a marriage, divorce, birth or death in the family. This rule suffers from perpetual bad timing. It is difficult to deal with the paperwork at times like these, because there is always something "more important" to deal with. But it has to be done.
California is a community property state, but everything your husband owned prior to his marriage with you is his separate property, including his pension if he's retired. If he dies before you without a will, you'll inherit the community property, but there won't be much of that. You will also inherit one-third of your husband's separate property, because he has more than one child, with the other two-thirds being divided among his surviving children and the living descendents of his children who die before him.
His estate would also have to be probated in the courts. Normally this is a disadvantage, but the silver lining behind this cloud is that you should be able to get family support payments during the probate. Of course these payments would end when the probate is finished, so this is not a permanent solution.
Your husband should not rely on the default provisions of intestate succession. He should create a will or a trust that spells out how he wants to provide for you and his children upon his death. Do not forget that he has a legitimate interest in protecting the family legacy of his seven children. He may not want to leave everything to you outright. But he should at least provide you with the right to reside in your home for a reasonable time after his death, perhaps even
Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at (707) 996-4505, or on the Internet at www.lentillem.com. Len also answers legal questions each weekday, Noon-12:45 PM, and Sundays, 4-7 PM, on KGO Radio 810 AM.
0 Comments | Add Comment Medi-Cal Planning
My mother is 84 years old and is in poor health. She has been on Medi-Cal for years. She is very concerned that upon her death her mobile home will have to be sold to payback the cost of her surgeries. Can this be true?
Barbara
Dear Barbara,
The California Department of Health Services, "DHS", is required by federal and state law to assert estate claims against the assets of deceased Medi-Cal recipients. After your mother's death, DHS's estate recovery section will mail you an estate questionairre asking you to tell them about the assets your mother owned upon her death. If she still owns her mobile home, then this home will be subject to Medi-Cal's estate claim. If Medi-Cal has spent a substantial amount of money on your mother's care, you and her other children may not be able to inherit anything at all.
There will be no estate claim if your mother is survived by her husband, or a disabled, blind, or minor child. The Medi-Cal estate claim is also limited to what your mother owns upon her death. If she gives away her home prior to her death, it will be protected from the Medi-Cal claim.
If the value of your mother's home has not increased much since she bought it, she could just give it to you outright, provided that you won't run up against any owner-residency restrictions from the mobile home park. If the park won't let you own your mother's mobile home without you living there, or if the value of the home has grown so much you'll have to pay capital gains tax when you sell it, there are other alternatives. For example, your mother could shelter her home in a particularly specialized irrevocable trust that is very different from the normal kind of trusts people create to avoid probate. If she is interested in this, she should consult with an elder law attorney.
DHS is working on new regulations that will impose Medi-Cal eligibility penalties if applicants or recipients transfer their homes. After the rules change, your mother may not be able to protect her home without giving up Medi-Cal benefits, at least for a while. As of today, there is implementation date for the new rules, but they could come into effect as soon as July. For this reason, your mother should act now to protect her home.
Len & Rosie
Dear Len & Rosie,
My aunt is 90 and has a residence in her name that she shares with my mother. She has Padget's disease and pays $5,800 a month for nursing home care. Her medical costs are funded by a line of credit from a reverse mortgage. My aunt never married. I am her nephew and have durable power of attorney. We do not have unlimited financial resources and seek Medi-Cal as a method to provide payment for the cost of her care.
Steve
Dear Steve,
Your aunt may already be eligible for Medi-Cal. Unless she made substantial gifts of her assets in the last 30 months, and the transfer penalties for these gifts have not ended, she is qualified for Medi-Cal long term care benefits if she has less than $2,000 in countable assets. If she has more than that, she can probably pay down the loans against her home to get her below the $2,000 resource limit. She does not have to borrow money each month to privately pay for her care, because her home is an exempt asset that she can still own while being on Medi-Cal.
In fact, your aunt may be retroactively eligible for Medi-Cal for the last three months, if she had less than $2,000 in countable assets in each of those months. The only monkey wrench would be if the her nursing home does not accept Medi-Cal benefits. If it does not, she will have to move to another nursing home that does if she wants Medi-Cal to pay for her care.
Your family should sit down with an elder law attorney to review your aunt's situation. From the facts in your letter, she seems to be eligible for Medi-Cal already, and she's just throwing money away by needlessly spending her equity on her care. Also, if she is going to receive Medi-Cal benefits, it is important to act now to shelter her home from Medi-Cal estate recovery claims so that after your aunt's death, your mother can continue to live in the home. The best way of sheltering the home is with an irrevocable trust, but there are other alternatives that should be explored.
Len & Rosie
Dear Len & Rosie,
My 84-year-old mother will go into full time nursing home care within a month. Since her bank account has sufficient funds to pay for this care for about four years, and given that I have power of attorney over her finances, what legal steps can I take to exempt any of her assets before she qualifies for Medi-Cal?
John
Dear John,
There are a number of different techniques available to qualify your mother for Medi-Cal nursing home benefits. Gifting assets out of your mother's name is one of those techniques, but you have to be very careful if you do this. Having your mother's power of attorney is not enough. You cannot use her power of attorney to gift away her assets unless it specifically grants you the authority to make gifts. Otherwise, you're simply stealing your mother's life savings.
Also, if and when you apply for Medi-Cal for your mother, you must disclose any gifting that was done during the thirty month "look back period" prior to the date of the Medi-Cal application. Any gifts made during the look back period trigger a transfer penalty during which your mother is ineligible for Medi-Cal. Fortunately, the transfer penalty starts when the gifts are made, not when you apply for Medi-Cal. There are ways of minimizing transfer penalties to qualify your mother for benefits sooner rather than later.
In general, there are three techniques for gifting assets to qualify for Medi-Cal. Your mother could simply give everything away and wait out the thirty-month look back period, but that is almost never the most efficient way to qualify someone for Medi-Cal. She could make a "half-a-loaf" gift in which part of her assets are gifted away and the remaining assets are used to privately pay for her care until the transfer penalty runs out. Monthly gifting is also a commonly used technique.
The best way to qualify someone for Medi-Cal varies from case to case. You should also consider whether or not trying to qualify your mother for Medi-Cal is worthwhile. Depending on her health, she may not live long enough to qualify for benefits, and there can be some adverse tax consequences to making gifts of her assets during her lifetime.
Your mother will not have to give away her home to qualify for Medi-Cal, but it's important to shelter the home from Medi-Cal reimbursement claims after her death. Usually the best way of going about this is with an irrevocable trust, but there are other alternatives. This is why Medi-Cal planning falls into the category of "don't try this at home, kids". If you want to qualify your mother for Medi-Cal, you should start by consulting with an elder law attorney who does Medi-Cal Planning.
Len & Rosie
Dear Len & Rosie,
My mother has been on Medi-Cal for the past eight years. My father passed away ten years ago. My mom lives in her home which was purchased thirty years ago and is paid in full. She has a trust which leaves her home to my sister and me after her death. If she sells her home now, or if she dies, does Medi-Cal require my mother to pay back all the financial aid that she has received so far?
Alec
Dear Alec,
The California Department of Health Services (DHS) operates an estate recovery program. After your mother dies, DHS will assert an estate reimbursement claim against everything she owns upon her death. The good news is that your mother will not have to reimburse Medi-Cal while she's alive, and it's possible to shelter her assets from Medi-Cal estate claims after her death.
If your mother sells her home today, she will not have to immediately reimburse Medi-Cal. DHS can normally assert reimbursement claims only after the deaths of Medi-Cal recipients and their surviving spouses. The exception to this rule is if your mother has received Medi-Cal benefits that she wasn't really entitled to. DHS can always assert reimbursement claims for money spent on people who were not really eligible for Medi-Cal benefits.
Your mother will not even lose her Medi-Cal benefits if she sells her home. She is allowed to keep the proceeds of the sale of her home for up to six months to buy a new home. After the six months are up, any money left over will cause her to lose Medi-Cal eligibility.
Fortunately, your mother can act now to shelter her assets from Medi-Cal estate claims. Because the claims are limited to only what she owns upon her death, she can avoid reimbursing Medi-Cal after her death by giving her home to her children. Usually, an irrevocable trust is the best means of doing this, but this would prevent your mother from taking the $250,000 capital gains tax exclusion if she sells her home during her lifetime.
There are other alternatives. Before she commits to selling her home, your mother should sit down with an elder law attorney and decide for herself the best way to shelter her assets from Medi-Cal estate claims and maintain her eligibility for Medi-Cal benefits.
Len & Rosie
Dear Len & Rosie,
My mother is 75 years old and receives $734 per month of SSI. She has somehow managed to incur $15,000 of credit card debt. Every time she received something in the mail offering her a good deal she'd sign the pre-approved application and a few weeks later she'd have another credit card. I finally put a stop to this when I got involved in her finances. My mother owns nothing except for two insurance policies worth $10,000. Should she declare bankruptcy? Can bill collectors demand payment from mom's insurance money after her death?
Andrea
Dear Andrea,
Your mother can declare bankruptcy if she wants to, but it isn't really necessary. She owns next to nothing. Since she is on SSI, the total value of her assets has to be less than $2,000, and her life insurance policies are almost certainly term life policies with no cash surrender value. Since SSI payments are exempt from attachment, your mother is judgment proof, if only because the consumer lending industry hasn't yet figured out how to squeeze blood from a turnip.
If your mother's insurance policies do not name you as beneficiary, then she should change that now. She gets Medi-Cal benefits automatically because she collects SSI. Upon her death, the California Department of Health Services will assert a claim against anything your mother owns that isn't spent on her funeral and burial expenses. If the insurance pays into her estate, it will be subject to the Medi-Cal reimbursement claim, and anything left after that will wind up going to your mother's creditors. You would wind up with nothing for yourself.
If you are the beneficiary of your mother's life insurance policies, then the money will pass directly to you upon her death. Since the insurance money will not be part of her probate estate, it will not be subject to the claims of her creditors. You will not have to reimburse Medi-Cal either, because insurance proceeds are not presently subject to Medi-Cal estate claims.
You are not legally obligated to pay your mother's debts, but this will not prevent her creditors from asking you to pay them off after your mother's death. If they do, mail them a photocopy of your mother's death certificate with a note telling them that your mother died with no assets and that she was on SSI and Medi-Cal. That should take care of it. If they continue to ask you for money, give them nothing.
Len & Rosie
Dear Len & Rosie,
My dad is an 80 year old widower, who now owns a single-wide mobile home. He wants to sell it and use the money from the sale to buy a double-wide to live in with me. I need advice on how to set this up, whose name should the title be in and what tax results will be imposed. How will this affect Medi-Cal if he needs it later?
Francine
Dear Francine,
There shouldn't be any tax problems with your father selling his mobile home. Mobile homes tend not to appreciate in value so much, so there may not be any capital gains at all when he sells his home. And if there is, he can deduct up to $250,000 in capital gains for selling his home, as long as he has owned it and lived there for any two of the last five years.
If your father ever receives Medi-Cal benefits, then anything he owns on his death will be subject to Medi-Cal Estate Recovery Claim, unless he is survived by a minor, blind, or disabled child. So ideally, the new mobile home would not be titled in his name at all, in order to protect it from potential future Medi-Cal claims.
If your father is really concerned about Medi-Cal, the way to go about it is to sell the old home and buy a new mobile home in his name. Then he can give the mobile home to you. The reason to do it this way has to do with the way Medi-Cal gifting penalties work. If your father sells his old home and gives you the money to buy the new home, there will be a substantial transfer penalty for Medi-Cal benefits if your father applies for Medi-Cal within thirty months of the date of the gift.
However, if your father buys the new home in his name and then gives it to you, there will be no penalty at all, because giving away an exempt asset, such as your residence, does not count as a transfer made for the purpose of qualifying for Medi-Cal.
Your father should see an attorney before doing this. There may be other issues involved, such as other children who may not inherit anything at all if your father gives you his new home.
Dear Len & Rosie,
Mom owns only a home valued at approximately $500,000. She gets help from In Home Supportive Services and Medi-Cal. Would it be best to have her gift the house to her three kids or is there a better way to safeguard her home? Mom has a living trust with me as trustee.
Aida
After your mother's death, the California Department of Health Services (DHS) will assert a Medi-Cal Estate Recovery claim against everything your mother owns, including everything within her revocable living trust. There will be no claim if your mother is survived by a disabled, blind, or minor child. If she's married, then the Medi-Cal estate claim will be deferred until both spouses have died, but it won't go away. Otherwise, you'll have to reimburse DHS for everything it spent on your mother's care through Medi-Cal and IHSS after she turned age 55, and for care provided to her in a nursing home at any age.
Your mother can shelter her home by giving it to her children, but there are problems with this. You could conceivably sell it out from under her, leaving her without a roof over her head. Her home would also become subject to the claims of the creditors of each of her children. Also, if your mother gives you the home now, the cost basis of the home won't get a step-up to its date-of-death value upon your mother's death. You and your siblings may wind up paying more in capital gains tax than you would otherwise have to reimburse Medi-Cal if your mother "protects" the home by giving it to you today.
The best way your mother can protect her home from Medi-Cal claims is to transfer the home to an irrevocable trust that would no longer count as her property. The trust would restrict your mother's rights with respect to her home to only a "right of personal occupancy" - the right to live in her home. This right of occupancy is not subject to Medi-Cal estate claims, but is enough of a retained interest to give the home a step-up in cost basis on your mother's death.
When your mother dies, you and your siblings would be able to sell the home and pay no capital gains tax on any of the appreciation in the value of the home before your mother's death. If your mother is not planning on selling her home, and if she is willing to give up her outright ownership of her home, then this is the kind of trust she needs.
Len & Rosie
Dear Len & Rosie,
My father is 83 and is not in good health. He has put his home into a revocable trust with my brother and I as beneficiaries and cotrustees. My name has been put on his bank accounts as a joint tenant. Will this form of ownership avoid probate, avoid possible Medi-Cal recovery and will the house still receive a step up in basis with regard to capital gains tax? Should his life insurance policy and personal property also be put in the irrevocable trust?
Brad
Dear Brad,
If your father receives Medi-Cal nursing home benefits, or non-nursing home Medi-Cal benefits after his fifty-fifth birthday, then his home and anything else he owns upon his death will be subject to a Medi-Cal estate claim. A normal revocable trust will not protect your father's assets. The only way to avoid the Medi-Cal claim is for your father to die owning nothing, or if he is survived by a minor, blind, or disabled child and is thus exempt from Medi-Cal estate claims.
Your father's home is an exempt asset for purposes of Medi-Cal eligibility. That means he can give away his home without losing Medi-Cal or having to delay eligibility by waiting out a transfer penalty period. Giving the home to the children now will protect it from Medi-Cal estate claims, but an outright gift is a bad idea. If you do not inherit your father's home on his death, the home would not get a step-up in cost basis, and you would have to pay a great deal of capital gains tax if you ever sell the property.
Instead of making an outright gift of the home, your father can transfer it into a special form of irrevocable trust for the benefit of his children. The way these trusts work is that the settlor (your father) will retain no interest in his home that is subject to a Medi-Cal estate claim, but he will retain certain limited rights (the IRS refers to these as "incidents of ownership") that cause the home to be subject to Federal Estate Tax upon his death. The inclusion of the home in your father's estate for death tax purposes will trigger a step-up in cost basis, even if no estate tax is actually due. This way, you can sell the home after your father's death at its date-of-death value and pay no capital gains tax and you will not have to reimburse Medi-Cal.
Do not worry about your father possessions and life insurance. Medi-Cal recovery does not extend to your father's personal possessions and life insurance policies and even retirement accounts are not subject to Medi-Cal estate claims unless they pay into your father's probate estate upon his death. To protect his insurance, IRA's and other retirement accounts, your father need only name his children as pay-on-death beneficiaries.
Len & Rosie
Dear Len & Rosie,
I was injured on the job ten years ago, so I cannot get any insurance because of my pre-existing injuries and I have never been able to return to work. I own my own home but I am very concerned about losing it if a major illness were to happen to me. I am a 62-year-old women, and I am not really in the best of health. Can you give me some help on protecting my home and any cash in the bank?
Sharon
Dear Sharon,
You have several options. It is possible for you to qualify for Medi-Cal benefits by spending down and sheltering your countable assets, which more or less consists of everything except your home, car, some life insurance policies and retirement accounts, and $2,000. If you collect Medi-Cal benefits, then it becomes important to shelter your home from Medi-Cal estate claims. The best means of doing so is usually to transfer the home into an irrevocable trust.
But it may not be a good idea just yet. You are only 62, and you are probably not yet ready to give up control of your property. If your home were held within an irrevocable trust designed to protect it from Medi-Cal, someone other than you would have to be the trustee. Also, you would not be able to borrow against the trust property under most circumstances, and if the property were sold within your lifetime, you would have to pay more capital gains tax than you would if you keep the home in your name or in an ordinary revocable trust.
There are alternatives to Medi-Cal. You will turn 65 in three years, which will allow you to enroll in Medicare which will take care of most of your medical expenses. You could also get Medicare early, if you qualify for Social Security Disability Insurance (SSDI), but since it takes two years of collecting SSDI benefits to get Medicare, that's probably not an option for you. What you need is something to cover your medical needs until you turn 65.
The answer may be for you to buy insurance through the Major Risk Medical Insurance Program, which is a state program that provide you with medical insurance with health insurance providers such as Blue Cross, Blue Shield, and Kaiser Permanente. The cost is fairly low regardless of any pre-existing conditions. Perhaps more importantly, after three years you can transition to ordinary health insurance with your major risk provider and they can't deny you coverage.
You can find additional information about Major Risk Medical Insurance Program on the internet at www.mrmib.ca.gov, and you can obtain an application by calling (800) 289-6574.
Len & Rosie
Dear Readers:
You should be aware of the recent changes in federal Medicaid law. This February, the federal government enacted the Deficit Reduction Act, or "DRA", which will have a far-reaching effect on the Medi-Cal program in California. We have an update for you. So far, the California Department of Health Services has implemented only one new rule.
When one spouse of a married couple applies for Medi-Cal benefits, the spouse at home is allowed to keep exempt assets such as the home, one vehicle, retirement accounts and certain annuities, plus $99,540 in non-exempt assets. This amount is called the Community Spouse Resource Allowance, or "CSRA" and it is increased each year for inflation. Under the old rules, it was possible to increase the amount of CSRA to allow the a low-income at-home spouse to keep more money for his or her own needs and avoid being improvised by the cost of long term care.
Under the new rules, the income of both spouses counts towards whether or not the CSRA may be increased in any particular case. But many retirees have single-life pensions that will pay nothing to a surviving spouse and therefore should not be counted when increasing the CSRA for a low-income at-home spouse. These pensions won't be available to provide for the at-home spouse after the spouse in long term care passes away. The new rules do not take this into account. This will make is tougher for some couples to qualify a spouse for nursing home Medi-Cal while retaining enough assets to get by.
Other than that, there is no news. Under the DRA, the "look back" period for which a Medi-Cal applicant must disclose gifts made before applying for benefits has been increased from thirty months to five years. Even worse, the penalty for making a gift will start when the Medi-Cal application is filed and not when the gift was made, as is the case under today's rules. But we have no idea when these new rules will come into effect.
Officials from the California Department of Health Services have informally stated that they expect to implement the rest of the new rules in 2007 or 2008. This is bureaucrat-speak for "we don't know when we'll get around to it", so the forecast is still cloudy. As soon as they figure it out and tell us, we'll tell you.
Len & Rosie
Dear Len & Rosie,
Aunt Katie is in a rehab center. Her doctor said she will not be able to return to her home of 50 years. She has only my mother an my mother's children as her living relatives. I have been assisting aunt Katie for the past 20 years. She refused to give anyone a power of attorney. Now, she is not in a position to do so. She has social security benefits, a VA pension, and her house has a reverse mortgage. At this point ,I do not know what to do about aunt Katie's problem. Please help.
Jack
Dear Jack,
Your aunt is in a difficult situation. On one hand, it is likely to be very easy to qualify her for Medi-Cal nursing home benefits. All you would have to do would be to spend her excess cash paying down her reverse mortgage, and chances are, there isn't a lot of cash. She can still own her home and collect Medi-Cal nursing home benefits, as long as she, or her authorized representative (you can do it) checks the box on her Medi-Cal application stating that she intends to return home, if she is ever able to do so. Whether or not she has a realistic chance of returning home doesn't matter.
There are two problems here. She has a reverse mortgage. This is a loan against her home for which she doesn't have to make any payments. But the loan becomes due and payable when she dies, or if she moves out of her home. If your aunt Katie moves into a nursing home, the lender may call the loan. You may have to refinance the loan with a conventual mortgage, or perhaps an equity line of credit.
Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at (707) 996-4505, or on the Internet at www.lentillem.com. Len also answers legal questions each weekday, Noon-12:45 PM, and Sundays, 4-7 PM, on KGO Radio 810 AM.
0 Comments | Add Comment Property Tax
My mother has a trust and owns her house within the trust. She rents it out. My brother and I want to hang on to the house after our mother dies and we want to continue to rent it, but we want to avoid the step up basis in property taxes. How can we do this?
Amy
Dear Amy,
You are confused, but that's OK. Taxes are confusing. California's property tax has absolutely nothing to do with capital gains tax, federal estate tax, or basis. And that's good for you.
When your mother dies, everything that she owns is subject to federal estate tax. Fortunately, there will not be any tax due, as long as the total value of your mother's assets upon her death is less than $1,500,000 if she were to die in 2004 or 2005. This amount is called the "unified credit exemption equivalent", which is IRS doublespeak for "What mom can give away now or own on her death tax free." Under the tax law enacted in 2001, this exemption will increase to $2,000,000 in 2006 and $3,500,000 in 2009. In 2010, there will be no estate tax regardless of how rich your mother is, but in 2011, this law will be automatically repealed, and the exemption will fall back down to $1,000,000.
Anything your mother owns on her death that is subject to estate tax gets a step-up in cost basis, whether or not any estate tax has to be paid. Your mother's basis in her rental property, which was originally what she paid for it, will increase to the property's value on her date of death. What this means is that you and your brother can sell the property after your mother's death at its date-of-death value and pay no capital gains tax at all. Also, if you continue to own the property as a rental, you and your brother will have a much greater cost basis that you can depreciate over time to save on your income taxes.
Under Proposition 13 and Proposition 58, your mother can pass to her children her home and the next $1,000,000 of her other real property with no property tax reassessment. That means you and your brother will inherit the rental property and pay the same amount of property tax your mother pays today. You should know, however, that there is no way to avoid a property tax reassessment if you buy out your brother's half of the rental after your mother's death. If you want to wind up owning the entire rental property, your mother should have an attorney review and update her trust. It may be possible for her to leave you the entire rental and to give your brother an equivalent amount of cash. This way, you could inherit the entire property and still avoid a property tax reassessment.
Len & Rosie
Dear Len & Rosie,
Last year, my grandmother gifted her home to me, to protect her home because she was on Medi-Cal. I was shocked to discover the home was reassessed and I received a $6,016 dollar property tax bill! After contacting the assessor, I learned that this could have been avoided if the home was first passed through my mother, retaining the original base value. I also learned that I can still rescind my deed, return the home to grandma, then process the transfer back through my mother, then to me. However, this is not without risk. The process is up to the discretion of the county assessor, based upon original intent. Also, I lose ownership until is comes back from my mother. My brother would have to sign for this since he is now her legal guardian, and I am worried that he will not cooperate. Is it worth the risk?
Gene
Dear Gene,
Under Proposition 13, your grandmother's home was not subject to a property tax reassessment for as long as she owned it, and you may have assumed that the grandparent-to-grandchild transfer reassessment exclusion would have protected you from a property tax increase when your grandmother gave you her home. Unfortunately, you were wrong. It's a bit more complicated than that.
California Revenue and Taxation Code section 63.1 allows grandparents to transfer their home and $1,000,000 of other real property to their grandchildren, but only if their child who is the parent of the grandchildren is dead at the time of the transfer. The grandparents' relationship with the other parent (the son or daughter-in-law) also has to be severed, either by death, divorce, or remarriage.
For the transfer to qualify for the grandparent reassessment exclusion, your mother had to be deceased, and your father, if alive, had to have either divorced your mother prior to her death, or remarried after her death, or was never married to your mother at all. It is confusing, so do not be surprised that you made a mistake.
It can be fixed, but we cannot guarantee to you that the county assessor and your brother will cooperate with you. Your brother, and even your mother, may not like the idea that you are going to wind up with your grandmother's property. So before you do anything, clear it with the county assessor ahead of time and try to get everyone in your family on board.
Len & Rosie
Dear Len & Rosie,
My father died in May of 2004 and I inherited his home. I used the attorney who drew up my father's trust. I did everything that he said to do. Now almost two years later I hear that I should have had the house reassessed at the time of his death so I would be protected from increased property taxes because of Prop. 13 and the trust. As it stands now the assessed value of the house is very low, as is my property tax. I do not want to open a can of worms. I am upset however that my attorney did not advise me to do this at the time. Is it too late?
Kathleen
Dear Kathleen,
Don't worry so much. You have a common misunderstanding. You have confused the assessed value of your home for property tax purposes with the basis value of your home for capital gains tax purposes. They are apples and oranges and have nothing to do with one another. Everything is OK.
When your father died and you inherited his home, the county assessor did not reassess the home and increase the property tax you pay because of the parent-to-child transfer reassessment exclusion enacted by the voters with Proposition 58. Your attorney filed the Prop. 58 claim form when he or she transferred the property to you out of your father's trust.
Property tax has absolutely nothing to do with the basis value of your home. Everything your father owned upon his death, including the home, was subject to federal estate tax. There should have been no estate tax due, because the first $1,500,000 of your father's assets were protected from estate tax by his gift and estate tax unified credit. But because his home was subject to estate tax, its cost basis of the home on your father's date of death.
This is the only reason to have the home appraised (not reassessed). If you obtain a professional appraisal of your home, as of your father's death, then you will be able to calculate the amount of capital gains tax, if any, you'll have to pay if and when you sell the home. Appraising the home will have no effect on your property tax.
It's been two years, but there's no reason why you cannot have an appraisal done now. The home's value two years ago can be calculated easily enough, because appraisers have access to historic data concerning property sales in your community. Just make sure the appraiser is certified, or is a California Probate Referee, so the appraisal will hold some wait if the IRS ever looks at it in an audit.
Len & Rosie
Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at (707) 996-4505, or on the Internet at www.lentillem.com. Len also answers legal questions each weekday, Noon-12:45 PM, and Sundays, 4-7 PM, on KGO Radio 810 AM.
