Should you add your children’s names to the title of your homes?

Dear Len & Rosie,

My father died and left some cash and the house to my mother. She is 82 years old. She has put the house in my name as well as hers. Her doctor has informed her she needs a pacemaker, and now she wants to put the house solely in my name.

I have several concerns. The first is tax purposes for me. How will this affect me and my husband’s taxes for the next year? I also have other sisters and a brother who will eventually inherit part of the home. Mom’s lawyer says that she is safe with just my name on the deed, but I am not sure.

Linda

Dear Linda,

We normally do not recommend to my clients that they add their children’s names to the title of their homes. One reason why is that if you get sued if you declare bankruptcy, your mother could lose her home. Also, she would not be able to sell her home without your permission.

There will not be any particular tax consequences to you this year if your mother signs her home over to you. Gifts are not subject to income tax. Your mother will have to file a gift tax return with the IRS, but she won’t have to send a check to the IRS unless she has given away more than $5,430,000 of gifts in excess of the annual gift tax exclusion (currently $14,000). You should have those problems.

The property tax of the home will remain the same. Thanks to Propositions 13 and 58 there will be no reassessment. You will lose the $7,000 Homeowner’s property tax exclusion unless you live in the home, but that will increase the property tax by less than $100. It’s no big deal.

The big deal comes in when you sell the home after your mother’s death. If she gives you the home to you, it will not get a new cost basis when she dies. If you ever sell the home, you will have to pay capital gains tax on the increase in value since either your father’s death.

You will have tax problems even if you don’t sell the home. There is no property tax transfer exclusion for transfers among siblings. If you add your brother and sisters on title the way your mother wants you to, either before or after her death, the home will get reassessed and the property taxes will increase dramatically.

Your mother would be much better off if she keeps the entire home in her name, and creates a revocable trust to both avoid probate and take advantage of the basis adjustment that will happen upon her death. As an added benefit, if the children get their shares directly from their mother instead of from you, there will be no property tax reassessment.

Your mother should seriously consider a transfer of the home only if your she is in a nursing home or is likely to need nursing home care and Medi-Cal benefits during her lifetime. And in that event, it’s still not best to simply give her home to her children. An irrevocable trust designed to shelter her home from Medi-Cal estate recovery claims is a better bet.

Len & Rosie

Providing notice of the existence of a trust to certain persons

Dear Len & Rosie,

I have a sister who is a drug addict and is usually out of contact with us. My other sister and my stepbrother and I are the beneficiaries of my step-father’s living trust. Is there anything I can do ahead of time to ensure that we don’t have to find her when my step-father dies?

David

Dear David

When an ordinary revocable trust becomes irrevocable upon the deaths of the settlors  (the persons creating the trust), then the trustee is required to provide notice of the existence of the trust to certain persons, including all of the beneficiaries, other trustees, and the people who would inherit from the trust settlors had they died with no estate plan at all.

If your step-father created the trust on his own, presumably after your mother’s death, then you have nothing to worry about. Your sister, his stepdaughter, isn’t entitled to any notice regarding the existence of the trust unless she’s named as a beneficiary.

If your step-father’s trust was created by him and your mother, then your drug addicted sister is entitled to notice of the trust under California Probate Code section 16061.7. If you know where she resides, then the trustee’s attorney can mail the notice to her after it is signed by the trustee, with a cover letter explaining that she’s not entitled to anything. If she cannot be located after a diligent search, then that’s OK too. The trustee does not have to send the notice if your sister cannot be located.

Alternatively, it may be possible for your stepfather to revoke the trust he created with your mother, and transfer everything to a trust he creates for which your sister will not be entitled to notice.

It’s difficult to deal with a drug addicted loved one in an estate plan. Frequently, it does more harm than good to leave a substantial sum of money to someone suffering from an addiction. There are generally two ways of dealing with this challenge. The easiest way is to disinherit the drug addicted child, but that can be harsh.

An alternative would be to leave an inheritance to the drug addicted beneficiary within a discretionary trust in which the trustee has the absolute right to withhold most distributions unless the beneficiary passes a drug screening test. The trust would be there to pay for drug rehabilitation, but not the drugs themselves. The problem with this alternative is that the person serving as trustee becomes his brother or sister’s keeper. The trustee is the person who has to say no to the drug-addled demands of a suffering beneficiary.

That’s why many families take the easy way out by disinheriting the drug addicted child, leaving everything to the other children, and rely on a legally unenforceable handshake promise from the family to help out the drug addicted child when it’s appropriate.

Len & Rosie