Elderlaw Advocates June 15, 2019
Dear Len & Rosie,
My parents have a revocable trust naming my brother and me as beneficiaries. My parents want to change the trust eliminating my brother. Their trust is very simple and their assets are moderate. Those consist of their home, and bank accounts. Would it be easier to dissolve the trust and have them add me as joint owner of the home with right of survivorship as well as adding my name to the bank accounts as joint owner with right of survivorship? My brother also has a power of attorney which needs to be withdrawn. How do they do that?
Your parents have the right to leave their assets to anyone. They may certainly disinherit your brother if that’s what they want. What you need to understand is that when your brother finds out, he’s going to be upset and angry, and he may want to sue. This isn’t to say your parents shouldn’t change their estate plan. Our point is that since there is a prospect of litigation, they should make an effort to provide you with the best legal defense if there is a dispute after their deaths.
That means no shortcuts. They should see their attorney, without you in the room, the building, or even in the parking lot waiting in the car. Any estate plan, even a deed, can be overturned on the basis of undue influence, which is a three-legged stool. The first leg is a “confidential relationship”, meaning that your parents trust and confide in you. The second leg is “active procurement.” If you set up the appointment and join in the meeting and start speaking for your parents it begins to look like it was all your idea. The third leg is “unjust enrichment”, which really just means that you’re getting more than your nominal “fair” share. If all three conditions are met, the gift to you is legally presumed to be invalid. The burden of proof will be on you to show that this is what your parents really wanted, and it’s really hard to do that if there aren’t any witnesses other than you.
Your parents should see their attorney and amend their trust. The attorney and his or her staff will be disinterested witnesses as to your parents’ mental capacity and their intent to favor you over your brother. The attorney should take careful notes. If there is a lawsuit, you could certainly testify as to exactly why your parents are leaving it all to you, but that would be self-interested testimony which may be disregarded.
We would almost never advise your parents to put your name on the deed to their home. They could change their mind about leaving it all to you. They may want to sell the home or borrow against it. If so, why should they have to ask you for permission? If you were to get sued, their home could wind up getting a judgment lien recorded against it. It’s best for your parents that they leave the home to you in their trust.
As for the power of attorney, they just need to sign a new one that revokes the one naming your brother as attorney-in-fact. If your brother has a copy of the old power of attorney, they should notify him of this change. If he doesn’t have a copy, then he doesn’t need to know.
Len & Rosie
Dear Len & Rosie,
My sister recently divorced. She was able to keep her home, but she had to pay her ex-husband $200,000 for his half. Our mother, who is 82 and is worth over $2,000,000, gave him the money to get him off the title to my sister’s home.
What are the tax implications of this? My mother says she can take the money from my sister’s inheritance. Everyone thinks this is a good idea. How do we do it? Should my mother be on title to the home with my sister? Should my sister give our mother a promissory note even though she wouldn’t be able to make payments on it?
When a parent gives money to a child, it is presumed to be a gift and not an advancement against the child’s inheritance. The best way of dealing with this, assuming your mother doesn’t want or need the money back during her lifetime, is for her to amend her estate plan to take this gift into account. She can leave each of her other children $200,000 off the top to make up for this gift, and then leave everything else equally among the children, assuming that this is what your mother wants to do.
There are not going to be any adverse tax consequences to this gift. Your mother will have to file a gift tax return, IRS Form 709, with her income taxes next year, but she will not have to pay any gift tax, because it will be paid by her federal gift and estate tax unified credit, which in 2019 protects $11,400,000 from gift and estate tax. Your mother’s $200,000 gift will reduce the amount of her assets that will pass free of estate tax by $185,000, which is $200,000 less the $15,000 annual gift tax exclusion. Unless your mother wins the lottery, this isn’t going to create any actual gift or estate tax liability. And just to be clear about it, your sister does not have to pay income tax on this gift at all. It’s a gift, not income.
Doing it this way is easier than your mother being on title to property with your sister, and it’s probably more fair. It is also better than having a promissory note your sister won’t be making payments on, because the tax authorities may assume the interest your sister doesn’t pay as having been gifted back to her. Your mother could even be made to pay income tax on interest payments she never receives. Do not open this can of worms.
If your mother has a trust (which she ought to have, given that a $2,000,000 estate earns a lawyer $33,000 in probate lawyer fees), she can amend the trust to include a schedule of advancements to make things even when she dies. This way, your mother can record future gifts made to each of her children and avoid having to go back to her attorney every time a child needs money.
Len & Rosie