Introduction To Estate Planning

affordable-care-actThis check-list would be incomplete if you are not reminded about open-enrollment for many health insurance plans, in general, and the Affordable Care Act (open enrollment has been extended through March 2014). Even if you currently have health insurance, there may be financial advantages to reviewing the costs associated with the ACA. This is particularly true for blended families, those where an ex-spouse continues to be covered or where you are straddling being on Medicare, but have children to cover. This checklist provides a starting point.

For more information, contact an estate planning professional for a comprehensive review of your plans.

farm-300Dividing some assets is a simple matter of math. Other assets, however, seem to pose as large a problem as the baby in the legend of King Solomon. Family farms, like that infant, are often both beloved and challenging to divide.

For those who have poured years of work into a family farm or similar land-based business, the question of how to pass it on may seem a matter of intense emotion rather than of quotients and remainders. But with creative estate planning, inheritance need not be a matter of choosing one heir over others or of liquidating an endeavor you would rather leave intact.

You may want to consider a variety of strategies, but the crucial point is that an imperfect plan is immeasurably superior to no plan. Following a "wait-and-see" approach means that any unexpected turn could result in an outcome neither you nor your heirs would prefer. Even if your plan isn't ideal, you can revisit and change it as you work out something better. In the meantime, don't leave your farm's future to chance. Your succession plan should be thorough and exist in writing, not merely in your mind. It should also take a form likely to hold up under legal scrutiny.

Avoid the trap of imagining that siblings who get along well will be able to sort out how to divide your property after your death. None of your heirs will be in a position to serve as an impartial judge, and even if they do not end up disputing the way to divide the property, you will have left them a large administrative (and potential tax) burden at a time when they are grieving and dealing with the rest of your estate. You should certainly involve them in your plans, but the ultimate responsibility is yours.

The solution that is best for you will depend on the variables at play, including the number of heirs you wish to include and the nature of the property you wish to pass down. Your heirs may have different levels of ability or interest that will dictate different roles in passing along a business. They may have had different levels of involvement in the past reflecting these abilities and interests, too. As with other estate-planning concerns, it makes sense to differentiate between fairness and equality when dividing the farm.

The largest decision will be whether to liquidate the farm and divide the proceeds among your heirs, or to transfer the working farm, including the ownership, management and labor components of the enterprise. The former does raise its own estate-planning issues, but is comparatively simple. For many, however, it is likely to be the more emotionally wrenching choice. Further, if one of your heirs has already invested significant time or effort in working the property, he or she may believe that selling the farm just to simplify the process of dividing it is ultimately unfair.

If you divide the farm equally without liquidating it, more questions arise, especially if you have multiple heirs. Will the child or children working on the farm have to pay rent to siblings who have other careers? If the child working on the farm is outnumbered by siblings who don't, could the majority outvote him or her on important decisions about the farm's future? If you would prefer to give the entire farm to one child and give assets of equal value to the others, how will "equal value" be determined? If you plan to divide a business or business interest that needs active management, consider the time and energy it will take to maintain the entity's value; an interest in the farm is certainly valuable, but its value will be maintained through hard work, whereas liquid assets come with fewer strings.

Remember also that children or family members who have worked on the farm or with the property are likely to have different expectations than heirs who have not been involved to this point. An adult child who has stayed put and worked on your farm may very well depend on it for his or her future livelihood. If your farm is not currently profitable, it is also important to have a plan to address the shortfall during and after the transfer. Consider whether you are open to financing capital improvements as part of the succession plan.

What if none of your children currently works on the farm? It is important to build in time to teach your heirs how to manage what you plan to give them if they have not been a part of the farm's operation. If none of your children has the capacity for or interest in taking over day-to-day operations, even with time for training, you must accept this; you may want to transfer your farm as a working interest to someone else, structuring some amount of the profits to flow back to your family.

Whoever you choose, identify your successor or successors, if you plan to transfer ownership of the operation. Have plans for transition to them upon your retirement, but also in case of your unanticipated incapacity or death, so all three scenarios have corresponding plans. Also take the time to discuss your plans with those affected, both your heirs and others with substantial stakes in the farm, making sure they understand your intentions and the planned timeline for the transfer of responsibility. If you have children and plan to transfer the farm to someone else, you do not want it to come as a surprise.

You will need to plan your ideal timeline for the transfer. Assess how long you would like to keep working (assuming you are able) and what your income sources will be once you retire. Do you want to continue working on the farm after you are no longer its owner? Will you be able to step back from the final decision-making if so, leaving it to your successor? Or would you prefer to take a more traditional, leisurely retirement? Making an informed choice about how to divide the farm will also require a thorough and up-to-date understanding of your overall financial situation and estate plan, so the transfer can work in harmony with your other constraints and goals.

Estate planning is always complicated, and especially so with a farm or other enterprise. You will need a financial planner and an attorney with experience in succession planning issues specific to farms or other small business interests. If you are considering restructuring the business to accommodate multiple owners, you may want to seek out a management consultant with experience in farming. Unexpected life events are not the only reason to start your planning early. Giving yourself time to deal with estate-planning issues allows for in-depth conversations with professionals and your family, in which you can respond to their concerns and advice.

Once you know what you want to happen, the professionals you hire can help you understand the most effective way to go about structuring the division and transfer. There are many options, with pros and cons. Often, there is no one right answer. Here are a few factors you may wish to take into account:

  • Minimizing tax liability for you and your heirs
  • Risk management and protection from creditors
  • How joint owners or partners will share management and/or profits
  • If and how profits will flow to heirs not involved in the farm's daily operation
  • State law requirements and constraints

All of these factors and more may influence what planning solution is right for you. As with any business succession plan or estate plan, remember that making the plan is not a one-time event. Instead, it should be a process, in which you respond to changes and new information by updating your plans as necessary.

The discussions and choices involved in dividing a family farm or other family business will not be easy, but they are essential. The sooner you begin, the longer you will have to work out a plan that will be best for you and your family.

For more articles, please visit the Palisades Hudson Financial Group LLC newsletter or subscribe to the blog.



About Rebecca Pavese

Rebecca Pavese, CPA, is a client service manager of Palisades Hudson Financial Group LLC. Based in the Atlanta office since 2008, she supervises the delivery of income tax planning and return preparation services to approximately 130 clients nationwide.

Rebecca joined Palisades Hudson in 2000 as an associate in our tax and financial planning practice in New York, after graduating from the University of Pittsburgh with a B.S. in business administration. She has worked extensively in our tax, financial accounting and estate planning and administration practices. She also supervises Palisades Hudson's accounting and administration services for estates and trusts, as well as accounting services for a complex oil and gas investment partnership.


elderly-patient-300Americans are living longer than ever before. At the turn of the 20th century, the average life expectancy was about 47 years. As we enter the 21st century, life expectancy has increased significantly. As a result, we face more challenges and transitions in our lives than those who came before us.

One of the most difficult transitions people face is the change from independent living in their own home or apartment to living in a long term care facility or "nursing home." There are many reasons why this transition is so difficult. One is the loss of home... a home where the person lived for many years with a lifetime of memories. Another is the loss of independence. Still another is the loss of the level of privacy we enjoy at home, since nursing home living is often shared with a roommate.

Most people who make the decision to move to a nursing home do so during a time of great stress. Some have been hospitalized after a stroke, some have fallen and broken a hip, still others have a progressive disease, like Alzheimer's, and can no longer be cared for in their own homes.

Whatever the reason, the spouse or relative who helps a person transition into a nursing home during a time of stress faces the immediate dilemma of how to find the right nursing home. The task is no small one, and a huge sigh of relief can be heard when the right home is found and the loved one is moved into the nursing home. For many however, the most difficult task is just beginning: How to cope with nursing home bills that average more than $7000.00 per month.

How to Pay for Nursing Home Care:

One of the things that concerns people most about nursing home care is how to pay for that care. There are basically four ways that you can pay the cost of a nursing home:

1. Long Term Care Insurance - If you are fortunate enough to have this type of coverage, it may go a long way toward paying the cost of the nursing home. Unfortunately, long-term care insurance has only started to become popular in the last few years and most people facing a nursing home stay do not have this coverage.

2. Pay With Your Own Funds - This is the method many people use at first, even though with proper planning, they would not have to. Quite simply, it means paying for the cost of a nursing home out of your own pocket. Unfortunately, with nursing home bills averaging over $7000.00 per month, few people can afford a long term stay in a nursing home.

3. Medicare - This is the national health insurance program primarily for people 65 years and older, certain younger disabled people, and people with kidney failure. Medicare provides short term assistance with nursing home costs, but only if you meet the strict qualification rules.

4. Medicaid - This is a federal and state funded and state administered medical benefit program which can pay for the cost of the nursing home if certain asset and income tests are met.

Since the first two methods of private pay (i.e. using your own funds) and long term care insurance are self-explanatory, our discussion will concentrate on Medicare and Medicaid.

What About Medicare?

There is a great deal of confusion about Medicare and Medicaid.

Medicare is the federally funded and state administered health insurance program primarily designed for older individuals (i.e. those over age 65). There are some limited long term care benefits that can be available under Medicare. In general, if you are enrolled in the traditional Medicare plan, and you've had a hospital stay of at least three days, and then you are admitted into a skilled nursing facility (often for rehabilitation or skilled nursing care), Medicare can pay for up to 100 days.

If you qualify, traditional Medicare may pay the full cost of the nursing home stay for the first 20 days and can continue to pay the cost of the nursing home stay for the next 80 days, but with a deductible that is approximately $100 per day. Some Medicare supplement insurance policies will pay the cost of that deductible. In order to qualify for this 100 days of coverage, however, the nursing home resident must be receiving daily "skilled care" and generally must continue to "improve"

While it's never possible to predict at the outset how long Medicare will cover the rehabilitation, from our experience, it usually falls far short of the 100 day maximum. Even if Medicare does cover the 100 day period, what then? What happens after the 100 days of coverage have been used?

At that point, in either case you're back to one of the other alternatives... long term care insurance, paying the bills with your own assets, or qualifying for Medicaid.

What is Medicaid?

Medicaid is a benefits program which is state and federally funded and administered by each state. Sometimes the rules can vary from state to state.

One primary benefit of Medicaid is that, unlike Medicare (which only pays for skilled nursing), the Medicaid program will pay for long term care in a nursing home once you've qualified. Medicare does not pay for treatment for all diseases or conditions. For example, a long term stay in a nursing home may be caused by Alzheimer's or Parkinson's disease, and even though the patient receives medical care, the treatment will not be paid for by Medicare. These stays are called custodial nursing stays. Medicare does not pay for custodial nursing home stays. In that instance, you'll either have to pay privately (i.e. use long term care insurance or your own funds), or you'll have to qualify for Medicaid.

Why Seek Advice for Medicaid?

As life expectancies and long term care costs continue to rise, the challenge quickly becomes how to pay for these services. Many people cannot afford to pay $7000.00 per month or more for the cost of a nursing home, and those who can pay for a while may find their life savings wiped out in a matter of months rather than years.

Fortunately, the Medicaid Program is there to help. In fact, in our lifetime, Medicaid has become the long term care insurance of the middle class. To be the eligible to receive Medicaid benefits requires that you pass certain tests on the amount of income and assets that you have. The reason for Medicaid planning is simple. First, you need to provide enough assets for yourself and your loved ones - they too may have a similar crisis. Second, the rules are extremely complicated and confusing. The result is that without planning and advice, many people spend more than they should and their financial security can be jeopardized.

Exempt Assets and Countable Assets: What Must Be Spent?

To qualify for Medicaid, applicants must pass some fairly strict tests on the amount of assets they can keep. To understand how Medicaid works, we first need to review what are known as exempt and non-exempt (or countable) assets. Exempt assets are those which Medicaid will not take into account (at least for the time being). In general, the following are the primary exempt assets:

-Homestead and any adjacent real estate. The home must be the principal place of residence.

-Personal belongings and household goods.

-One vehicle.

-Irrevocable prepaid funeral contract.

-Burial spaces and certain related items for the applicant and spouse.

-Up to $1,500 designated as a burial fund for the applicant and spouse.

-Value of life insurance if face value is $1,500 or less.

All other assets are generally non-exempt, and are countable. Basically, all money and property, and any item that can be valued and turned into cash, is a countable asset unless it is one of those assets listed above as exempt. This includes:

-Cash, savings, and checking accounts, credit union share and draft accounts.

-Certificates of deposit.

-U.S. Savings Bonds.

-Individual Retirement Accounts (IRA), 401K, 403B, 457, Keogh plans.

-Nursing home accounts.

-Prepaid funeral contracts which can be canceled.

-Trusts (depending on the type of the trust)

-Real estate (other than the primary residence).

-More than one car.

-Boats or recreational vehicles.

-Stocks, bonds, or mutual funds.

-Land contracts or mortgages held on real estate.

While the Medicaid rules themselves are very complicated, it's safe to say that a single person will qualify for Medicaid as long as he or she has only exempt assets plus no more than $2000.00 in countable assets.

Some Common Questions:

I've added my kid's names to our bank account. Do they count all the money is the account? Yes. The entire amount is counted unless you can prove some or all of the money was contributed by the other person who is on the account. This rule applies to cash assets such as:

-Savings and checking accounts

-Credit union share and draft accounts

-Certificates of deposit

-U.S. Savings Bonds

Can't I Just Give My Assets Away?

Many people wonder, can't I just give my assets away? The answer is, maybe, but only if it's done exactly right. The law has severe penalties for people who simply give away their assets to create Medicaid eligibility. For approximately every $6400.00 given away during the five years prior to the filing of a Medicaid application creates a one month penalty period under the Medicaid rules. So even thought the Federal Gift Tax laws allow you to give away up to $12,000 per year without gift tax consequences, those gifts would result in a penalty period under the Medicaid rules.

Though some families do spend virtually all of their savings on nursing home care, Medicaid does not require it. There are a number of legal strategies which can be used to protect your family financial security.

Division of Assets: Medicaid Planning for Married Couples

Division of Assets is the name commonly used for the Spousal Impoverishment provisions of the Medicare Catastrophic Act of 1988. It applies only to couples. The intent of the law was to change the eligibility requirements for Medicaid where one spouse needs nursing home care while the other spouse remains in the community, i.e., at home. The law, in effect, recognizes that it makes little sense to impoverish both spouses when only one needs to qualify for Medicaid assistance for nursing home care.

As a result of this recognition, division of assets was born.

Basically, in a division of assets, the couple gathers all their countable assets together in a review. Exempt assets, discussed above, are not counted.

The countable assets are then divided in two, with the at-home or "community spouse" allowed to keep one half of all countable assets up to a maximum of approximately $110,000. The other half of the countable assets must be "spent down" until less than $2,000 remains. The amount of the countable assets which the at-home spouse gets to keep is called the Community Spouse Resource Allowance (CSRA).

Each state also establishes a monthly income floor for the at-home spouse. This is called the Minimum Monthly Maintenance Needs Allowance. This permits the community spouse to keep a minimum income ranging from about $1,750 to $2,300.

If the community spouse does not have at least $1,750 in income, then he or she is allowed to take the income of the nursing home spouse in an amount large enough to reach the Minimum Monthly Maintenance Needs Allowance (i.e., up to at least $1,750). The nursing home spouse's remaining income goes to the nursing home. This avoids the necessity (hopefully) for the at-home spouse to dip into savings each month, which would result in gradual impoverishment.

To illustrate, assume the at-home spouse receives $750 per month in Social Security. Also assume that her needs are calculated to be the minimum of $1,750. With her Social Security, she is $1000.00 short each month.

In this case, the community spouse will receive $1000 (the short fall amount) per month from the nursing home spouse's Social Security and the rest of the nursing home spouse's income will then go to pay for the cost of his care.

This does not mean, however, that there are no planning alternatives which they can pursue. Consider the following case studies:

Case Study: Medicaid Planning For Married People

Ralph and Alice were high school sweethearts. Two weeks ago, Ralph and Alice celebrated their 51st anniversary. Yesterday, Ralph, who has Alzheimer's, wandered away from home. The police found him, hours later, sitting on a street curb, talking incoherently. They took him to the hospital. Now the family doctor has told Alice that she needs to place Ralph in a nursing home. Ralph and Alice grew up during the Depression. They always tried to save something each month. Their assets, totaling $120,000, not including their house, are as follows:

Savings account ... $ 35,000

CDs ... 65,000

Money Market account ... 17,000

Checking account ... 3,000

Residence (no mortgage) ... 100,000

Ralph gets a Social Security check for $1000 each month; Alice's check is $350. Her eyes fill with tears as she says, "At $7000 to the nursing home every month, our entire life savings will be gone in less than two years!" What's more, she's afraid she won't be able to pay her monthly bills, because a neighbor told her that the nursing home will be entitled to all of Ralph's Social Security check.

There is good news for Alice. It's possible she will get to keep everything all of their assets and all of the income... and still have the state Medicaid program pay Ralph's nursing home costs. The process may take a little while, but the end result will be worth it.

To apply for Medicaid, she will have to go through the Department of Human Services (DHS). If she does things strictly according to the way the DHS tells her, she will only be able to keep about half of her assets plus she will be entitled to a minimum monthly income to pay her expenses. But the results can actually be much better than that.

It is essential that Alice get advice from someone who knows the Medicaid rules. With proper advice, Alice will be able to avoid the spend-down and keep everything she and Ralph have worked so hard for.

This is possible because the law does not intend to impoverish one spouse because the other needs care in a nursing home. This is certainly an example where knowledge of the rules, and how to apply them, can be used to resolve Alice's dilemma.

Of course, proper Medicaid planning differs according to the relevant facts and circumstances of each situation as well as the current state law. For example, some children never gain independence - they remain dependent on their parents. What can be done in such a case?

Case Study: A Trust for a Disabled Child

Margaret and Sam have always taken care of their daughter, Elizabeth. She is 45, has never worked, and has never left home. Elizabeth is "developmentally disabled and receives SSI (Supplemental Security Income). They have always worried about who would take care of her after they die. Some years ago, Sam was diagnosed with dementia. His health has deteriorated to the point that Margaret can no longer take care of him. Now she has placed Sam in a nursing home and is paying $7000 per month out of their savings. Margaret is even more worried that there will not be any money left for the care of Elizabeth.

Margaret is satisfied with the nursing home Sam is in. The facility has a Medicaid bed available that Sam could have if he were eligible for Medicaid. However, according to the information she got from the social worker, Sam is over $75,000 away from Medicaid eligibility. Margaret wishes there was a way to save the $75,000 for Elizabeth after she and Sam are gone. There is.

Margaret can consult an Elder Law attorney to set up a "special needs trust" with the $75,000 to provide for Elizabeth. As soon as she does, Sam will be eligible for Medicaid. Elizabeth won't lose her benefits, and her security is assured.

Of course, all trusts must be reviewed for compliance with Medicaid rules. Also, failure to report assets is fraud, and when discovered, will cause loss of eligibility and repayment of benefits.

I Heard I Can Give Away $10,000 Per Year. Can't I?

As discussed earlier, many people have heard of the Federal Gift Tax provision that allows them to give away $10,000 ($12,000 currently) per year without paying any gift taxes. What they do not know is that this refers to a Gift Tax exemption. Having heard of the exemption, they wonder, "Can't I give my assets away?" The answer is, maybe, but only if it's done within the strict allowances of the Medicaid rules.

So even though the federal Gift Tax law allows you to give away up to $12,000 per year without incurring tax, those gifts could result in a period of ineligibility under the Medicaid rules. Still, some parents want to make gifts to their children before their life savings is all gone. Consider the following case study:

Case Study: Financial Gifts to Children

After her 73 year old husband, Harold, suffers a paralyzing stroke, Mildred and her daughter, Joan, need advice. Dark circles have formed under Mildred's eyes. Her hair is disheveled. Joan holds her hand.

"The doctor says Harold needs long-term care in a nursing home," Mildred says. "We have some money in savings, but not enough. I don't want to lose our house and all our hard-earned money. I don't know what to do."

Joan has heard about Medicaid benefits for nursing homes, but doesn't want her mother left destitute in order for Harold to qualify for them. Joan wants to ensure that her father's medical needs are met, but she also wants to preserve Mildred's assets.

"Can't Mom just give her money to me as a gift?" she asks. "Can't she give away $10,000 per year? I could keep the money for her so she doesn't lose it when Dad applies for Medicaid."

Joan has confused federal Gift Tax law with the issue of transfers and Medicaid eligibility. A "gift" to a child in this case is actually a transfer, and Medicaid has very specific rules about transfers.

At the time Harold applies for Medicaid, the state will "look back" five years to see if any gifts have been made. The state won't let you just give away your money or your property to qualify for Medicaid. Any gifts or transfers for less than fair market value that are uncovered in the 5 year look-back period will penalize Harold's receipt of Medicaid benefits.

So what can Harold and Mildred do? They can institute a formal gifting plan, save a good portion of their estate, and still qualify for Medicaid. However, the gifts must not violate the Medicaid rules. Generally, if done properly, you can often save as much as one half of your assets or more through a properly designed gifting plan

But remember, when it's given away, it's given away. Studies have shown that "windfall" money received by gift, prize, or lawsuit settlement is often gone within three years. In other words, even when the children promise that money will be available when needed, their own "emergencies" may make them spend the money. You must consult and experienced Elder Law attorney on how to set a plan that complies with the law and achieves your goals.

Will I Lose My Home?

Many people who apply for medical assistance benefits to pay for nursing home care ask this question. For many, the home constitutes much or most of their life savings. Often, it's the only asset that a person has to pass on to his or her children.

Under the Medicaid regulations, the home is an unavailable asset. This means that it is not taken into account when calculating eligibility for Medicaid. But in 1993, Congress passed a little-debated law that affects hundreds of thousands of families with a spouse or elderly parent in a nursing home. That law requires states to try to recover the value of Medicaid payments made to nursing home residents. This is called Estate Recovery.

Estate Recovery does not take place until the recipient of the benefits dies. Then, federal law requires that states attempt to recover the Medicaid benefits paid. In order to protect your home, you should seek assistance from an experienced Elder Law attorney.

Legal Assistance

Aging persons and their family members face many unique legal issues. As you can tell from our explanation of the Medicaid program, the legal, financial, and care planning issues facing the prospective nursing home resident and family can be overwhelming. If you or a family member needs nursing home care, it is clear that you should seek expert legal help. Where can you turn for that help? It is difficult for the consumer to be able to identify lawyers who have the training and experience required to provide expert guidance during this most challenging time.

Generally, Medicaid planning is an aspect of the services provided by Elder Law attorneys. Consumers must be cautious in choosing a lawyer and carefully investigate the lawyer's credentials.

How do you find an Elder Law attorney that has the knowledge and experience you need? You may want to start with recommendations from friends who have received legal help with nursing home issues. Who did they use? Were they satisfied with the services they received? Hospital social workers, Alzheimer and other support groups, accountants, and other financial professionals can also be good sources of recommendations.

In general, a lawyer who devotes a substantial part of his or her practice to Medicaid planning should have more knowledge and experience to address the issues properly. Don't hesitate to ask the lawyer what percentage of his practice involves Medicaid planning. You may want to ask how many new Medicaid planning cases the attorney handles each month. There is no correct answer. But there is a good chance that an attorney that assists with at least 3-4 nursing home placements each month is likely to be more up-to-date and knowledgeable than an attorney that helps with two placements a year. Ask whether the lawyer is a member of any Elder Law organizations. Is the lawyer involved with committees or local or state bar organizations that have to do with Medicaid planning? Does the lawyer lecture on Medicaid planning? If so, to whom? (For example, if the lawyer is asked to teach other lawyers or professionals about Elder Law and nursing home planning, that is a very good sign that the lawyer is considered to be knowledgeable by people who should know.) If the lawyer lectures to the public, you might try to attend one of the seminars. This should help you decide if this is the lawyer for you.

In the end, follow your instincts and choose an attorney who knows this area of the law, who is committed to helping others, and who listens to you and the unique wants and needs of you and your family.

Brett Howell, the founder of the Elder and Estate Planning Law Firm, specializes in helping Michigan families protect their estates. Contact our office for a confidential consultation to discuss your concerns with Brett - you will be glad (and relieved) you did. Contact Brett by calling the Elder and Estate Planning Law Firm at (810) 953-3846 or visit his website for more information.


home-two-storyYou are getting ready to purchase your first home and you are presented with a question: "How do you want to hold title to the property?"

Huh? You'd learned all about qualifying for a mortgage, interest rates, home inspections, and countless other things. You must have missed this one. Unfortunately, answering the question is not just choosing between one thing and the other. In fact, it can be very complicated. While many real estate agents are knowledgeable in helping their clients understand the issue, there are just as many that are not. One option may work for one person, but be completely wrong for another. The following covers the basics of the different alternatives. As we are based in California, this discussion will consider the law here in our state.

Sole Ownership. In situations where the home will be owned by one person the title will reflect sole ownership. This is possible for someone who is unmarried as well as a married person who will hold title as separate property.

Joint tenants with rights of survivorship. In this form of ownership, two or more persons share equal ownership and share the right to keep or dispose of the property. Holding title as joint tenants provides for the immediate and automatic transfer of title to a surviving spouse upon the death of the first spouse. Joint tenants are not allowed to pass along their interest to anyone through a will. In the case of a married couple the issue of heirs is probably not a problem as their heirs are probably the same - but it could be a problem if each spouse had children from a prior marriage.

Many California married couples own their homes as joint tenants because they want the surviving spouse to own the entire home, without having to go through the probate process (which is lengthy and expensive). However, there is relatively new alternative (discussed below) that can achieve the same result.

Under income tax rules, property received from a decedent receives a step-up in basis to the value at the time of death. This is important as it reduces potential taxes on the gain when the property is sold. However, with property owned as joint tenants only the decedent's portion of the property receives a step up in basis.

Community property. Nine states, including California, have laws that dictate that each spouse owns one-half of the couple's property. Upon the death of one spouse, one-half of the property is inheritable by that person's heirs. The surviving spouse retains his or her one-half. The chief drawback of titling property as community property is that it does not provide automatic transfer to the survivor at death. The survivor must petition the court for a spousal property order, or initiate a probate proceeding. Another drawback is that the entire property becomes liable for the debts of either spouse. One advantage to holding title as community property is that upon the death of the first spouse the entire property will receive a step-up in tax basis.

Community property with right of survivorship. In 2001 California enacted a new law that allowed a husband and wife to hold title to their property as community property with right of survivorship. This form of holding title combines the benefits of holding title as community property and the benefits of joint tenancy. In other words, the couple gets the desirable tax features of community property with the right of survivorship of joint tenancy. Prior to 2001, a husband and wife had to choose between these two benefits.

Trust. Revocable living trusts are a common method of holding property. One major advantage of holding title through a trust is that probate proceedings can be avoided in the transfer of property on the death of the husband or wife. The terms of the trust supersede state law and the community property will go exactly where the spouses want it to go. A trust provides many other additional benefits for estate planning and passing assets to heirs.

Tenancy in Common. Property may be owned by two or more people with each owner holding a percentage of ownership interest in the property. It is an undivided interest and the percentages do not have to be equal. There is no right of survivorship with a tenancy in common. The ownership may be left to any heir. This is not a common way to hold title to a residence but is sometimes used for holding commercial property.

Greg Tanner, Principal
Wertz & Co, Irvine Tax Accounting
Tax, Accounting and Business Solutions Designed for Entrepreneurs
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gay-marriageUntil recently, and even if they were married in a state that recognizes same sex marriage, married same sex couples were treated differently under federal law than heterosexual married couples.  On June 26, 2013, the Supreme Court changed that by striking down the Defense of Marriage Act (“DOMA”) as unconstitutional.  The decision in U.S. v. Windsor split the Court 5-4 and will surely be hailed as one of the most significant civil liberties victories in the history of the United States.

The estate planning implications of this decision are immense as married same sex couples can now take advantage of a federal estate tax provision that previously was only available to married heterosexual couples.  In fact, the ruling in U.S. v. Windsor specifically addressed the estate tax calculation for a married same sex couple.  These couples can now benefit from the application of the federal marital deduction, which is a deduction that allows assets to pass to a surviving spouse free of estate tax regardless of the amount.  It may also be possible to amend a recently filed federal estate tax return to take advantage of this change.  Similarly, married same sex couples can also now pass assets to each other with no federal gift tax consequences. 

With the striking down of DOMA, same sex married couples will now enjoy various federal income tax provisions that their heterosexual counterparts have enjoyed all along.  It will increase their ability to contribute to an IRA for a non-working spouse, and it will allow them to make larger donations to charity due as their combined higher income providing an increased charitable giving deduction.  Married same sex couples will also be allowed to file joint federal income tax returns, regardless of their state of residence, which will be beneficial to some couples.

Health care benefits have also been impacted.  With respect to obtaining Medicaid benefits to pay for nursing home care, the rules that protect spouses who remain at home in the community will now apply to same sex couples.  This includes the ability to transfer assets between the spouses without penalty.  If the spouse in the nursing home has assets greater than the asset limit for the institutionalized spouse, they can be transferred to the community spouse, who will be able to keep them as long as they do not exceed the applicable asset limit for the community spouse.  Without this protection, the spouse in the nursing home could not transfer assets to the spouse in the community without incurring a penalty period during which time Medicaid benefits would not be paid.

Another massive impact for older same sex married couples is that they will have the same rights to Social Security spousal benefits as heterosexual married couples.  Social Security’s survivor benefits are a lifeline for many widows and/or widowers, as without them, the surviving spouse would lose a significant income stream upon the death of their spouse.  If you are now eligible to apply for Social Security spousal benefits, you should be sure to do so.

It is important to note that there is no impact on unmarried couples, whether same sex or heterosexual, except that perhaps the reasons to marry have increased for same sex couples.  It is also important to realize that this decision only impacts federal law.  It does not change discriminatory state laws that exclude same sex couples from enjoying state given marriage rights.  This is not an issue here in Massachusetts where same sex marriage is legally recognized.

It will take some time for all of the ramifications of this decision to be seen.  It is surmised that due to the administration’s opposition to DOMA, it will also treat as married under federal law any same sex couple married in a state that recognizes same sex marriage who then moves to a state with a defense of marriage act, such as Florida.  Whether this is true remains to be seen as the court did not rule on these provisions of DOMA in this decision.

At this time, married same sex couples should revisit their estate planning documents to take advantage of the changes.  In addition, an update of beneficiary designations may be in order.  With the protection of federal law, same sex couples may ultimately achieve equality with their heterosexual counterparts in the eyes of federal, state and local municipalities; however, it will be necessary for them to act to ensure that they take full advantage of the benefits now available.