The Importance of funding your trust with your assets.

Dear Len & Rosie,

My husband died three weeks ago. He had a trust of his own. If he has some accounts that are not in the trust, and have no beneficiary listed, who inherits those? He has two sons. I, his wife, am co-executor of his will and co-trustee of his trust with his oldest son.

Margot

Dear Margot,

Once your husband created his trust, his only real job after that was to fund his trust with his assets. Trusts avoid probate, but only for those assets that owned titled in the name of the trustee of the trust. If he left accounts in his name alone, outside the trust, and without any joint tenants or beneficiaries, then he didn’t finish the job. Now it’s up to you and your step-son to do it.

These non-trust assets will pass under the terms of your late husband’s will. Since he has a trust, it’s more likely than not that the will is a “pour-over will” that leaves the estate to the trust.

If the non-trust assets are worth less than $150,000 in total, then there’s no probate necessary. The persons inheriting these accounts, the “successors in interest”, can collect the accounts directly, without probate, using small estate declarations under California Probate Code section 13101. You’ll have to wait 40 days or more after your husband’s date of death to do this, however, and there are other issues to consider, such as whether or not the trust requires a taxpayer identification number obtained from the IRS.

If the total value of the non-trust accounts in the probate estate is worth more than $150,000, then there are only two options. The first is probate. This is expensive and time consuming.

The alternative to probate is to petition the court seeking an order declaring that these assets are really owned by the trust, no matter what the account statements say. There’s an appellate court decision in California, called “Estate of Heggstad”, that basically stands for the proposition that if your husband’s trust document includes a list of trust assets, then the trust document itself may be a valid assignment of assets to the trust, despite your husband never having gone to his banker and broker to retitle his accounts into the name of the trust.

There’s also another appellate decision in a case named “Heaps vs. Heaps” that can be used to drag into a trust non-trust assets that were purchased with trust property. A good example of this is if your husband sold a home held within his trust and put the money into a brokerage account titled in his name alone.

These techniques don’t work in every case, so sometimes a probate is necessary. You and your step-son should gather your husband’s account statements, deeds, and stock certificates, together with his trust and other estate planning documents, and review everything with a trusts and estates attorney.


Len & Rosie

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