Proper estate planning

By McNichol & Tillem

Dear Len & Rosie, My father has added my sister to the deed of his house. He is very ill and may soon be placed in long-term care.

He has asked each of the four children to share in the proceeds of the sale of the home upon his death. What steps should be taken to ensure a smooth transition when its time to sell his house and split the proceeds without hard feelings and tax implications? -- Chuck

Dear Chuck, While it may appear that your father has saved some money by simply giving the home to your sister, looks are deceiving. Your father did precisely the wrong thing to shelter his home. After his death, there are likely to be tax complications, Medi-Cal estate recovery claims, and maybe even fighting among the children.

If your father ever collects Medi-Cal nursing home benefits (and if he goes to long-term care, he probably will) then any assets he owns upon his death will be subject to Medi-Cal estate recovery claims brought by the California Department of Health Care Services. If your father is still on the title to his home as a joint tenant, then his half of the home will be subject to this claim.

Second, your father’s gift of the home has likely blown the step-up in cost basis that would otherwise occur if he owns the home upon his death. Upon your father’s death, only the portion of his home subject to federal estate tax will get a new cost basis. If your father retained no interest in the home in order to avoid Medi-Cal claims, then when your sister sells the home after your father’s death, she will probably have to pay a great deal of capital gains tax. If he owns half of the home, then only his half may get a new cost-basis upon his death.

Third, if the property belongs solely to your sister today, or  it passes to her alone upon your father’s death, then there’s no legal guarantee that she will honor her father’s wishes by dividing it equally amongst all four children. She could simply say that it belongs to her alone, and you would have to sue her to get your share — and there’s no guarantee that you’ll win.

What your father ought to do is to get the property back into his own name, and then transfer it into an irrevocable trust designed to shelter the home from Medi-Cal and preserve the step-up in cost basis. After your father’s death, the trustee of the trust can sell the property, without paying any capital gains tax, and then divide the money the way your father wants.

There is no substitute for proper estate planning, especially if you collect or may collect Medi-Cal benefits. The money your father spends now to do it right will be repaid after his death in money saved from taxes and Medi-Cal estate claims.

Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, 996-4505 or www.lentillem.com. Len also answers legal questions each weekday, noon to 12:45 p.m., and Sundays, 4-7 p.m., on KGO Radio 810 AM.

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