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Elderlaw: 05/01/2018

Elderlaw Advocates May 1, 2018



Dear Len & Rosie,

My sister and I inherited a two million dollar apartment building. My wife of 31 years and I have a trust. I have no problem adding her name to the deed as a trustee, but could I stipulate in an agreement with my wife that if she asked me for a divorce down the road she would give the property back to me?

Douglas

Dear Douglas,

Everything you and your wife acquire during your marriage as a result of your labor is community property. But you did not earn your inheritance. Everything you inherit is your separate property, and will remain separate property unless you do something to transmute it into community property. California law requires an express transmutation in a writing that clearly states you are converting your separate property to the community property of you and your wife.

The trust documents we draft for married couples include a provision that says putting property into the trust, or taking it out of the trust, will not change its characterization as either separate or community property. Because of this provision, your inheritance should not be transmuted into community property if you put it into your revocable trust, even if your wife is a trustee. Our trust documents also allow either spouse to hold his or her separate property in his or her name as sole trustee, even though both spouses are trustees of the overall trust.

But that’s not playing it safe. We did not draft your trust document, so your trust could say otherwise. If you sign a deed putting your half of the apartment building into your joint trust and you get divorced later, your wife can make things very difficult for you. Remember the old saying that possession is nine-tenths of the law? If the two of you get divorced, she may refuse to sign a deed putting the property back into your name, even though it belongs to you alone. It would make your divorce more expensive than it would be otherwise if you have to fight her over this.

It’s a silly rule, but the best way to keep your separate property separate is to keep it separate.  The cautious thing for you to do would be to keep the property out of your wife’s name, even as a trustee. Create a new revocable trust just for your separate property. Keep it separate by never, ever transferring anything into your separate property trust that can be traced to any community property source. Name the children as your successor trustees instead of your wife. Or, consult with your estate planning attorney and review your trust to verify would happen to your apartment building if you were to get divorced.

On the other hand, you and your wife have been married for over three decades, and you can be fairly sure that she hasn’t stuck with you this long just to cash in on your inheritance.

Len & Rosie

Dear Len & Rosie,

My sister recently passed away. She did not leave a will, but she did have a pension of about $250,000 of which her sons are the beneficiaries. Her $200,000 insurance policy was left to me to pay off her son’s student loans, and the rest was to be distributed to myself and her grandchildren, nieces and nephews. She also left a credit card debt of $25,000. Does her pension or insurance qualify for probate? Are we responsible for paying off this debt? What options are available to us? Morally we feel responsible to pay the debt; is there a legal responsibility?

Patricia

Dear Patricia,

If your sister owned a home or other assets in her own name or within a revocable trust, then these assets are fully subject to the claims of her creditors, and her credit card debt would need to be paid off.

Retirement accounts and life insurance policies are different. They are not subject to probate as long as there are designated pay-on-death beneficiaries and they are not subject to the creditor claims of a decedent except for federal estate tax. That shouldn’t be a problem because the estate tax exemption is now $11,200,000. Retirement accounts and life insurance policies with named beneficiaries are also exempt from Medi-Cal Estate Recovery Claims against the estates of persons who received Medi-Cal benefits after age 55 or in a nursing home at any age.

Do not use the life insurance money to pay off your sister’s credit cards. Doing so would be throwing away money your sister left to her family. You’re better off using the money to pay off your nephew’s student loan debt, especially as student loan debt never goes away and in most cases cannot be discharged in bankruptcy. Honor your sister’s wishes and divide up what’s left the way she wanted.

Make sure that your nephews also understand that they shouldn’t use their mother’s retirement account to pay off her debts either. What they should do is to roll over their mother’s retirement account into Inherited IRAs. The rule used to be that any non-IRA retirement accounts had to be cashed in within five years of the participant’s date of death. Fortunately the Pension Protection Act, enacted into law on Aug. 17, 2006, allows retirement account beneficiaries to roll over any retirement account into an Inherited IRA. Your nephews should absolutely do this.

With Inherited IRA’s, your nephews will have to take Required Minimum Distributions (“RMD”) each year after their mother’s death. The amount of each distribution is based on each beneficiary’s age. Your nephews may also take out additional amounts, with no penalty, but all Inherited IRA distributions are subject to income tax unless they were rolled over from a Roth IRA or Roth 401k. The power of an Inherited IRA is that your nephews will be able to control when they pay the income tax due as the accounts are distributed. Instead of paying the income tax all at once, they may stretch out distributions over their own lives.

Len & Rosie

Dear Len & Rosie,

My sister has power of attorney over our mother and is now also the trustee of our mother’s trust. My mother has dementia. Does my sister have an obligation to her brothers in regards to what she is doing with our mother’s monies and how it is being handled in regards to our mother’s care? We are all named in the trust and have received money from our mother’s trust as our sister decides. Our concern is whether or not this money be left in the estate for our mother’s future care? Is she required by any law to report to the rest of us on how she is handling all of this? She is very difficult to deal with and she’s a know-it-all.

Dennis

Dear Dennis,

If your sister is smart, she would bury you in information – when a trustee shares information, account statements and the like with family members, trust develops and everyone gets along better. A trustee who hides information creates a situation in which family members think the trustee is up to no good. Trustees need to be honest, organized and diplomatic. Your sister appears to be lacking in at least one of these traits.

This is a case where we would have to review your mother’s trust to see what rights you have to distributions from the trust and what duties your sister has, if any, to account to you for her actions. But we can tell you what most trusts say about this.

Most trusts keep everything for the benefit of the parents, passing assets on to the children only after the parent or parents have died. It is very unlikely that your mother’s trust says anything about your sister the trustee making gifts to anyone without your mother’s direction. Sometimes gifting language is included in trusts to allow for gifting to reduce or avoid estate taxes or to qualify for Medi-Cal benefits, but that’s not very common. There is a very good chance that your sister has been making gifts in violation of the terms of your mother’s trust. In any event, your sister shouldn’t be making any gifts of anything your mother may need for her own care unless the trust document requires that she do so.

On the other hand, unless the trust document gives you a right to present distributions from the trust, you probably have no right to any information concerning the trust, let alone a trust accounting. Only beneficiaries presently entitled to distributions of trust income or principal have the right to an accounting, and, chances are, your mother is the sole beneficiary of the trust until her death.

You should review your mother’s trust with an attorney. Maybe you are entitled to an accounting, but probably not. If you are not entitled to an accounting now, the only way you can get one is if you are your mother’s agent under her Durable Power of Attorney or you are appointed by the court as her conservator.

Len & Rosie


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