Here is a 2012 update on important numbers used in Estate Planning and Medicaid Planning in Hawaii.

How much money and property can a person have at death without paying estate taxes?

Under a temporary federal law, $5,000,000 is tax free this year. From January 1, 2013, only $1,000,000 will be tax free.  There is a bill in Congress, introduced on November 17, 2011, called the “Sensible Estate Tax Act of 2011,” which proposes to reduce the exemption to $1,000,000 immediately. You can track this bill at http://www.govtrack.us/congress/bill.xpd?bill=h112-3467. There is also a Hawaii Estate Tax.  The State Tax Department is saying that $3,500,000 is tax-free.  The law is ambiguous.  It could be argued that the state exemption is meant to be the same as the federal exemption – $5,000,000.

How much can a person give away without paying a gift tax? You can give $13,000 each year to each person without having to report it to the IRS.  You can give any amount to a husband or wife who is a U.S. citizen without reporting to the IRS.  If you give more than $13,000 to any person in one year, then the amount over $13,000 is a “taxable gift.”  You have to file a gift tax return to report the gift, but for 2012, you can give up to $5,000,000 of taxable gifts in your lifetime without paying a gift tax.  This amount goes down to $1,000,000 in 2013. For the wealthy, now is the time to give.  If you give assets away, there will probably be a Medicaid penalty if you need nursing home care.  Do not give away assets (not even your home) without expert advice about the effect of both gift tax laws and Medicaid laws.

How much in assets can a husband and wife have and still qualify for Medicaid to pay nursing home costs for one of them? A husband and wife together can have $115,640 in assets and still have Medicaid pay for the nursing home costs for one of them. (The amount was $111,560 last year.) This $115,640 is in addition to the following exempt assets, which the government will not count: necessities such as clothing, furniture and appliances; motor vehicles; funeral or burial plans; one burial plot for each family member; one wedding ring and one engagement ring, and up to $786,000 of equity in a home. (The equity limit was $750,000 last year.)

If a person is not married, or if both husband and wife need nursing home help, how much in assets can each have and still qualify for Medicaid for nursing home costs? A single person can have $2,000; a married couple can have $4,000.

If you give away assets to your children, how long do you have to wait before you can qualify for Medicaid for nursing home costs without a penalty? The answer is 5 years.    However, this does not mean that you have to wait 5 years before getting Medicaid help.  There are ways to reduce or eliminate the penalty period.

If a person qualifies for Medicaid for nursing home costs, how much of the family income can the spouse keep? The spouse who is not in the nursing home (“community spouse”) can keep all of his or her own income (social security checks, pension checks, etc.).  If the income of the community spouse is less than $2,841 per month, the community spouse can also be given some of the income of the one in the nursing home to bring the community spouse’s income up to $2,841.  The one who is in the nursing home has to use the rest of his or her income towards nursing home costs, except for $50 a month, which can be kept.

When is a probate necessary? Probate is necessary in Hawaii if a person dies with real estate of any value, or other assets worth over $100,000, which are not in a revocable living trust, not in joint names with right of survivorship, and do not name a beneficiary.

© OKURA & ASSOCIATES, 2012

People often ask me for advice about reverse mortgages.  They hear that with a reverse mortgage the bank pays you instead of your paying the bank, and that sounds good to them.  Here is the advice I give them:  if you want your children or other loved ones to inherit your home, do not get a reverse mortgage.  If you don’t mind having your home go to the bank rather than to your children when you die, then it might be ok to get a reverse mortgage.

The name “reverse mortgage” is not accurate. A more accurate name would be “anaconda mortgage,” because like the anaconda snake, a reverse mortgage will usually swallow up your home, so that it cannot be left to your children as an inheritance.

A reverse mortgage requires that all the owners of the home be at least 62 years old. You can choose to receive a lump sum loan, a loan that comes to you in monthly installments, a line of credit, or a combination of the three.  The bank does not “pay” you. You are borrowing money, the same as with any other mortgage. The difference is that you do not have to make any payments to the bank until you are no longer living in the home. The bank charges large fees when you first get the reverse mortgage, and charges you interest and fees every month. Since you are not making payments, the bank is earning compound interest. The interest and fees you are not paying are added to your loan every month, the interest amount increases every month, and you owe the bank more and more every month.  It is amazing how quickly the balance owing grows to a large amount.

If you die or move out of your home, the entire loan balance must be paid.  If a husband and wife have a reverse mortgage together, when both of them die or move out of the house, the entire balance must be paid. Many times, the loan balance is so large that the children cannot afford to pay it off. The bank then forecloses on the mortgage. Often, the bank ends up owning the home. The bank can then sell the home at a profit, and keep all the profit, in addition to the interest and fees that were charged. The children get nothing.

Also, a reverse mortgage makes it impossible to protect your home from nursing home costs. One of the best ways to protect your home from nursing home costs is to transfer it to an irrevocable trust for your children, and to keep a life estate in the property. A reverse mortgage does not allow you to use this asset protection technique. Also, with a reverse mortgage, if you have to go into a nursing home, the bank will demand that you pay the entire balance of the loan.  Since you will probably not be able to pay off the reverse mortgage, you either have to sell the home, or the bank will foreclose.  When your home is sold, the reverse mortgage could eat up all of the money from the sale.  If it doesn’t, then the bank will take everything that is owed them, and you will end up with some cash.  That cash will disqualify your from Medicaid (unlike a life estate in the home, which would have been an exempt asset).

If you absolutely need more income to survive, before getting a reverse mortgage, see if your children or other loved ones would be willing to buy a remainder interest in your home, with your keeping the right to live in the home. You could charge a low interest rate, much lower than the bank would, and have your children pay a monthly amount, without any down payment. If they could afford to do that, you could have your increased income, and they could end up with the home at a low cost.

© OKURA & ASSOCIATES, 2011

Many senior citizens are worried about probate and death taxes.  For most people, the fear of probate and estate taxes is misplaced.  The greatest threat to our hard earned money is not probate or taxes, but nursing home costs.

This year and next year, a person can die with $5,000,000 of assets without any estate tax.  Under current law, beginning 2013, $1,000,000 will be tax free at death.  Estate taxes will not be a problem for most of us.

Probate (a court proceeding) is required when a person dies with assets in his or her sole name.  Although going through probate is inconvenient, it usually is not very expensive.  If a person dies owning a home and bank accounts, the probate might cost $5,000 to $10,000.

Nursing home costs, on the other hand, run $8,000 to $14,000 a month!  If staying in a nursing home costs $9,000 a month, that totals $108,000 a year.  Three years in a nursing home will cost $324,000.  This could wipe out everything a person has saved over a lifetime.

Medicare, which most of us have after age 65, pays only for a maximum of 100 days of nursing home costs.  Even though the rules say that they can pay for up to 100 days, on the average, Medicare only pays for about 25 days of nursing home costs.  As soon as the patient’s condition stabilizes, Medicare stops paying.  The patient then has to use his or her own money to pay $8,000 to $14,000 a month.  To get Medicaid (which is different from Medicare) to pay for nursing home expenses, the patient’s assets have to be below a certain amount.  If you are married, you and your spouse together can have $111,560 in assets and still qualify for Medicaid.  If you are single, you can have only $2,000 in assets.

Some senior citizens, because they don’t want to lose their assets to nursing home costs, will give their assets away to children.  You need to be careful, because when you give away assets, there will be a penalty period during which Medicaid will not help you.  Many people think the penalty period is 5 years.  The penalty period can be shorter or longer than 5 years.  These rules are complicated, and you should not give away assets without expert advice.

If you do get your assets below $2,000 and qualify for Medicaid, the government will help pay your nursing home expenses.  But watch out, because there is a trap.  Even though the home is an “exempt asset” and is not counted when adding up your assets, if you are single, the government can usually put a lien on your home.  Even if you are married, if you are in a nursing home and your spouse dies first, a lien will go on your home.  A lien is like a mortgage.  It guarantees that the government will someday get back all the money it pays for your nursing home expenses.  Your children are forced to sell the home or mortgage it to pay back the government.

Another trap is having your home in a revocable living trust.  A trust is good for protecting your assets from probate.  However, a revocable living trust cannot protect your assets from nursing home costs.  In fact, since May 10, 2003, you cannot qualify for Medicaid if your home is in a trust, even if you have less than $2,000 in assets.  To qualify for Medicaid, the Medicaid office will force you to take your home out of your revocable living trust.  When you take your home out of your trust, the government will be able to put a Medicaid lien on it!

Estate planning is now a lot trickier than it used to be.  Many senior citizens who have trusts think they are safe.  They actually face the risk of nursing home costs, which for the ordinary person, is a far greater threat than probate or taxes.

NEW LAW:  TRANSFER ON DEATH DEED

Hawaii has a new law which allows real estate to go to a beneficiary when the owner dies, without having to go to court for probate. This new procedure requires a new kind of deed, called a “Transfer on Death Deed.” Governor Abercrombie signed Act 173, which creates this new law, on June 27, 2011. The law became effective on July 1, 2011. The law is called the Uniform Real Property Transfers on Death Act.

Let me explain how the law in Hawaii works for anyone who doesn’t have a Transfer on Death Deed. If a person dies owning any real estate in her name only, when she dies, there would have to be a probate proceeding in court before the persons named in the will could inherit. Probate usually takes about one year.  Sometimes it takes much longer. In the experience of our law firm, the attorney’s fees for handling a typical probate without complications can run between $3,000 and $6,500.  If the person dies with $100,000 or less, then the court can handle the probate as a “small estate” proceeding without an attorney. Still, the court charges 3% of the value of the property as a fee, and adds court costs and newspaper publication fees, and often takes as long as an attorney handling a probate case. Even if a person dies owning a tiny portion of land worth only a few hundred dollars, a probate or small estate proceeding is required before ownership can pass to the heirs.

Because of the time and expense caused by probate, many people use revocable living trusts to avoid probate. Others add a joint owner to the property to allow the joint owner to inherit without probate. Adding a person as a joint owner creates special problems, because then you are actually giving away half of the property at the time the joint owner is added.

Now, with the new Transfer on Death Deed, it is possible to avoid probate without a revocable trust and without adding a joint owner to the property. A Transfer on Death Deed names a beneficiary who will inherit the property upon death of the current owner.  It is similar to a “pay on death” bank account or credit union account, where upon your death, the money goes to the beneficiary you named. With a Transfer on Death Deed, you still own the property, you can still sell it or mortgage it, and you can change your beneficiary at any time. Yet, if you die, the property goes to your beneficiary without having to go to court for probate. To cancel or change a beneficiary, the legal document showing the change must be recorded in the Bureau of Conveyances in Honolulu before you die.

The Transfer on Death Deed could be a good idea for some people.  However, it does have some problems of which you need to be aware.  If you have or need an A-B Trust to protect assets from estate taxes, you should probably have your real estate in your trust. Having real estate go directly to a beneficiary could mess up the way the A-B Trust is supposed to work to protect assets from estate taxes. If you are old enough to start being concerned about nursing home costs, then I would not recommend a Transfer on Death Deed, because that kind of deed will not protect real estate from nursing home costs.  Instead, I would recommend transferring the property to an irrevocable trust, keeping a life estate in the property. Also, if you would like the property to be protected after your death in case your child gets a divorce or has enough assets to be taxed by the estate tax, I would recommend putting your property into a generation skipping trust, for asset protection.

The Transfer on Death Deed might be appropriate for someone with a small estate who is not concerned about nursing home costs.

Here is a Medicaid rule that often surprises those in nursing homes: if your home property is in a Revocable Living Trust, you cannot qualify for Medicaid for nursing home costs until you take your home out of the trust.  However, if the healthy spouse is living in the home, the Medicaid worker generally ignores the rule, and does not require the home to be taken out of the trust. Then the Revocable Living Trust can become a trap, so that your home could later be lost to nursing home costs.

Let me give you an actual example.  Husband and Wife are elderly.  Wife suffers from dementia, and is not mentally competent.  She is in a nursing home.  Husband is healthy.  Husband and Wife own a home, which is held in their Revocable Living Trusts.  The trusts say that when both Husband and Wife die, the property will go to their children equally.  Medicaid has been paying Wife’s large nursing home expenses for years. 

Wife’s trust says that her half of the trust assets are to be used for her support. Wife is not mentally competent, so she cannot take her half of the property out of the trust.  Husband can take his half of the property out of the trust, but he can only take Wife’s half out of the trust to put it in her name.  If the property is left in both trusts and Wife dies first, the property will all go to husband, and he may be able to give it to his children.  However, the gift will cause a Medicaid penalty period if he needs nursing home help for himself.  If Husband dies first, the property will all go to wife, a Medicaid lien will probably be placed on it, and the entire property could be lost to nursing home costs. 

There is another option.  Husband could give his half of the property to his children now.  However, if Wife outlives Husband and still owns her half of the property at the time she dies, the government will be able to get reimbursed for Medicaid payments out of her half of the property.  This is not a good situation to be in. 

The problem with this trust is that it does not clearly allow Husband or the children to transfer Wife’s property out of the trust to themselves after she is incapacitated.  The trust provides that after she is incapacitated, her trust assets are to be used for her benefit.  If the trust assets can be used only for her benefit, then since Medicaid is paying her nursing home costs, her assets in the trust may have to be used to pay back the government.  A trust like this may be fine for a single person with no children who wants to make sure that no one gets any of her assets unless some assets are left after she dies.  However, if a person has a spouse or children, or would prefer to have a relative or friend, rather than the government, receive her assets, the trust should be worded differently.

Our law office has seen many different trusts written by many different attorneys.  Most trusts have the problem described above.  Most trusts are written so that the assets may become trapped if the person becomes incapacitated and enters a nursing home.  The reason for this is that most trusts were written to avoid probate or estate taxes.  The attorney who prepared the trust was not thinking about protecting assets from nursing home costs. 

The problem can be solved by amending the trust to make it more flexible.  There should be some way of transferring the assets to someone else in case of incapacity.  If you have a trust, it would be a good idea to have it reviewed to make sure it gives you the flexibility you need in case nursing home care becomes necessary.   

Your will or trust probably says that you give your assets to your children when you die.  (Whenever I mention “children,” I also mean nieces and nephews, brothers and sisters, or anyone else who will be inheriting your assets.)  The problem with giving property or money directly to your loved ones is that it can be taken away from them by death, divorce or taxes.

Let me give you an example.  Suppose you and your spouse die, and leave an inheritance to your daughter.  Your daughter is married, and has children.  She dies before her husband.  When she dies, everything she owns, including the property she inherited from you, goes to her husband.  Her husband remarries.  Then he dies.  Everything he owns, including the inheritance you left for your daughter, goes to his new wife.  Your own grandchildren get nothing.  Your son-in-law’s new wife, who is a stranger to you, ends up owning the property you worked hard for all your life, and your own grandchildren get none of it!

Here is another example:  divorce.  Suppose you and your spouse die, and leave your property to your daughter.  She puts her husband’s name on the property with her.  They get a divorce.  In the divorce, her husband takes half of the property you gave to your daughter.  Even if your daughter does not put her husband=s name on the property, in a divorce, he may be able to get half of the growth in value.

Here is another way you can unintentionally hurt your children by giving them an inheritance.  Suppose when you and your spouse die, you leave your son an inheritance worth $400,000.  Your son is a hard worker.  He saves money and invests.  He becomes successful.  The years go by.  Your son dies.  When he dies, his estate has to pay estate taxes before his children can inherit his assets.  He is in a 50% estate tax bracket.  The property you gave your son as an inheritance has grown to $600,000 in value.  Therefore, the inheritance you gave your son increases his estate taxes by $300,000 when he dies.  Your grandchildren get only half of the property you left for your son! The IRS gets the other half.

There is a way to avoid the kinds of problems I describe above.  The answer is a special kind of trust called a “generation skipping trust” or “dynasty trust.”  Here is how it works.  When you and your spouse die, the trust does not give your assets directly to your children.  You may have the trust split into separate trusts so that each of your children gets his or her own trust.  Each son or daughter becomes trustee of his or her own trust.  As trustee, they can control their own inherited assets.  Each son or daughter is also beneficiary of his or her own trust.  Anytime they need money, they can take out of the trust any amount of money they need for their own health, education or support.  To get money out of the trust, all they have to do is write a check from the trust account to themselves.  It is that simple.

As Trustees, your children have control of your assets after you die.  As Beneficiaries, your children can use the assets.  Yet, technically, they do not own the assets; the trust does.  Therefore, when your children die, the inheritance you left them does not go to their spouses; it is guaranteed to go to your own grandchildren.  If there is a divorce, the divorcing spouse cannot take away any of the inheritance you left to your own child.  If your son or daughter dies wealthy, there is no estate tax on the assets in the generation skipping trust, no matter how large it may grow!

If your trust is not a generation skipping trust, this is something worth looking into.

© OKURA & ASSOCIATES, 2011

By

Sanford K. Okura

Here is a 2011 update on important numbers used in Estate Planning and Medicaid Planning in Hawaii.

How much money and property can a person have at death without paying estate taxes?

Under a temporary federal law, $5,000,000 is tax free this year and next year.  From 2013, only $1,000,000 will be tax-free. The amount will probably be changed again in the next year or two.  There is now also a Hawaii Estate Tax.  The State Tax Department is saying that $3,500,000 is tax-free.  In my opinion, the law is ambiguous.  It could be argued that the state exemption is meant to be the same as the federal exemption – $5,000,000.  I will inform you in this column of further changes and clarifications.

How much can a person give away without paying a gift tax? You can give $13,000 each year to each person without having to report it to the IRS.  You can give any amount to a husband or wife who is a U.S. citizen without reporting to the IRS.  If you give more than $13,000 to any person in one year, then the amount over $13,000 is a “taxable gift.”  You have to file a gift tax return to report the gift, but for 2011 and 2012, you can give up to $5,000,000 of taxable gifts in your lifetime without paying a gift tax.  This amount goes down to $1,000,000 in 2013. For the wealthy, now is the time to give.  If you give assets away, there will probably be a Medicaid penalty if you need nursing home care.  Do not give away assets (not even your home) without expert advice about the effect of both gift tax laws and Medicaid laws.

How much in assets can a husband and wife have and still qualify for Medicaid to pay nursing home costs for one of them? A husband and wife together can have $111,560 in assets and still have Medicaid pay for the nursing home costs for one of them.  This $111,560 is in addition to the following exempt assets, which the government will not count: necessities such as clothing, furniture and appliances; motor vehicles; funeral or burial plans; one burial plot for each family member; one wedding ring and one engagement ring, and up to $750,000 of equity in a home.

If a person is not married, or if both husband and wife need nursing home help, how much in assets can each have and still qualify for Medicaid for nursing home costs? A single person can have $2,000; a married couple can have $4,000.

If you give away assets to your children, how long do you have to wait before you can qualify for Medicaid for nursing home costs without a penalty? The answer is 5 years.    However, this does not mean that you have to wait 5 years before getting Medicaid help.  There are ways to reduce or eliminate the penalty period.

If a person qualifies for Medicaid for nursing home costs, how much of the family income can the spouse keep? The spouse who is not in the nursing home (“community spouse”) can keep all of his or her own income (social security checks, pension checks, etc.).  If the income of the community spouse is less than $2,739 per month, the community spouse can also be given some of the income of the one in the nursing home to bring the community spouse’s income up to $2,739.  The one who is in the nursing home has to use the rest of his or her income towards nursing home costs, except for $50 a month, which can be kept.

When is a probate necessary? Probate is necessary if a person dies with real estate of any value in his name only or as a tenant in common.  With assets other than real estate, probate is necessary in Hawaii if a person dies with assets worth over $100,000 which are not in a revocable living trust or joint account, and do not name a beneficiary.

First, it is important to understand the reciprocal beneficiary law, created by the Hawaii State Legislature in 1997.  Partners who register with the State Department of Health as reciprocal beneficiaries gain about 50 to 60 rights out of approximately 160 rights which married couples have under Hawaii law.  In the area of estate planning and inheritance, the law appears to give reciprocal beneficiaries all of the rights that married couples have in Hawaii.

Let me list some of the ways inheritance rights and estate planning are affected by both the reciprocal beneficiaries law and the civil unions law.  Under both laws, if a person dies with assets in his or her own name, the surviving partner is entitled to claim a homestead allowance of $15,000, an exempt property allowance of $10,000, and a family allowance, usually of $18,000.

If a person dies without a will, the surviving partner has the same right of inheritance as a surviving spouse.  The intestacy law applies only to property which is not distributed by a will, trust, joint ownership, or beneficiary designation.  If the person dies with no living descendent but has a living parent, then the surviving partner gets $200,000 plus 3/4 of the balance of the assets.  If all of the person’s descendants are descendants of the surviving partner and if the surviving partner has one or more other descendants, then the surviving partner gets $150,000 plus 1/2 of the balance of the assets. If one or more of the descendants of the person are not descendants of the surviving partner, then the surviving partner gets $100,000 plus 1/2 of the balance of the assets.

If a person dies leaving assets to someone other than the surviving partner, the surviving partner can claim an “elective share.”  An elective share is a percentage of the combined assets of the deceased partner and the surviving partner, including life insurance death benefits and some assets transferred to other people.  The percentage which the surviving partner can claim depends on how many years they have been registered as reciprocal beneficiaries or united in a civil union.  For example, the surviving partner is entitled to 3% after one year, 30% after 10 years and 50% after 15 years of union.

Another important property right available to both reciprocal beneficiaries and couples in a civil union is the right to own property as tenants by the entirety, a right traditionally reserved only to married couples.  Unlike jointly owned property, no part of tenancy by the entirety property can be transferred or mortgaged unless both owners sign the deed or mortgage document.  Also, tenancy by the entirety property is protected from lawsuits against one of the partners.  The person bringing the lawsuit can go after tenancy by the entirety property only by having a good reason for suing both partners, and by getting a judgment against both partners.

Having a civil union does not give the partners any rights under federal laws, including federal estate and gift tax laws.  Although a married person can give to a spouse any amount of assets without any gift tax consequence, a person cannot give a civil union partner more than $13,000 a year without filing a gift tax return and using up part of the person’s exemption from estate tax.  Therefore, a person should seek advice from an estate planning specialist before putting property into joint tenancy or tenancy by the entirety with a civil union partner.

If you own property in any of the following states, it is important that you understand the basics about community property: Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.  Also Puerto Rico and some Indian nations allow property to be owned as community property.  In Alaska, you can choose to have property be community property.  In the other nine states listed above, the community property laws apply automatically.

Community property laws affect married couples who own property in the community property state.  These laws affect property rights of the husband and wife in case of divorce.  They also affect rights of inheritance at death.  They also affect capital gains taxes when the property is sold after death of the husband or wife.

As a general rule, in a community property state, most property bought during the marriage is considered to be community property, and is therefore owned by both the husband and wife, even if title to the property is in the name of only one of them.  However, property that was acquired before the couple was married to each other is separate property, not community property.  Also, property that is given as a gift or inheritance to the husband or wife is separate property.

If the couple gets a divorce, the community property is generally split 50-50 between them.  If one of the couple dies, the surviving spouse can often claim half of the property owned by the one who died, even if his will or trust doesn’t give it to her. The specific laws of each community property state are different from the laws of the other community property states.  If you have a specific question about how community property laws affect your property, you need to find out about the specific laws of the state where the property is located.

One of the most useful things about community property is the affect on the “stepped up basis.”  Let me first review how stepped up basis works in a separate property state like Hawaii.  Suppose you and your spouse bought a vacant lot many years ago for $10,000.  Now, that same land is worth $110,000.  If you sell that land for $110,000, your gain is $100,000 ($110,000 minus $10,000).  You have to pay capital gains taxes on that gain.  The federal capital gains tax rate for property held more than one year is generally 15%.  The State of Hawaii rate is 7.25%.  You would have to pay $22,250 in taxes.  (If you itemize deductions, you can take a deduction the following year on your federal income tax return for the state taxes paid.)  Suppose that instead of selling the property, you hold on to the land until you pass away.  Your spouse inherits your half from you.  Then she sells it for $110,000.  She does not have to pay any capital gains taxes on the half of the property she inherits from you.  When you die owning land, the tax basis in your half changes or “steps up” from $5,000 to $55,000 (the fair market value of your half on the date of death.)  When your spouse sells the whole property for $110,000, her gain and tax on the half she inherited from you is zero.  However, she still has to pay $11,125 in taxes on her own half of the property.

With community property, when one spouse dies, the ­entire property gets a stepped up basis.  The surviving spouse can then sell the property at date of death value, and pay zero taxes!

If you own property in a community property state, it is possible to add to your trust and your spouse’s trust special provisions that retain the community property nature of the property even though you live in Hawaii. Then, if one spouse passes away, the surviving spouse has the tax advantage of a stepped up basis, and can sell the property with no capital gains taxes.

If you put another person’s name on property or a bank account as a joint tenant, then that person’s creditors can come after the property.  Let me share the experience of one of my clients.  She had a joint bank account with her daughter.  One day, she received the bank statement in the mail and looked at it.  Thousands of dollars had been taken out of her account!  She called the bank and talked to several people before she finally understood what happened.  Her daughter had gotten divorced. The daughter’s ex-husband was supposed to pay the car loan.  He stopped paying. His wife was still legally liable for the loan.  The car loan was at the same bank where mother had the joint account with daughter.  The bank saw that there was money in the account with daughter’s name on it, so they took out of that account thousands of dollars to pay off the car loan that her ex-husband was supposed to pay!  That is just one of the risks you face whenever you have a joint tenant.

Joint tenancy also lessens your control over your property.  If you own property with only you on the title, then you can make all the decisions for that property.  You can sell it and keep all the money.  You can put a mortgage on the property.  However, when you add someone else to the property as a joint tenant, then you need that person’s permission to sell it or put a mortgage on it, and if the property is sold then that other person gets half of the money.  Also, the other joint tenant can give his half away, or sell it.  The other joint tenant can force a sale of the property and take half the money.  You can’t take the other joint tenant’s name off the property without his permission.  The risks are greater when you add more than one joint tenant.

Joint tenancy can also have unintended tax consequences if you have enough assets to be taxed by the estate tax.  If you paid for the property, then add someone else as a joint tenant, when you die, the value of 100% of the property is counted for estate tax purposes, even though you only own half of the property.  Also, once you add someone else on the property as a joint tenant, you have given her a gift.  If the value of the gift exceeds the annual exclusion amount, currently $13,000, then you should file a gift tax return with the IRS.

Joint tenancy does not protect your home from Medicaid liens.  If you go to a nursing home and qualify for Medicaid, the government can still put a lien on your half of the property.  A lien is like a mortgage.  It means that someday the government will collect from your half of the property all the money they pay for your nursing home costs.

The exposure to creditors, loss of control, unintended tax consequences and loss to nursing home costs can be avoided by using other methods.  A revocable living trust avoids probate, limits the property’s exposure to only your creditors, keeps control over the property in your hands, but does not protect property from Medicaid liens.  It is wise to consult a knowledgeable estate planning attorney before deciding on the best way to protect your assets.