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 me as beneficiaries and co-trustees. 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?
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 fatherís 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 fatherís home doesnít count, neither does life insurance with no cash surrender value, retirement accounts and personal possessions. But thatís 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 55th 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 fatherís 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 fatherís 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 fatherís 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 ďincidents of ownershipĒ) that cause the home to be subject to Federal Estate Tax upon his death. The inclusion of the home in your fatherís 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 fatherís 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 fatherís possessions and life insurance. Medi-Cal recovery does not extend to your fatherís personal possessions and life insurance policies and even retirement accounts are not subject to Medi-Cal estate claims unless they pay into your fatherís probate estate upon his death. To protect his insurance, IRAís and other retirement accounts, your father need only name his children as pay-on-death beneficiaries.
Len & Rosie
List of Eleven (plus one)
We would like to share with you something that we share with each of our trust clients. Itís really important, our clients like it, and we think that your family can benefit from it as well. You may have seen this in the column before. We print it year after year. Consider it as a gentle reminder to get yourself organized. One of the most tedious tasks in administering a trust or an estate is finding the decedentís estate planning documents and asset information. Frequently, children or even spouses have no idea where their parents or spouse kept these important documents.
After you pass away, the last thing you should want is for your loved ones to have to search through your belongings in a morbid scavenger hunt to find your will, stock certificates, or other important papers. They shouldnít have to lift up your mattress to look for your safe deposit box key. They shouldnít have to waste a month waiting for new account statements to come in the mail so they can figure out where you invested your savings.
To avoid these difficulties, you should organize your personal and financial data. This is where the list comes in. Collect the information described in this list and give a copy to your children or close relatives, or keep it somewhere safe and let your family know where to find it. In case something happens to you, the List of Eleven is one of the best ways to ensure that your relatives can find all your vital records.
The List of Eleven Plus One
1. The name of the bank where you have your safe deposit box, its number, and the location of your key.
2. The numbers for all of your insurance policies, health, life, auto, home, burial, etc., and the names and addresses of the agents for each policy.
3. A list of your stocks, bonds, mutual funds, and the name and address of your broker.
4. The names of the banks or savings and loans for each of your accounts, and the account numbers, or even copies of account statements.
5. The location of your cemetery plot or mausoleum niche.
6. The location of your will or trust and the name of your attorney.
7. Your credit card numbers.
8. Your Social Security Number.
9. The name and address of your mortgage holder, the account number, and the amount of the outstanding debt.
10. The name and address of your accountant, and where your past income tax returns are located.
11. The type of memorial or funeral service you want.
11 Plus One. These days, many people receive account statements and pay their bills online, leaving no paper trail at home. Itís important for your loved ones to be able to access your email and online accounts so they can wrap things up when you are gone.
If you think this is too hard to do yourself, consider how hard it will be for your children to deal with after you pass away. Take a few minutes to get organized.
Len & Rosie
Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at (707) 996-4505, or on the Internet at www.lentillem.com. Len also answers legal questions each weekday, Noon-1 p.m. and Sundays, 4-7 p.m. on KGO Radio 810 AM.