You need an estate plan, even if it’s a simple will.

Dear Len & Rosie,

I would like some advice. My friend and I bought a home 24 years ago. We are listed as half owners on the Deed of Trust. Last October, my friend passed away. We never had the home listed as joint tenants on the Deed. Am I going to have a problem having the Title changed into my name only? My friend didn’t have a will or any children. 

Dear Cathy,

First of all, don’t assume the home was not in joint tenancy. In your email, you referred to the Deed of Trust. This isn’t the deed to your home. Instead, a Deed of Trust is your mortgage lender’s recorded lien on your home that gives your lender the right to have your home sold in a foreclosure if you default in your loan payments.

The deed you need to examine should be a “Grant Deed”, or sometimes a “Corporation Grant Deed” or “Individual Grant Deed.” If you do not have this document, you can obtain a copy from your local County Recorder for a very small fee. Do not bother paying $20 or $25 for a certified copy. You’ll never need one. Just get a copy.

If the deed says, “Cathy and Friend, as Joint Tenants”, or “Cathy and Friend, as Joint Tenants with Right of Survivorship” then it’s easy. All you need to do is to record your friend’s certificate of death with an Affidavit of Death of Joint Tenant. The property won’t even be reassessed under Proposition 13, because there’s a transfer exemption for transfers on death between cohabitants (you may need a lawyer’s help for this).

If the deed doesn’t say it’s a Joint Tenancy, then you have serious problems. If it’s not a Joint Tenancy, it’s a Tenancy in Common, and that means your friend’s half of the home belongs to his or her probate estate. Since your friend died without a will, his or her probate estate passes by “intestate succession,” the law about who gets what when someone dies without a will. The bad news is that’s not you, because you and your friend were not married or registered as domestic partners with the California Secretary of State. This means your friend’s family, even if they are distant relatives, are entitled to inherit your friend’s half of your home.

If this is the case, then your best bet may be to lie low and hope that nobody notices you’re not on title to the entire property. You will have to deal with this if you ever try to sell or borrow against the property, but you don’t have a duty to deal with the situation now. What you really ought to do is to review the deed to the home with a trusts and estates attorney.

Here’s the lesson for the rest of our readers: You need an estate plan, even if it’s a simple will, because if you don’t you may leave a giant mess behind that your loved ones may not be able to clean up.

Len & Rosie

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