Is it really necessary to restate your A/B Trust

Dear Len & Rosie,

We have a living trust that we created ten years ago. I believe the trust is called an “A/B Living Trust.” Over the last ten years we have kept all assets in the trust.  The company that created the trust has called and said that it is a good idea to restate the trust especially because it is an A/B trust. Of course they want us to pay for it. Is it really necessary to restate the trust given that we haven’t changed our beneficiaries, or our assets?

Christine

Dear Christine,

The way your A/B trust works is that upon the death of the first of you to die, the trust is divided into two or sometimes three subtrusts. The A trust (for the above-ground spouse) holds the surviving spouse’s assets.  The B trust (for the below ground spouse) holds the dead spouse’s assets.

The B trust, frequently called the “Bypass” or “Exemption” or “Decedent’s” trustis an irrevocable trust funded with the portion of the deceased spouse’s assets that pass free of Federal Estate Tax. The surviving spouse usually gets all of the income of the B trust, and may dip into the principal of the B trust if the A trust assets and assets outside the trust are insufficient to pay for the surviving spouse’s needs.

When you created your trust, there was a lot of uncertainty as to the future of the Federal Estate Tax. Under the 2001 tax law, the Federal Estate Tax exemption was supposed to drop to only $1,000,000, in 2011. So if you and your spouse had more than that ten years ago, then an A/B trust was right for you, at that time.

Times are different now. The estate tax exemption today is $5,430,000, and will increase annually with inflation. The surviving spouse can also take the dead spouse’s exemption for himself or herself, allowing a married couple to pass in excess of $10,000,000 without paying any estate tax.

You may want to keep the A/B trust the way it is if you and your husband want to restrict the ability of the surviving spouse to change things. This can be very important in blended families with children from prior marriages, because while most spouses want to leave everything to one another, they still want their children to inherit it all in the end.

Having said that, what you should do is to amend your existing trust by replacing the entire document with a restated trust. This is better than making an entirely new trust, because you won’t have to remove your assets from your old trust and put them into a new trust. Most well-drafted ordinary trusts for married couples include an optional disclaimer trust, so that if it turns out that you are too wealthy for estate tax purposes, the surviving spouse may disclaim assets passing from the deceased spouse in order to avoid the estate tax on the second death. Disclaimed trust assets would then be held in the disclaimer trust, which still provides income to the surviving spouse and the ability to dip into the trust principal if needed.

Len & Rosie

Joint Tenancy and Medi-Cal Recovery Claims

Dear Len & Rosie,

My wife and I and my recently deceased mother held title to a house in joint tenancy that all three of us bought together about seven years ago. My mother was on Medi-Cal for five years. Does Medi-Cal have a legal claim against this property? I was under the impression that joint tenancy property was immune from their claim but Medi-Cal’s claim form seems to indicate otherwise.

Richard

Dear Richard,

You and your wife will probably have to break out your checkbook. Joint tenancy property was once exempt from Medi-Cal estate claims, but that hasn’t been the law since October 1993. Prior to then, state Medicaid agencies could assert estate recovery claim against estates probated in the courts. Any asset that avoided probate, such as a home held in joint tenancy or within a revocable trust, was once exempt from Medi-Cal estate recovery.

That changed in October, 1993, when Congress enacted the Omnibus Budget Reconciliation Act, or “OBRA ‘93”. This law made significant changes in the way Medi-Cal estate recovery claims work. Under the federal government’s definition of the “expanded estate”, Medi-Cal is legally required to assert an estate claim against any assets owned by a Medi-Cal recipient upon his or her death. Since your mother owned one-third of your home when she died, that third is subject to Medi-Cal’s estate claim. The two-thirds you and your wife own together is protected from the estate claim.

There are exceptions to Medi-Cal recovery claims. If your mother was survived by a spouse, the claim would be deferred until after her husband’s death. If she was survived by a blind, disabled, or minor child, Medi-Cal has no claim at all. There is also a means of asserting a hardship waiver, but these waivers are difficult to come by and are most frequently granted only when you can show that care you provided to your mother at home kept her out of a nursing home, saving the state money. Unfortunately for you, it’s more than likely that you and your wife will have to pay off Medi-Cal’s claim.

It is too late for you and your wife, but any living person who is a recipient of Medi-Cal benefits can act now to protect his or her home and other exempt assets from Medi-Cal estate claims. One way of doing so is simply to give the property away to the children. However, this is usually a bad idea because an outright gift would result in a loss of the step-up in cost basis that happens when property is inherited. When the children sell the home, they’ll have to pay a great deal of capital gains tax that they would avoid if they were to inherit the property instead of receiving it as a gift.

Fortunately, it’s possible for a Medi-Cal recipient to shelter his or her home while preserving the step-up in cost basis by transferring the home into an irrevocable trust. These trusts are very different from most irrevocable trusts found in estate planning, and should be prepared only by an attorney experienced in Medi-Cal planning.

Len & Rosie