Q.  My wife and I hold title to her home as joint tenants, and most of our cash assets are in the form of two large IRA accounts and one big annuity. We have basic wills which leaves everything to the other and then on to our children. Our son suggested that our wills may not control what happens to our assets when one of us dies. Should we be concerned?

A. Perhaps, in the sense that you wills will not control what happens to your assets when one of you dies. Rather, the form of title will control as to your home, and the beneficiary designations on your IRA’s and annuity will control what happens to those assets. Here is the way it works:

Your Home: Since you and your wife hold title to your home in joint tenancy, when one of you dies the other will automatically become the owner by right of survivorship. The right of survivorship is the primary feature of joint tenancy.  In essence, the form of title overrides your wills.  It is only when the survivor later dies that his or her will may control who ultimately gets the home. While many couples in California do hold their home in joint tenancy, it is often not the best form of co-ownership. One principal reason:  it does not optimize the tax benefits that go along with holding title as ”community property” where the home has appreciated significantly in value since the time of purchase. Often, holding your home in a “Living Trust” may be the best option.

Your IRA Accounts: Each of your IRA accounts will, upon the death of the IRA owner, go to the primary beneficiary named in the account agreement signed when you created your IRA’s.  Presumably, the primary beneficiary for each of you is the other spouse and, if deceased, your children. However, the pattern of distribution very much depends upon who you designated as primary and contingent beneficiaries when you created your accounts. It is always wise to periodically review these designations and retain in your permanent file a copy of the documentation you signed when you created your accounts. As a lawyer, I have been involved in at least one case where the IRA custodian, a large brokerage firm, lost the paperwork on a very large IRA account, almost costing the designated beneficiary a six-figure tax bill because of the resulting delay in distribution. The IRS has strict rules about inherited IRA accounts, and these must be observed on a timely basis to avoid unnecessary tax. In particular, the rules have changed as to how long your beneficiaries may “stretch” their receipt of distributions.

Your Annuity: the person or persons to receive your annuity would, just like the IRA, depend upon who was named as the primary beneficiary and contingent beneficiaries on the annuity contract, itself.  The same would be true if you owned any other insurance products or policies. Where you have designated named individuals to be primary or contingent beneficiaries, the contract or policy controls and not your will or trust.

In view of the above, whenever clients come in to see us for estate planning, we always urge a review of all beneficiary designations associated with IRA and other retirement accounts, as well as annuities and other insurance products.  Where appropriate, the beneficiary designations can then be modified, so that the plan design accomplishes the clients’ goals and everything works together.  In many cases, the clients choose to name their Living Trust as the contingent beneficiary of these contracts and policies, so that the plan of distribution integrates with that created in their trust.

Q. My wife and I have been following the news about the recently signed Inflation Reduction Act, and there seems to be significant benefits for seniors on Medicare. Can you provide more information?

A. Sure. The recently signed Inflation Reduction Act has been considered by many as a blockbuster piece of legislation, perhaps one of the most important during the Biden Administration, and perhaps the most sweeping in terms of Medicare prescription drug reforms since inception of the Medicare Part D Program. Here is a kind of “bullet point” summary:

The ACT Caps Medicare Part D Out-Of-Pocket Costs at $2,000 per Year

Seniors and others with Medicare Part D coverage will see their out-of-pocket prescription drug costs capped at $2,000 per year, beginning in the year 2025. The good news is that this cost-cap will apply to both persons enrolled in stand-alone prescription drug plans (“PDPs”), as well as those in Medicare Advantage Drug Plans (“MA-PDs”). Further, in 2025, a new monthly cost sharing policy will allow people to spread their out-of-pocket costs throughout the year, if they wish. This option will also be available to those on the Extra Help Program.

Further, Commencing in 2023, Insulin costs for those on Medicare will be capped at $35 per month, without a deductible. And, for plan years 2024 through 2029, the annual premium growth for Part D Coverage will be limited to 6%.

The ACT Lowers Prescription Drug Prices

For the very first time since the Part D Program was created, the program will be required to negotiate prices with drug manufacturers of certain high-cost prescription drugs covered under either Part D or Part B. Though these negotiated prices will be phased in, the requirement that prices be negotiated is expected to deliver significant savings for people on Medicare, and to the Medicare program itself.

Commencing in the year 2023, the ACT also requires prescription drug manufacturers to rebate excess charges to the government if they increase the price of a drug covered under the Part D or Part B Programs above the inflation rate. The obvious purpose of this provision is to discourage pharmaceutical manufacturers from making large price hikes. The Act Expands the Medicare Part D Extra Help Program

Commencing in the year 2024, the ACT expands the full Part D low income subsidy (a.k.a., the “Extra Help” program) to people with incomes below 150% of the federal poverty level (“FPL”) ($20,385 per year for a single person in the year 2022). Folks with incomes between 135% and 150% of the FPL, who previously had only a partial subsidy, will now have a full subsidy with lower co-pays and no deductibles. These changes, alone, are expected to provide significant additional financial support to the more than 400,000 low income people who currently only have partial subsidies and for thousands more who are eligible but not currently enrolled.

The ACT Expands No Cost Coverage of Vaccines

Commencing in 2023, individuals on Medicare will receive all recommended vaccines without cost-sharing, and the same will be true for persons on Medicaid (known as ‘Medi-Cal’ in California).

The ACT Enhances Premium Assistance For Those with Marketplace Coverage

The ACT extends the enhanced premium tax credit for Affordable Care Act Marketplace coverage for 3 years (through 2025), providing additional cost savings for older adults who are not yet eligible for Medicare. With the subsidies, it is estimated that over 80% of enrollees in marketplace plans in the 55 to 64 age-range will now be eligible for a plan with monthly premiums of only $50, or less.

These out-of-pocket cost caps and other innovations should greatly help folks with chronic conditions who otherwise face high drug costs, as well as seniors and the disabled on fixed incomes, who will then be protected from catastrophic costs for their medication.

Official Summary of Law

Q.  I have a Living Trust. I am the original trustee and my children are the successor trustees.  Do you have any thoughts about easing the transition of trustee duties from me to my children when the management of my finances has become too much for me?

A. Yes. It is important for that transition to be as seamless as possible, so that your assets can be managed and bills paid without delay. Here are some suggestions:

1) Simplify Succession “Trigger”: Take a look at your trust to determine what triggers the change of trustees from you to your children. Typically, it may be the written determination by one, or perhaps two, physicians, reciting your inability to handle your financial affairs.  If your trust requires a letter from two physicians, I suggest changing that requirement to only one. Reason:  If you are then residing in a nursing home, where patient care is typically monitored by one physician, it may be difficult to arrange an evaluation for this purpose by a second physician. Reducing the requirement to only one doctor may save your children much grief with medical logistics.

(2) HIPAA Release.  Make sure that your trust, or related document, provides a HIPAA privacy release authorizing your doctor to disclose information about your ability to manage your affairs.  Absent a privacy release, some physicians may be reluctant to write a letter regarding your capacity.

(3) Add Co-Trustee. At some point, consider adding one of your children as a co-trustee and recite in your trust, or in an amendment to your trust, that any single trustee has the power to write checks or take other action on behalf of the trust. This would then authorize your child to gradually take over more responsibility for managing trust assets without a formal certification of your incapacity. Doing so sooner than later also allows you the opportunity to watch your child perform his or her duty, and afford you the opportunity to provide pointers to him based upon your years of accumulated wisdom.

(4) Consider Resignation.  Alternatively, when you feel that managing your trust has become too much for you, you might consider the proactive approach of resigning. A formal resignation triggers the succession of trustee duties to your child without a formal finding of incapacity. It, too, can accomplish a smooth transition without the need for doctors’ letters.

(5) Minimize Successor Liability.  To encourage a successor trustee to step into the shoes of the predecessor, recite in your trust that the successor is not responsible for any acts or omissions of his predecessor.  You might also recite that whoever is serving as trustee is not liable for any action taken in good faith. These two protective clauses would help induce your designated nominee to assume his duties when appropriate, whether that successor is one of your children or the trust department of your favorite bank.

(6) Inform Your Bank: Make sure that your financial custodians have your list of successors on file, so that when they step forward to assume their duties their identity is known to the bank. You might even introduce your nominees to your bank officers, and suggest that they take a sample signature and make note of the child’s address and driver’s license.

By taking some or all of the above steps, you will have taken proactive steps toward a seamless transition of trustees when the time comes.

Q.  My husband and I are concerned about how to keep our trust up to date in light of changing tax law and changing family circumstances.  What if we are too ill to make changes ourselves. Any thoughts on how we can handle these concerns?                                                

A. With the ever-changing tax landscape, and changes over time in family circumstances, keeping your trust up-to-date can be challenging. Here are some techniques to keep your trust flexible to help deal with change, even where you are unable to do so yourself. You may wish to include one or more in your estate plan:

1) Use a Power Of Attorney: delegate authority to a trusted agent to amend your trust as tax laws and family circumstances warrant. Your agent would typically act only if you were unable to do so yourself.   To be valid, this power must be expressly stated in a Durable Power Of Attorney (“DPOA”) and reciprocal provisions must also be in your trust. Unfortunately, this dual requirement is too often overlooked, resulting in an ineffective delegation of authority.

2) Use a Trust Protector: an emerging mechanism involves naming an Trust Protector (“TP”) in your trust in order to update your trust as need requires. The TP would be independent of your trustee, who would handle normal trust administration.  By contrast, the TP would act like a “super trustee”: he would have the power to replace the trustee, modify administrative provisions and even change the ultimate disposition of trust assets in order to meet your stated objectives. Unlike the trustee, who would have a fiduciary duty to act according to the existing provisions of the trust, the TP could modify or override those provisions to comply with changing law and your expressed intent. The TP must be someone who is not a beneficiary under your estate plan, but in whom you have a high degree of trust.  Unlike the agent acting under a DPOA, the TP could even make some changes to your trust after your death if necessary to meet your stated goals, e.g. tax avoidance.

3) Include Disclaimer Provisions: a disclaimer is the right to decline a bequest, so that it goes to the next person in line, typically one’s children. Disclaimers can be very effective in postmortem tax planning, especially as a technique to remove future appreciation from one’s taxable estate.   Example: assume that a married couple has a combined community property estate valued at just under the current Federal Estate Tax Exemption amount ($12.06 Million/each for persons dying in 2022–2025, but which is likely to revert to a much lower number after 2025, when the current exemption ‘sunsets’).  

Upon husband’s death, assume their estate plan directs that all goes to wife as the surviving spouse.  If she reasonably anticipates future appreciation, it is likely that–upon her later demise–the value of her estate will then be above the amount that can escape estate tax.  If, however, upon her husband’s death she makes a timely disclaimer of a portion of her “inheritance”, so that a portion “skips” her and goes immediately to their children, the appreciation attributable to the disclaimed assets will then be owned by their children and will escape estate tax at the wife’s later death. 

In larger estates, this technique can potentially save a significant amount of tax upon the surviving spouse’s later demise. For more modest estates, since the disclaimed assets “skip over” the surviving spouse and pass directly to the children or other designated successor beneficiaries, it can save the time and expense of a second estate or trust administration upon the surviving spouse’s death. Its use can also accelerate the children’s inheritance. The good news is that the decision as to whether, and to what extent, a disclaimer should be exercised can be made up until 9 months after the first spouse’s death, providing time for reflection. However, if not exercised by that deadline, it then lapses. In our view, appropriate disclaimer provisions should be included in every estate plan.

4) Permit Decanting: Decanting is a term borrowed from wine vintners, and in the trust world it refers to modifying an existing trust to get rid of unwanted provisions (i.e., “sediment”, for vintners), by “pouring” the good provisions into a new trust that is free of the unwanted provisions.  In 2019, California became one of a growing number of states to adopt the Uniform Trust Decanting Act, which now allows a trustee to make changes to a trust without initiating a judicial proceeding, upon notice to, and usually with the consent of, the trust beneficiaries. Decanting can be implemented so long as the trust does not expressly prohibit this technique. Changes via decanting can even be made, in many cases, after the death of the original creator(s) of the trust. Here are some examples of its application: to create a Special Needs Trust to hold the share of a beneficiary then on public benefits; to comply with changes in the tax code; to address changes in family circumstances, etc. For more, see articles on our website for both non-lawyers and for lawyers

5) Include a Power of Appointment: A Power of Appointment (“POA”) is a power held by a designated individual, usually the surviving spouse, in a couple’s joint trust, to take another look at the plan design and modify it as the power holder feels is then appropriate, typically some time after the death of the first spouse. The survivor can then re-arrange the distribution of trust assets, and add or delete beneficiaries, as he/she feels circumstances then require. It can be very useful when family circumstances have changed since the trust was originally created, for example by deaths, births, divorces or other changes in relationships (whether they be positive or negative).

It has been said that the only certainties in life are death and taxes.  I would add a third:  change. Make sure that your estate plan includes at least some mechanisms to deal with this “third rail” of estate planning.

Q. In connection with creating our estate planning documents, my husband and I would like to leave our children and grandchildren something more than just our money and assets. We would like to leave them a sense of our values. A friend mentioned something to us about an “Ethical Will”. Do you have any thoughts on this?

A. Yes. An Ethical Will is a statement in your own words expressing your values, hopes for the future, family history, emotions, and anything else that you would like to pass on to your loved ones. It deals with values, rather than with assets. It is really a very old concept: one of the earliest references is found in the Book of Genesis, chapter 49, where Jacob gathers his 12 children around him and gives them his charge for their futures.

Initially, Ethical Wills were transmitted orally, but eventually they were written down. Although an ethical will is not a legal document, it can be a valuable complement to legal documents. It can be an expression of love, a statement of personal or family history, a statement of lessons learned in life, a wish for the future of your loved ones, or anything else that you would like to pass on down as a personal legacy.

It is really a personal statement that carries your “voice” to future generations. It can be as simple as a one-page letter of love, or a novella length memoir detailing your life experiences.

In our family, we actually went a step further and videotaped my grandmother over a number of sittings, a project that ultimately took approximately 2 years to complete. We began with her earliest memories of growing up in Europe and covered all the history forward, all in her own voice. At times she broke into song, especially when our young children toddled into the room. That videotape, since turned into a DVD for preservation, is now a cherished family heirloom and each member of the family has a copy. We view it from time to time at family gatherings.

If you wish, your “Ethical Will” can be shared with your loved ones during your lifetime, and you might even add to it from time to time. It is your spiritual legacy which can live on long after your will or trust has been permanently filed away.

 

Q.  My wife and I had our Living Trust prepared back in the year 2008. I hear there have been changes in tax law since then which might affect us. Is it time to have our trust reviewed? 

A.  You refer to the Tax Cuts and Jobs Act,” (“TCJA”) signed by former President Trump on 12/22/2017, which has temporarily enlarged the current estate tax exemption to over $12 million per person for those dying between 2018 and 2025. It also permits a married couple to effectively double their exemption even without special estate tax planning, provided they so elect by filing a timely Estate Tax Return Form 706 after the death of the first spouse. Unless Congress votes to extend that TCJA before 2026, when it is otherwise scheduled to “sunset”, the estate tax for persons dying thereafter will likely return to the prior exemption, which was approximately $5,250,000 (plus increases for inflation) under the American Taxpayer Relief Act signed by former President Obama.

By comparison, when you created your own trust, the estate tax exemption was much smaller and special tax planning was required to minimize estate taxes. At that time, your attorney probably recommended a form of trust which was tailored to the lower estate tax exemption, namely a Living Trust with a Bypass Sub-Trust built into it. This Bypass Sub-Trust is also known as a “B Trust,” an Exemption Trust, a Family Trust, and a Credit Shelter Trust.

Bypass Trusts typically require that, on the death of the first spouse, a share of the couple’s assets be transferred into an irrevocable sub-trust called the “Bypass Trust”, rather than to the survivor directly. This is to preserve the first spouse’s estate tax exemption for later use at the survivor’s death.  Without the Bypass, the first spouse’s exemption would be lost and all trust assets at the survivor’s death would be sheltered by only the survivor’s one exemption and the excess (if any) was exposed to an estate tax at a rate as high as 55%. Understandably, couples went to great lengths to avoid that tax.

The typical Bypass Trust was not, however, without its problems: (1) the survivor typically lost the right to make any changes in the Bypass portion even if family circumstances have changed,      (2) the survivor’s access to the assets in the Bypass portion was usually restricted, (3) the Bypass trust could interfere with applying for a Medi-Cal long-term care subsidy, and (4) it usually required separate accounting and income tax returns during the life time of the survivor.  Surviving spouses usually found the restrictions burdensome.

Two important new developments arrived with the new law: (a) as of 2018, the amount of the estate tax exemption has now increased to over $12 Million per person, and is annually adjusted for inflation, and (b) the unused portion of the first spouse’s full exemption can now be preserved for use by the second spouse even without the use of the restrictive Bypass Trust, effectively doubling the exemption for most couples.

In view of these new developments, couples with Bypass Trusts created for estate tax purposes under old tax law should have their trusts reviewed and, where appropriate, consider eliminating the mandatory funding feature at the first spouse’s death. Instead, they might now consider plans which give the survivor the option of doing postmortem planning after the first death, e.g. by funding a portion of trust assets into an optional Disclaimer Trust. The Disclaimer Trust would then operate as a tax-saving Bypass Trust if that later appeared necessary due to the increase in value of the couple’s estate. 

An exception to the above recommendation:  The use of the mandatory Bypass Trust can still be useful for non-tax purposes, e.g. in situations involving second marriages. Here, each spouse usually wishes to provide financial security for the survivor, but also wishes to preserve a portion of assets for his/her own children. Under these circumstances, a Bypass Trust can still help these couples achieve their estate planning goals.

 

Q. My mother recently died. Her home, bank accounts and other assets were held in a Living Trust. Her financial advisor said we should now see a lawyer to help with trust administration. What? I thought if you had a Living Trust that there was little or nothing to do following the death of the trust-maker? Is that not so? 

A. Your mother’s financial advisor is correct. One of the most common misconceptions among those who have established a Living Trust is that there is little or nothing to do following the death of the trust-maker. In fact, depending upon the nature of the assets, there is often quite a bit to do.

Think of it this way: many people create Living Trusts in order to avoid a formal probate proceeding, which many people correctly understand to be a cumbersome, time-consuming process overseen by a judge in court. By comparison, administering a trust following death involves many of the same processes, except that it is controlled by a trustee in an out-of-court process called trust administration. A probate is a public proceeding, while administering a trust is typically private. Still, even with trust administration there are things to do and laws to follow.

While everyone’s situation is different, here is a partial list of things that need to be done during a typical trust administration:

Prepare formal, written notice to beneficiaries and heirs in legal format

Identify and protect decedent’s assets

Give formal notice to agencies: Medi-Cal, FTB, IRS

Prepare trust accounting, if required by the terms of the trust or work with Accountant undertaking that task

Obtain appraisals: for tax purposes and for distribution purposes

Lodge decedent’s Will with the Court in the County of Decedent’s Domicile

Ascertain and pay creditors

Deal with any Medi-Cal Estate Recovery Claim for benefits received by the Decedent

Resolve disputes among beneficiaries

Take title to real property in trustee’s name

Upon distribution, re-transfer title to beneficiaries

Assist with Non-Pro Rata Distribution of Home or selected assets where appropriate

Where necessary, arrange interim funding from special lender to assist with Non-Pro Rata Distributions

Deal with Property Tax Issues, such as “Prop 13” & recently enacted “Prop 19”

Sell real property where appropriate

Handle sub-trust funding if required by the trust

File fiduciary income tax returns, if sufficient income or work with Accountant undertaking that task

Assist accountant to file estate tax returns for larger estates or to elect portability for the surviving spouse

Arrange care for pets

Sometimes there are problems with a trust which need to be corrected by either (1) seeking a  court order to modify the trust, or (2) via the recently enacted Decanting Act, wherein some changes may now be handled by an out-of-court process. One example of the need for change might involve a trust prepared years ago, when tax laws were different, which should now be revised to comport with new tax law.  Another example: where a trust leaves assets to a beneficiary who is now disabled and receiving public benefits (such as SSI and Medi-Cal), and whose bequest should, instead, now go into a Special Needs Trust for his benefit so as not to disturb the continuation of those benefits.

While the rules regarding trust administration are generally more relaxed than those governing a probate proceeding, nevertheless it is wise for the successor trustee to consult with an attorney knowledgeable in these matters so that he or she can be properly advised and avoid tripping over legal requirements. Remember: the successor trustee typically has a fiduciary duty to honor the terms of the trust, comply with relevant law, and deal fairly with the designated beneficiaries.

We recommend that all successor trustees seek appropriate legal guidance so that they discharge their duties lawfully, minimize family disputes and avoid creating liability for themselves.

 

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Q. I heard that the Medi-Cal rules to qualify for a long-term care subsidy are about to change. This would be very important to us, as my husband, now aged 85, will soon need care in a nursing home, and we are very concerned about the cost. Do you know anything about this?

A. Yes, indeed, and you heard correctly! The changes coming are probably the most dramatic since the Medicaid program was first established under President Lyndon Johnson back in 1965. A bit of background may be helpful:

Historically, Medicaid, which we call “Medi-Cal” in California, has been a healthcare program for “the poor”, defined over the years as an individual with less than $2,000 in savings or other countable assets. That very modest number has not changed over the years.

However, if that individual is married, and has a spouse living at home in the community (a “Community Spouse”), a 1989 amendment to the Medicaid Act recognized the need for a Community Spouse Resource Allowance (“CSRA”), to avoid the impoverishment of the spouse at home. That CSRA amount has adjusted over the years based on inflation, and the current amount is $137,400. So, under today’s Medi-Cal rules, a married individual with a Community Spouse could qualify for a Medi-Cal subsidy if, together, their savings and other countable resources do not exceed the sum of $2,000 + $137,400 = $139,400.

The big change coming is the increase, and ultimately elimination, of the resource cap for the individual seeking a Medi-Cal subsidy. Under California legislation signed by Gov. Newsom as part of the 2021 Budget Bill (“AB 133″, at Section 364), the resource caps are set to be modified, and ultimately eliminated, in two stages, as follows:

1) Stage #1: Effective July 1, 2022, just a few short weeks away, the $2,000 individual resource ceiling will increase from $2,000 to $130,000. In addition, another $65,000 will be allowed for each household member, up to a total of 10. However, if that individual is married and has a Community Spouse who is not, herself, seeking Medi-Cal, then the couple’s combined resource allowance will be the sum of the following: $130,000 + $137,400 = $267,400.

The rules are a bit complex in terms of who qualifies as a Community Spouse (and is thereby entitled to the full CSRA of $137,400), but in our practice we have found that in most cases the spouse at home will so qualify, provided that he/she is not also seeking a Medi-Cal subsidy.

Stage #2: The California legislation proposes that on January 1, 2024, the resource caps will be eliminated entirely, subject only to Federal approval! While this approval has not yet occurred, rumor is that approval is likely. In that event, California will be the only state in the entire country that will have completely eliminated the long-standing resource test to qualify for a Medi-Cal subsidy.

However, the following aspects of the Medi-Cal rules will not change:

1) The rules pertaining to the treatment of INCOME. Currently income is considered in determining whether an individual has a Share of Cost (“co-pay”), and is also a determinant for eligibility for certain Medi-Cal programs, such as the Aged & Disabled Federal Poverty Level Program, and the Assisted Living Waiver Program;

2) The rules pertaining to ESTATE RECOVERY. Under current rules, California may seek to recover the benefits paid, following the death of a Medi-Cal beneficiary, if his/her estate goes through a full probate, unless statutory exceptions apply, such as survival by a spouse or a disabled child. Note: assets held in a Living Trust typically do not require a probate and are therefore usually protected from estate recovery.

3) The rules pertaining to the making of GIFTS.

Caution: For those Medi-Cal recipients who are on other programs, such as the Supplemental Security Income Program (“SSI”), note that those rules will not change and $2,000 continues to be the resource ceiling for an individual receiving SSI. Thus, an individual on both SSI and Medi-Cal, may be obliged to continue to keep his/her resources below the $2,000 cap.

These Medi-Cal changes are dramatic, and I predict that California may ultimately become a Mecca for the relocation of elderly parents who are now residing in other states. Whether easier access to a Medi-Cal subsidy will impact the quality of care in long-term care facilities, only time will tell.

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Note: the above discussion applies only to those persons over 65 years of age (and younger individuals on MediCARE due to a qualifying disability), the so-called Traditional Medi-Cal population (aka the Non-MAGI Population), but not to younger individuals who do not have a qualifying disability and are eligible for Medi-Cal pursuant to the “Patient Protection and Affordable Care Act”, based upon their modest incomes (i.e. the so-called “MAGI Population”). For this younger group, eligibility is based upon their “Modified Adjusted Gross Incomes”, alone, without regard to their resources). By raising and ultimately eliminating the resource requirement for the older, NON-MAGI population, AB 133 proposes to bring the (older) Non-MAGI population into line with the (younger), MAGI Population.

 

Q. One of our adult children has a disability and receives SSI and Medi-Cal. We are concerned that an inheritance may terminate his benefits. We have heard something about a Special Needs Trust. Can you tell us more about that?

A. Sure. As you apparently know, under present rules your son cannot have more than $2,000 in savings or other nonexempt assets and still remain eligible for these benefits. His receipt of an inheritance from you would likely put him over that ceiling and thereby terminate his eligibility.  However, the law permits you to create a Special-Needs Trust (“SNT”) to receive his inheritance without jeopardizing his public benefits.  The law’s purpose is to allow you to set aside “private funds” to supplement his SSI and/or Medi-Cal, and thereby enhance his quality of life in a kind of public–private partnership.

You could create the SNT as a stand-alone trust for your son and fund it during your lifetime, or you could do so as part of your own estate plan and fund it upon your demise. In either event,  you would designate someone other than your son to be the Trustee to hold and manage those funds, such as one of your other children, a trusted relative, or even the trust department of a bank. So long as properly created and managed, the funds in the SNT would allow the Trustee to  pay third-party providers of goods and services to him, while also preserving his public benefits.

Currently, a single individual on SSI in California, living independently, can receive a monthly benefit of up to $1,040.21(in 2022) or $1,110.26 if blind. Since the SSI program is designed to cover food and housing expense, there would be a modest reduction in his SSI if the SNT paid for those same expenses.  Therefore, it is usually best for the SNT to pay for expenses which are not food or housing, e.g.  transportation, cell phone, computer, training, etc.  Reason: payments for expenses which are not food or housing would result in no reduction in his SSI or Medi-Cal benefits.

The ISM Reduction: A Benefit Opportunity:  However, the SNT could even assist with the cost of food or housing, but in exchange for only a modest reduction in SSI.  Example: if the cost of an apartment were, say, $2,000 per month, your son could pay, say, $50 from his SSI toward that expense, and the SNT could pay the $1,950 balance directly to the lessor.  Your son’s SSI would then only be reduced by a flat $300.33 per month (in 2022), which is called the “Presumed Maximum Value” or “PMV”. Not a bad trade-off.  I call this the “PMV leverage”.

Further, if the SNT had sufficient assets, it could actually pay virtually any amount per month to any number of providers of goods and services to him, and here’s the beauty about how this works: no matter how much the SNT pays to all such 3rd parties for your son’s monthly housing or food expense, the maximum reduction in his monthly SSI benefit would never exceed the current PMV of $300.33 per month.  Thus, a well-endowed SNT could generate a substantial benefit to a person with a disability, with only a modest reduction in his or her SSI and usually none to his or her Medi-Cal eligibility.  The SSI rules which govern here are referred to as the “ISM Rules”, where ISM stands for “In Kind Support and Maintenance.”

Caution: the SNT should never distribute money directly to your son, as there would then be a dollar-for-dollar reduction in his SSI. Rather, payments should always be made to the third-party providers of goods and services to him.

Note:  if your son were receiving only Medi-Cal benefits, know that the Medi-Cal resource rules will be changing soon, and I plan to write an article on topic very soon.

 

Q.  My husband died last year, and I am now considering selling our home and relocating to be closer to our daughter.  I am concerned, however, about the potential tax consequences when I sell. Can you provide any information on this point?

A. Yes.  The biggest concern when selling property is capital gains taxes.  A capital gain is the difference between the “tax basis” in property and its selling price. The tax basis is usually the purchase price of property plus the cost of improvements. So, if you purchased a house for $250,000 years ago, added improvements at a cost of $100,000, your basis would then be $350,000.  So, if you sold it for $750,000, you would then have $400,000 of gain [$750,000 – ($250,000 + $100,000) =$400,000.

The $250K Exclusion:  However, you would then have the right to exclude a certain portion of that taxable gain using the home sale deduction provided in the Internal Revenue Code. Here is how that works: A single, unmarried person who has used the home as his/her principal residence for 2 out of the previous 5 years before sale can exclude up to $250,000 of that taxable gain. Couples, filing taxes jointly, can exclude up to $500,000 of that gain. But here’s the good news for persons in your situation:  Surviving spouses can claim a full $500,000 exclusion if they sell their home within two years of the date of their spouse’s death, and if other ownership and use requirements have been met. The result is that widows or widowers, who sell within two years of the passing of their spouse, will have a $500,000 capital gain exclusion!  By reason thereof, they may not have to pay any capital gains tax on the sale of their home (or at least far less than they would otherwise have to pay). So, consider a sale before the two years are up!

“Step-Up” in Basis:  However, the surviving spouse does not automatically owe taxes on the rest of any gain. This is because of another tax rule called the “step up in basis”.  Here’s how that works: When a property owner dies, the cost basis of the property is “stepped up” to its value at the time of his death.  This means the current value at death of the property becomes the basis. When a joint owner dies, half of the value of the property is stepped up. For example, suppose a husband and wife buy property for $200,000, and then the husband dies when the property has a fair market value of $300,000. The new cost basis of the property for the wife will be $250,000 ($100,000 for the wife’s original 50 percent interest and $150,000 for the other half passed to her at the husband’s death).

Double Step-Up for Community Property:  In community property states such as California, where property acquired during marriage is often the community property of both spouses, the property’s entire basis may stepped up when one spouse dies. However, the survivor would have to legitimately claim that the home was owned as the couple’s “community property” in order to get the “double step-up”.  If the couple held title to their home as their “community property” on their deed, the characterization would be clear. However, if they held it as “joint tenants” then the characterization would be less clear and the survivor might not be entitled to a double step-up in cost basis. This is why, where otherwise appropriate, I often urge couples to consider re-titling their home into their own names as their “community property”.

In California, there is a way to hold title that is similar to joint tenancy as regards survivorship. It is called “Community Property with Right of Survivorship”. I have written an article on topic which is available on our website

Property Tax:  There is one more tax to consider, and that is the Property Tax. If you are over age 55, then under recently enacted Proposition 19, you can relocate to any other county within the State of California and take your current low property tax with you, subject to certain conditions. In this regard, the Alameda County assessor has a lot of information on its website to explain this further and guide you.

Good wishes on your relocation:)