The Pros and the Cons of a Revocable Trust

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 revocable trust?

Brad

Dear Brad,

The good news is that everything your father has done so far will allow his home and other assets to avoid probate administration in the courts, and his home will also get a new cost basis upon his death, allowing you and your brother to sell the home after your father’s death and pay no capital gains tax, except on post-death appreciation, if any.

The bad news is that an ordinary revocable trust does nothing to protect your family from having to pay off a Medi-Cal estate recovery claim. Your father can qualify for Medi-Cal benefits if he has less than $2,000 in countable assets. Your father’s home doesn’t count, neither does life insurance with no cash surrender value, retirement accounts and personal possessions. But that’s just Medi-Cal eligibility.

If your father receives Medi-Cal nursing home benefits at any age, 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.

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

To those readers who are thinking of disinheriting a child, see an attorney now

Dear Len & Rosie,

My uncle died with a will that was purchased on the Internet by my wife leaving his estate to his two stepchildren, my sister and I. The will was signed at the hospital the night before he had surgery. He was uneducated and barely able to read and write so my wife carefully read the will to him in the presence of two of his close friends and a nurse. He has a son that he has not seen for forty years and intentionally left him out of the will. I was named as the executor of his estate. The son told our probate lawyer that he is going to contest the will. What are the chances that he can break this will and take the entire estate for himself?

Ernest

Dear Ernest,

As the nominated executor named your uncle’s will, you need to file a court petition to admit the will to probate. When you do that, a notice of hearing, together with a copy of the petition, must be mailed to your uncle’s estranged son. This gives your cousin the opportunity to object to the validity of his father’s deathbed will. He may have a case.

There’s a legal concept called “undue influence”. The law recognizes that sometimes it is possible to convince or coerce someone into doing something they do not really want to do. The elements of undue influence are a “confidential relationship”, “active procurement”, and “unjust enrichment”. If your uncle trusted you and your  wife and relied on your help, advice, and support, that is to say, if he confides in you, then a confidential relationship exists. Since your wife bought your uncle’s will on the Internet and brought it to him, she procured its creation. Finally, since you and other relatives are now inheriting the estate when you would not have done so before, it can be said that you have been unjustly enriched by the will.

If your cousin can show all of that, and it looks like he can, then the burden of proof shifts to you to prove in court that your uncle really knew what he was doing when he signed his will, and that his will accurately reflects his wishes as to the distribution of his estate. If your cousin hires a lawyer, objects to the admission of the will in court, and wins, then your uncle’s will shall be thrown out and the court will look to your uncle’s previous will, if he has one. If this will is valid and also disinherits the son, then you may not have to worry about him. He’ll have little interest in throwing out his father’s will if there’s no money in it for him. However, if your uncle has no previous will, then his son will inherit the estate.

This is water under the bridge for you, but the lesson is that you get what you pay for. If your cousin files a will contest, your case would be better if your uncle had an attorney prepare his estate plan, if only because the attorney would have been a neutral witness as to your father’s intentions and his mental capacity. To those readers who are thinking of disinheriting a child, see an attorney now. Waiting until the last minute and signing documents in the hospital the night before surgery is only asking for trouble.

Len & Rosie