Avoiding Medi-Cal recovery and understanding a step up in basis with regard to capital gains tax

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.

If your father had died prior to January 1, 2017, however, the trust would not have protected his home. While avoiding probate, the home and other trust assets would have been subject to a Medi-Cal Estate Recovery Claim from the California Department of Health Care Services (DHS).

Fortunately, as of January 1, 2017, only the probate estates of deceased Medi-Cal recipients are subject to such estate claims. If a recipient has a surviving spouse, a disabled or blind child, or dies without a probate estate as all of his or her assets pass outside of probate, then there is no claim at all.

In your father’s case, his plain vanilla revocable trust will protect his home from Medi-Cal claims provided that it isn’t sold while he is alive. If he sells the home, which is exempt under Medi-Cal rules, the proceeds of the sale of the home would disqualify him from continued Medi-Cal benefits, but would still be exempt from the Medi-Cal Estate Recovery Claim. Also, if the home is rented out from the revocable trust to generate income, that income will increase your father’s Medi-Cal Share of Cost.

You should not want this to happen. Therefore, if your family is contemplating selling the home during your father’s lifetime or renting it out to tenants, the home should be transferred to an irrevocable trust that would shelter the proceeds of the sale of the home, or any rental income from affecting your father’s Medi-Cal eligibility.

As for your father’s assets, if his checking account names a joint tenant or pay on death beneficiary, it will be exempt from the estate claim. If he owns an automobile, he should sign it over to a family member if he is no longer able to drive. Since the life insurance has beneficiaries, it will be exempt, and Medi-Cal doesn’t collect against personal possessions as they have no registered title so there’s no way of tracking them.

If your father has more than $2,000 in countable assets, he’s not eligible for Medi-Cal. If this is the case, an elder law attorney can help him qualify for benefits and verify that his assets will be exempt from the estate claim.

Len & Rosie

Protecting Inherited property

Dear Len & Rosie,

My sister and I inherited a two million dollar apartment building. My wife of thirty-one 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