.htm_cmp_willow000_vbtn.gif){kind=small}
July 28, 2005
Probate Avoidance Techniques - Part One
For many people, going through probate is an unnecessary adventure. By structuring your assets in certain ways you can eliminate the need for probate. For those who do need to probate an estate, they can expect about a 60 day delay in getting an appointment as executor. This means that for about 2 months you will not have access to the decedent’s assets. There are of course instances where you can receive temporary executor’s powers but these are limited to instances where immediate action is needed to preserve the assets of the estate.
Before I get into how to avoid probate, you need to understand what probate is. When someone dies, either with or without a will, their executor(they are called an administrator when there is no will) is charged with the duty of gathering the probate assets of the deceased and seeing that they are distributed in accordance with the person’s will or the rules of intestacy in the event there is no will. Just because you don’t have a will it doesn’t mean that your assets go to the State. Probate assets are those assets that are in the sole name of the decedent. Examples are bank accounts or stocks in just the decedent’s name alone. There are a few exceptions to this rule such as life insurance, IRA’s, pension plans and annuities. These all have named beneficiaries and can be paid out to the beneficiaries without going through probate.
Here’s one technique that can be used to avoid probate:
JOINT PROPERTY - Adding someone’s name to your bank account, that makes it a joint bank account. If you die, the surviving joint owner then owns the bank account. This is not a probate asset because it was not in the decedent’s name alone. If you make all of your assets jointly held, upon your death your last will and testament will not need to be filed because you do not have any probate assets. This is commonly referred to as the “Poor Man’s Will”.
We often recommend against the “Poor Man’s Will” in situations where there is more than one child because making an account joint leads to a presumption that a gift was intended and could lead to litigation if the joint owner child decided not to share the money with the other child. If there are multiple children we recommend that any child dealing with their parent’s money do so under a general durable power
Now before you go out and make all of your assets joint you need to understand that there are other considerations that must be taken into account. Although you might avoid probate by making all of your assets jointly held, you might end up paying more in taxes than the cost of probate. There is also the issue of whether making the asset jointly held is the equivalent of making a gift for MassHealth (Medicaid) purposes. I’ll try and explain:
TAX ISSUES – When someone dies, and you receive property from their estate, you receive the property with what we call a “Step-Up” in basis. This means that if your mother died and left you her house, you would get a “Step-Up” in basis and be able to sell the house tax free. Whatever the house was worth upon Mom’s death becomes your cost, and you will only have income if the sales price exceeds the value of the property on Mom’s death.
When it come to a “Step-Up” for joint property there are several rules to be aware of. Joint property held by husband and wife is allowed a 50% step up upon the death of one of the spouses. For non spouse joint owners, you need to determine who contributed the property and the “Step-Up” would only be allowed to the property to the extent of the decedent’s contribution. Here’s an example:
Example 1) Mom and Dad jointly own a house they bought for $200,000. Dad died when the house was worth $500,000. What would Mom’s cost be to determine gain if she sold the house? Because married couples receive a 50% step up in basis for jointly owned property, we would add 50% of the value at Dad’s death ($500,000/2=$250,000) and add that to 50% of their original cost ($200,000/2=$100,000). Mom’s cost would be $350,000.
Example 2) Brother and Sister own a house jointly that Sister bought many years ago for $50,000. The house is now worth $500,000 and Sister dies. Because Sister originally owned the home she is considered to have contributed 100% of the property and it is eligible for 100% step-up in basis. This means that Brother’s cost is now considered to be $500,000. Had Brother died instead of Sister then there would not be any step up in basis and Sister would keep her original cost of $50,000.
MASSHEALTH (MEDICAID) ISSUES - There are also MassHealth (Medicaid) issues that need to be looked into. What, if anything, have you done to protect the joint assets if you ever need nursing home care? From a MassHealth point of view, adding someone’s name to a bank account does nothing to protect the asset. Joint bank accounts are considered as belonging 100% to the nursing home applicant unless contribution can be proved by the other joint owner. Now for some strange reason, if this had been a stock instead of a bank account, then you would be treated as having made a gift equal to 50% of the value of the account when you set it up, and 50% of the stock would be protected if you needed nursing home care. Bank accounts are treated one way, all other assets are treated another way.
Example: Mom puts Sonny on her $10,000 bank account as a joint owner. Mom needs nursing home care. The full $10,000 is treated as belonging to Mom. If Mom had instead put her $10,000 of GE common stock into joint names, Sonny would now be treated as the owner of one-half of the stock and only $5,000 would be treated as Mom’s stock if she needed nursing home care.
The creation of the joint ownership of the stock created a gift for MassHealth (Medicaid) purposes and whenever you make a gift, there is an associated disqualification period. The length of the disqualification period
depends upon the value of the property that has been given away. There is a maximum 3-year disqualification period for gifts unless a trust is used, then it is increased to 5-years. The creation of the joint GE stock in the example above would result in less than one month of disqualification time.
Next week I will continue this discussion with a few more ways to avoid probate. You should always seek professional advice prior to making changes to your estate plan. There are many rules and exceptions to rules that are beyond the scope of this article.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org