And so we begin…
A widower with three children, Sam heard he can protect his assets if he gives them away. As a result, he decided to change the title of his assets to his oldest daughter Carol. Sam and Carol have a verbal understanding that the assets are really his, but Carol will have the legal title. Sam lives in the house he gave to Carol, and Carol lives in her own home with her husband.
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While Sam is alive and well, he no longer has control over his assets since they are not legally his. In the event that he gets sued, his assets are not exposed because he technically has none. However, if Carol gets sued Sam’s assets are exposed because she has the legal title. Also, if carol gets divorced Sam’s assets become exposed.
As he has aged, Sam is swept with a catastrophic illness and moves into Stage Two. Fortunately, Sam gave his assets away to Carol over five years ago so he is immediately qualified for Medicaid. If Sam gave his assets away less than five years before applying for Medicaid, Carol would have to give some or all of the assets back to Sam to pay for his care during the disqualification period. Because Sam did not have a Health Care Proxy or Durable Power of Attorney, a problem arose. For those of you unaware of what a Health Care Proxy is, it is the designation of decision making to another person if you are unable to make the decisions yourself. On the other hand, the Durable Power of Attorney is important in relation to Medicaid because it allows another person to act on your behalf when any legal decisions arise.
Confused at what to do next, Carol went to an estate planning attorney for help. The attorney petitioned the probate court to have Sam declared legally incompetent (such an action would appoint Carol with the decision making powers). Eventually, Carol was appointed as Joe’s guardian for financial matters. Sam’s condition worsened, and the doctor informed Carol that Sam is in a persistent vegetative state and is highly unlikely to recover to resume a normal life.
Now we have reached a point of conflict; there is disagreement amongst the children over Sam’s future. Carol’s brother believes his father would want to stay alive. Carol and her other brother think Sam would have wanted to terminate life support. As the siblings argue over who has the authority to make health care decisions for Sam, Sam is being kept alive.
Upon his death, there was no probate since Sam had no assets. Now in Stage Three Carol sold the house that Sam gave her and liquidated all of his accounts. When Sam gave Carol the house, he also gave her his tax bases in the house. He purchased the house many years ago for $100,000. It is now worth $400,000. When Carol sold the house she paid capital gains tax at a rate of 20% (combined state and federal rate) or $60,000.
As a result, Carol made gifts to her two brothers. Since she made gifts of over $12,000 in a year, she is now exposed to a gift tax at a rate of 50%.
To have avoided the confusion over who had legal decision making authority, it would have been wise for Sam to plan his estate. The benefits of avoiding the disorganization described above can be achieved through the establishment of a trust or will.
To learn more information about setting up a trust or will, contact Gerald Turner at 781-239-8900 or email at Kthompson@oarlawyers.com.
