Before we discuss these procedures, let’s review the definition of an “estate.”  When a person dies, that person is called a “decedent.”  If the person has a revocable living trust, all assets in the trust are part of the trust estate. These assets will go to beneficiaries according to the terms of the trust.  They are not included in the “decedent’s estate.” The decedent’s estate includes assets which were in the name of the decedent only, without a beneficiary, and without a joint tenant. Also, assets owned by the decedent as a tenant in common are part of the decedent’s estate. The decedent’s estate is sometimes called the “probate estate” or simply, the “estate.” Assets which have a beneficiary named, such as an IRA or life insurance, go directly to the beneficiary without probate. Also, assets that are held in joint tenancy or tenancy by the entirety go to the surviving owners without probate.  These assets are not part of the decedent’s estate.

            Suppose a person dies with the following assets:  $1,000,000 of real estate in his revocable living trust; $100,000 in a joint bank account with his wife;  $50,000 in an IRA with his daughter as beneficiary; 1/5 of a vacant lot worth $500,000 which he owns with his brothers and sisters as a tenant in common, and $5,000 in a credit union account in his name only. Upon death, the $100,000 of real estate owned as tenant in common and the $5,000 in the credit union account would have to go through a probate proceeding.

            This estate would have to go through probate because the value is more than $100,000.  If this person had put his 1/5 share of the vacant lot into his revocable living trust, then there would have been no need for a probate.

            If a person dies with $100,000 or less in assets, with no real estate, the assets can be collected by using an Affidavit for Collection of Personal Property.  An “affidavit” is a notarized statement. The Affidavit for Collection of Personal Property must be signed by the person claiming the property, and must be accompanied by a death certificate. The affidavit form is sometimes provided by the financial institution.  Otherwise, it can be obtained from the court or from an estate planning attorney. Motor vehicles can be claimed by signing an affidavit at the county Department of Motor Vehicles. The value of motor vehicles does not have to be counted to see if the decedent had more than $100,000.

            If the person dies with any real estate in his name only or as a tenant in common, even if the estate is not more than $100,000, a court proceeding is necessary.  The Small Estates division of the circuit court can help you with a small estate proceeding without your having to hire an attorney. They charge a fee of 3% of the value of the estate, plus court filing fees and newspaper publication costs. If there are no complications, a small estate proceeding takes an average of 10 to 12 months, which is about as long as a regular probate should take.

            One disadvantage of the small estate proceeding is that you cannot sell the property until everything is finished. If you want to sell the real estate without having to wait for a year or so, you would probably be better off hiring an attorney to do an informal probate proceeding.  With an informal probate, you can start advertising the property for sale immediately, and you can sell it as soon as the court appoints a personal representative, which may take about 6 weeks after you retain an attorney.

© OKURA & ASSOCIATES, 2009

Sanford K. Okura received his Doctor of Jurisprudence Degree from Stanford University in 1976.  He specializes in Estate Planning and Medicaid Planning to protect assets from nursing home costs, probate and estate taxes.

This written advice was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.)

This column is for general information only.  The facts of your case may change the advice given.  Do not rely on the information in this column without consulting an estate planning specialist.

1) gift taxes; 2) Medicaid rules for nursing home costs; and 3) capital gains taxes.

Many people think you can give only $10,000 tax-free to each individual.  Actually, the amount is now $13,000 a year.  This is called the “annual exclusion” from the gift tax.  This year you can give $13,000 to any number of persons without even reporting it to the IRS.

What most people don’t realize is that, in addition to the $13,000 a year, you can actually give away $1,000,000 during your lifetime, tax-free!  The law is that you can die this year with $3,500,000 tax-free and in 2011 with $1,000,000 tax-free.  You can use up part of that $3,500,000 by giving away $1,000,000 tax-free during your lifetime.  Here is how it works.  Suppose you give $100,000 to your daughter today.  $13,000 of that amount is a totally tax-free gift.  $87,000 is a “taxable gift.”  However, that does not mean you have to pay a gift tax.  You file with the IRS a “gift tax return,” which is different from the income tax return you file every year.  On the gift tax return you report that you gave a taxable gift of $87,000.  You use $87,000 of your million dollar lifetime exemption from gift tax, so you do not have to pay any gift tax.  Now you can die in 2009 with $3,413,000 of assets tax-free, in 2010 with everything tax free, or in 2011 with $913,000 tax free.

Don’t rush out and give away assets just because it is tax-free.  There are ways to give away $100,000 of assets and legally report that you only gave away $70,000.  Also, even though you can give away large amounts without any gift tax problems, you might be causing an unexpected Medicaid problem.  You must consider both the gift tax laws and the rules for Medicaid for nursing home costs.

A good reason for giving away assets is to protect them from nursing home costs.  As a general rule, for every $8,850 of assets you give away, there will be a one month penalty period during which Medicaid will not pay for your nursing home costs.  (There used to be a one month penalty for every $7,314 of assets you give away, but it changed to $8,850 in November 2008.)  For example, if you live in a condo worth $350,000 and give it to your children, there will be a waiting period of 39.5 months before Medicaid will help you pay your nursing home bill ($350,000 divided by $8,850 = 39.5 months).  However, there are techniques you can use to legally shorten the waiting period for Medicaid.  Suppose you are 70 years old, and instead of giving your condo to your children completely, you give it to them but keep a “life estate.”  A life estate means you still own the condo for the rest of your life, and you can still live there, but your children already own the “future interest” in the condo.  Using tables provided by the government, we calculate that the value of the future interest you gave your children is not $350,000, but only $138,173.  Therefore, your Medicaid waiting period is only 15.6 months, instead of 39.5 months.  If the nursing home charges $8,000 a month, you could save $191,200 in nursing home costs by using this simple technique!

Finally, the way you give property away can affect the capital gains taxes your children will pay if they ever sell the property.  (See my February, 2005 Estate Planning Insights column on “The Stepped Up Basis.”)  You may want to give away property in a way that lessens your children’s capital gains taxes.

The thing to remember is this:  whenever you give away assets, you may be causing a gift tax problem, a nursing home cost problem, or a capital gains tax problem.  Always seek expert advice before making a gift of more than a few thousand dollars.  

© OKURA & ASSOCIATES, 2009