Disinheriting

Dear Len & Rosie,

My parents have a revocable trust naming my brother and I as beneficiaries. My parents want to change the trust eliminating my brother. Their trust is very simple and their assets are moderate.  Those consist of their home, and bank accounts. Total assets are below $500,000. Would it be easier to dissolve the trust and have them add me as joint owner of the home with right of survivorship as well as adding my name to the bank accounts as joint owner with right of survivorship? My brother also has a power of attorney which needs to be withdrawn. How do they do that?

John

Dear John,

Your parents have the right to leave their assets to anyone. They may certainly disinherit your brother if that’s what they want. What you need to understand is that when your brother finds out, he’s going to be upset and angry, and he will want to sue. This isn’t to say your parents shouldn’t change their estate plan. Our point is that since there is a prospect of litigation, they should make an effort to provide you with the best legal defense if there is a dispute after their deaths.

That means no shortcuts. They should see their attorney, without you in the room, the building, or even in the parking lot waiting in the car. Any estate plan, even a deed, can be overturned on the basis of undue influence, which is a three-legged stool. The first leg is a “confidential relationship”, meaning that your parents trust and confide in you. The second leg is “active procurement.” If you set up the appointment and join in the meeting it begins to look like it was all your idea all along. The third leg is “unjust enrichment”, which really just means that you’re getting more than your nominally “fair” share. If all three conditions are met, the gift to you is legally presumed to be invalid. The burden of proof will be on you to show that this is what your parents really wanted, and it’s really hard to do that if there aren’t any witnesses other than you.

Your parents should see their attorney and amend their trust. The attorney and his or her staff will be disinterested witnesses as to your parents’ mental capacity and their intent to favor you over your brother. The attorney should take careful notes. If there is a lawsuit, you could certainly testify as to exactly why your parents are leaving it all to you, but that’s self-interested testimony that can easily be disregarded. Your inheritance could be cut in half depending on the outcome if your brother fights you.

We would almost never advise your parents to put your name on the deed to their home. They could change their mind about leaving it all to you. They may want to sell the home or borrow against it. If so, why should they have to ask you for permission? If you were to get sued, their home could wind up getting a judgment lien recorded against it. It’s best for your parents that they leave the home to you in their trust.

As for the power of attorney, they just need to sign a new one that revokes the one naming your brother as attorney-in-fact. If your brother has a copy of the old power of attorney, they should notify him of this change. If he doesn’t have a copy, then he doesn’t need to know.

Len & Rosie
 

Federal Gift and Estate Tax and Medi-Cal Gifting

Dear Len & Rosie,

My Dad is 90 years old and in excellent health except for losing his eye sight to macular degeneration. He can no longer live alone. He has approximately $300,000 in the bank. He has three children, and I understand that he can give us each $14,000 per year. Are there any circumstances that he can give us more? The reason for this question is the rule about not giving gifts over $14,000 for a three year period before you enter a nursing home.

Sandy

Dear Sandy,

You have mixed up the gifting rules for Medi-Cal eligibility with the gifting rules for Federal Gift and Estate Tax. Under gift and estate tax law, your father may give up to $14,000 each year to as many people as he wishes, without having to report his gifts to the IRS on a gift tax return (IRS Form 709). But federal gift tax law has absolutely nothing to do with Medi-Cal. Any gifts that your father may make will be subject to both the $14,000 gift tax exclusion and Medi-Cal’s transfer penalty rules.

If your father ever needs nursing home care and applies for Medi-Cal, he will have to disclose every gift he made in the thirty months (not three years) prior to applying for benefits. Each gift triggers a transfer penalty period during which your father cannot receive Medi-Cal. This does not mean that your father cannot get Medi-Cal benefits for thirty months after he makes a gift. The transfer penalties are applied retroactively to when the gifts were made. If your father makes gifts and waits out the transfer penalty periods before applying for Medi-Cal, he’ll be eligible.

If all of this sounds complicated, it’s because it is. Part of Medi-Cal planning is devising a gifting strategy to minimize the transfer penalties, and it is appropriate to start Medi-Cal planning when a person such as your father is in a nursing home, or suffers from an ailment that is likely to put him in a nursing home someday.

To make it even more complicated, federal law has changed. Once California implements the new rules, you’ll have to disclose gifts made in the five years prior to filing the Medi-Cal application, and Medi-Cal transfer penalties will no longer be applied retroactively. The bottom line: Don’t do this at home. It’s also vitally important to remember that while your father can give his money away, you can’t, at least without his permission. If you are going to transfer money out of your father’s name on his behalf, you had better have a durable general power of attorney that specifically authorizes you to do this gifting. Otherwise you’re stealing your father’s money.

You should also consider whether or not your father will ever need nursing home care. It’s certainly a possibility, but absent some other disability, a nursing home is not usually an appropriate care environment for the elderly blind person. However, if your father considers the risk of spending his money on nursing home care unacceptable, he should consult with an elder law attorney and start Medi-Cal planning now, so he’ll be eligible for Medi-Cal, or at least be closer to being eligible, if he needs nursing home care in the future.

Len & Rosie