Posts Tagged ‘joint tenancy’

Unreachable Joint Account Makes Applicant Ineligible for Medicaid

NOVEMBER 14, 2016 VOLUME 23 NUMBER 43
Paul (that’s not his real name) needed long-term care. His health and his mental capability had both declined, and he could no longer handle his personal affairs nor take care of himself.

Paul’s assets included a car (titled in his and his daughter’s names) and three Bank of America (its real name) bank accounts. Those assets put him over the $2,000 eligibility limit for Arizona’s version of the federal/state Medicaid program, the Arizona Long Term Care System (ALTCS).

One problem: Paul’s daughter had her name on the bank accounts and on the car. She had the car in her possession, in fact — and she refused to turn it over.

Before he became incapacitated Paul had signed a power of attorney naming his sister as his agent. She went to Bank of America to get control of Paul’s accounts so she could use the money to pay for his care — and ultimately get him eligible for ALTCS coverage. That’s when she learned about a Bank of America rule: both signers on a joint account are permitted access the account, but an agent under a power of attorney may not exercise that authority on behalf of one owner without the other’s consent.

In other words, Paul’s sister could not close the account, remove Paul’s daughter’s name from the account, or even withdraw money to pay for his care — unless his daughter signed a form letting her do that. And Paul’s daughter refused to sign.

Paul’s sister applied for ALTCS coverage on his behalf. Even though he had assets over the $2,000 limit, she argued that those assets were actually unavailable. ALTCS regulations permit applicants to become eligible when assets are unavailable, and Paul’s sister argued that the situation with Paul’s bank accounts was no different from real estate owned jointly with an uncooperative family member, for instance.

ALTCS disagreed. The agency determined that Paul could get access to his own account if his sister just initiated a court proceeding — a conservatorship of his estate. Consequently, ALTCS declined to grant him eligibility.

Paul appealed (through his sister, of course). The court considering the agreed with her, and ordered ALTCS to cover Paul’s care costs. ALTCS appealed from that decision.

The Arizona Court of Appeals last week issued its opinion in the case. It agreed with the ALTCS agency, ruling that Paul could have access to the account by having his sister initiate a conservatorship. As conservator, reasoned the appellate court, she could then withdraw money from the account for Paul’s care — and that made the whole account a countable, available resource. Paul’s ALTCS eligibility was denied.

The Court of Appeals acknowledged that there would be some cost and difficulty getting access to Paul’s money. That, though, was not enough to prevent counting the asset as available. “Any practical inconvenience or accessibility difficulties are not relevant to determining whether assets are to be counted,” ruled the judges. McGovern v. AHCCCS, November 8, 2016.

The decision in Paul’s case simply fails to deal with the practical realities facing Paul and people in his circumstances. The opinion does not make clear how large the joint accounts might have been (except that they obviously exceed $2,000), but the practical reality is that a conservatorship proceeding might well cost thousands of dollars — and could cost even more if Paul’s daughter simply objected. She, after all, would have a higher priority for appointment as conservator than his sister, and her side of the story about the accounts is simply unmentioned in the appellate decision.

Even if Paul’s sister was appointed as conservator, that does not guarantee that she could get access to the accounts. Bank of America might well insist on getting the joint owners’ consent to close an account, or make other changes in the account structure. Paul’s daughter, when faced with the likelihood of losing the accounts, might actually close them out; she would not be hamstrung by the Bank of America rule about powers of attorney, after all.

And Paul’s vehicle? As joint owner, his daughter has absolute right to possess and use the vehicle. Getting it back for Paul, or forcing his daughter to buy out his interest, would almost certainly cost more than the value of the vehicle — and might not be successful even after significant expenditures.

The outcome is especially odd since ALTCS easily recognizes that joint ownership creates problems for other kinds of assets. Joint tenancy real estate, owned with a family member? No problem — eligibility can be granted (though it is described as “conditional” eligibility, requiring the ALTCS recipient to make efforts to sell their fractional interest). But bank accounts — even small accounts worth far less than a piece of real estate — are treated differently. Or at least the bank accounts in Paul’s case were treated differently.

Another irony: Paul had actually died before his case even got to the appellate level. The dispute was about whether ALTCS would have to pay for the care he had already received — and (though the opinion does not clarify this point) it is likely that his care facility is the one left without recourse, not his sister and not his daughter.

“Right of Survivorship” Terminated by Co-Owner Unilaterally

MAY 9, 2016 VOLUME 23 NUMBER 18
First, a short primer on “joint tenancy with right of survivorship”:

In Arizona, there are two main ways that two or more people can own property together (assuming they are not married). One choice is for the owners to be “tenants in common.” The other is to be “joint tenants.”

What is the difference? There are several, but two stand out:

  1. Joint tenants must have an equal interest, while tenants in common can have any variation they choose (60%/40%, or any other variation they can come up with), and
  2. Tenants in common can leave their interests to the other tenant in common, or to anyone they choose. Joint tenancy automatically includes a “right of survivorship,” so that the surviving joint tenants automatically receive the share belonging to a deceased joint owner.

It is that second element — the right of survivorship — that most distinguishes joint tenancy. If three people own the property as joint tenants, and one of them dies, the two survivors are now 50/50 joint owners, with the right of survivorship as between themselves. So, for instance, if a married couple decides to transfer their home into joint tenancy with the wife’s daughter (from a first marriage) as joint tenants, and then the married couple both die before the daughter/stepdaughter, she is the sole owner of the property.

But here’s the less-known thing about joint tenancy: any of the joint tenants can, unilaterally and semi-secretly, turn the joint tenancy into tenancy in common. How? Simply by transferring their fractional interest to another person — even if the recipient promptly transfers the interest back to the original joint owner. In some states (including Arizona), the joint tenant can even transfer his interest to himself and get the same result. Of course, the transfer should be filed with the County Recorder (in Arizona, at least) to be effective, but no notice to the other joint tenants is required.

That’s what happened to Janet Smith (not her real name). Her mother and stepfather (we’ll call them Edna and Greg) owned their home, and Janet lived with them. In 2002, the couple transferred their home into three names: Greg, Edna and Janet, as joint tenants (with right of survivorship).

Edna died in 2006, and Janet continued to live in the home with Greg. She helped take care of him, and helped him to stay at home, until his death in 2013. Sometime before his death, however, Greg had transferred his one-half interest in the home into a trust, which named his two children (from his first marriage) as beneficiaries.

Janet filed a claim against the estate. She alleged that the care she had provided to Greg after her mother’s death was worth at least $100,000, and that there had been an understanding that Greg would not change the joint tenancy arrangement after Edna’s death. Part of the reason her name was put on the house in the first place, she said, was that Edna and Greg relied on her to take care of them, and that she was to receive the house in return.

Greg’s son, as personal representative of Greg’s estate, denied Janet’s claim. The probate court agreed with the disallowance of the claim, and granted summary judgment in favor of the estate. Janet appealed.

The Arizona Court of Appeals affirmed the probate court ruling. The appellate court first noted that there would likely be a problem with Janet’s claim in any event, since an agreement involving real estate ownership would ordinarily have to be in writing. But, since the appellate court agreed with the probate court on Greg’s ability to terminate the joint tenancy, the lack of a written agreement did not have to be considered.

The Court of Appeals ruled that Greg and Edna’s belief and expectation at the time they established the joint tenancy was simply unknown. Janet claimed that Greg had repeatedly told her that she would be “taken care of” after his death; that vague assurance was insufficient to support any agreement not to take the property out of joint tenancy. Janet’s claim failed again at the Court of Appeals level. Show v. Otto, May 3, 2016.

It is important to remember that Janet was not completely disinherited by the outcome. Upon her mother’s death she became an owner of a half interest in the property, and Greg’s later termination of the right of survivorship did not divest her of that interest. She just did not receive the entire property, as she had apparently expected. In fact, the Court of Appeals opinion mentions that the property was sold and the proceeds split. Her share of the proceeds will no doubt be reduced by the amount of attorney’s fees awarded against her by the appellate court decision.

Though the joint tenancy/tenancy in common distinction is most often thought of in the context of real estate, the same rules apply to personal property as well. The distinction is often, if somewhat imprecisely, characterized as a difference between “and” and “or” on a title. If, for instance, a vehicle title indicates that an auto is owned by “Greg AND Janet”, that amounts to tenancy in common — it takes both Greg and Janet to transfer the vehicle to a buyer, and if either of them has died then the decedent’s interest must be dealt with (by probate proceedings or otherwise). But if the auto title is “Greg OR Janet”, either can sign the title, and the result is equivalent to a joint tenancy (with right of survivorship).

And, just to confuse things further (sorry about that), there is an entirely different set of considerations when property is held by a married couple. But that’s a story for another day.

Quit Claim Deed Was a Mistake, Says Mother

OCTOBER 26, 2015 VOLUME 22 NUMBER 39

We’ve made the key points before: don’t sign your home over to your children while you’re still alive, and be very careful about doing your own estate planning without an attorney’s help. This week we’re going to add a couple of other points: do not rely on non-lawyer document preparers for legal help, and don’t try to represent yourself in court.

What kind of case could possibly be so convoluted as to support all of those positions? The Arizona Court of Appeals decision in a simple dispute between Deborah Fitch (not her real name) and her son Warren demonstrates all of those principles.

Let’s start with a bit of background information. Since 2003, Arizona has recognized a category of non-lawyer assistants called “Certified Legal Document Preparers.” The certification is handed out by the Arizona Supreme Court, based on an application and examination process. Document preparers (who often list the initials CLDP after their name) are not supposed to give legal advice, but can prepare divorce petitions, deeds, wills, trusts and other documents without the supervision of an attorney. Opinions about this authority are mixed, but Arizona now has over a decade of experience with its unique program.

How does that relate to Deborah Fitch? In 2009 she visited a CLDP to facilitate the transfer of her home to her son Warren. It is unclear precisely what she told the CLDP, but she signed the document that was presented to her. That document was a quit claim deed, transferring her home from her name alone into joint tenancy between her and her son.

Sometime later she decided that she had made a mistake. She had intended, she said, to sign a “beneficiary deed,” not a quit claim deed. If she had signed a beneficiary deed, Warren would not have gotten any immediate interest in the property, and Deborah would be able to change her mind at any time up until her death.

Deborah asked Warren to sign a deed conveying the property back to her, and negating the quit claim deed. Warren refused. Three years after she initially gave him an interest in her home, Deborah was filing a lawsuit in the local Arizona courts against her son. She sued, incidentally, to get her home back — and also to make him repay the student loans she had paid for him. Deborah had an attorney in that lawsuit, but Warren chose to represent himself.

Deborah’s attorney asked Warren to admit that his mother had intended to sign a beneficiary deed rather than a quit claim deed. Warren did not respond properly to that request, but did file an affidavit from the document preparer that claimed Deborah had understood the difference and had chosen to sign a quit claim deed. The trial judge gave Warren a second chance to respond to the request from his mother’s lawyer; he instead filed something he called a “motion to disqualify counsel in violation of ethical rules, motion to dismiss, response to amended complaint.”

Eventually, the trial judge granted Deborah’s attorney’s request for summary judgment in her favor, ruling that the quit claim deed was invalid and that Warren owed his mother for her loan payments on his behalf. The judge also granted Deborah an award of her attorney’s fees. Warren appealed.

The Arizona Court of Appeals disagreed with the trial judge. Warren might not have properly denied the assertion that Deborah misunderstood the nature of a quit claim deed, ruled the appellate court, but that is ultimately irrelevant. What matters is what Deborah understood, not what Warren thought she understood. And on the subject of Deborah’s understanding, the appellate judges noted that the affidavit from the document preparer created a dispute about her actual understanding. The trial court should not have granted summary judgment on that issue, ruled the Court of Appeals.

Not everything was reversed, however. Although Warren had asked for reversal of the judgment against him for the student loan payments, he didn’t actually introduce any arguments about why that item should be reconsidered. But, since most of Deborah’s claim was being sent back to the lower court for a trial, the appellate court did reverse the award of attorney’s fees. Fees v. Fees, October 20, 2015.

Could a lawyer have changed the course of the dispute between Deborah and Warren? We’d like to think so. A lawyer would have strongly counseled Deborah against signing a quit claim deed, and made sure she clearly understood the effect of the decision before she signed. In fact, a lawyer might well have declined to prepare the deed that eventually caused Deborah so much trouble. What she really needed (a will, powers of attorney, possibly a beneficiary deed) could have been prepared inexpensively by her lawyer — had she consulted one.

Warren, too, skipped legal representation once the dispute landed in court. Had he gotten good legal advice, he could have been guided as to legal procedures, and he might not have lost in the first instance in the trial court. He (and his mother, for that matter) would have saved significant expenses and delays incurred by having to go to the Court of Appeals — and back to the trial court for a repeat round of procedures.

Had this mother and son both had good legal representation, they might well have been able to work something out without the expense of court proceedings and appeals. Would they once again be a loving family, trusting one another implicitly? Perhaps — but it seems pretty unlikely that such an outcome remains possible now.

Home Refinance Can Foul Up Estate Planning

MAY 19, 2014 VOLUME 21 NUMBER 18

When our clients consider creating a revocable living trust, we usually explain that there are several benefits to that estate planning device. Chief among those benefits for most people: avoidance of probate on the death of the client. For married couples, there is usually no probate required on the first death anyway, so a living trust mostly protects against having a probate on the second death.

A few of our clients also see other benefits from living trusts. They may make it easier to minimize estate taxes on the death of the second spouse (though, frankly, current estate tax rules for Arizona residents make this a benefit for a very, very small portion of the population). They may make it easier to control the use of funds for heirs — though many clients are uninterested in imposing any restrictions on the inheritances they leave to children or others.

The living trust may have benefits beyond probate avoidance for a small number of our clients, based on their family situation, type of assets or the size of their estate. But for every client who decides on a living trust, the same two drawbacks need to be weighed against the benefits in their circumstances. First, a living trust is a more expensive estate planning option (how much more expensive? That will depend on individual circumstances, but typically between $1,000 and $2,000 more for most of our clients). Second, and the subject of this week’s cautionary story, is this: if you have a living trust, you need to keep that in mind for the rest of your life, and make sure that your assets get transferred to, and remain titled to, your living trust.

We were reminded of this issue by a typical client story we heard last month. A couple who have been long-time clients — we’ll call them Dick and Jane — created their joint revocable living trust a few years ago. They did it for the usual reason (to avoid probate on the second death), but also for a less-common reason — Dick had been diagnosed with early dementia, and the trust would make it easier for Jane to manage their joint assets as his capacity began to diminish.

After they created their trust, that’s exactly what happened. Dick became less and less able to make decisions, and more and more reliant on assistance with activities of daily living. In fact, Jane found that she had to hire help to take care of Dick in their home. Fortunately, she had a durable power of attorney and the living trust in place — she was able to take care of their finances and marshal them for Dick’s care needs.

Jane figured out that it would make sense for them to refinance their home mortgage. That might have been true just because of the current historically low interest rates — in Dick and Jane’s case, it also made sense to take out some additional principal from their home equity, so that Jane would have sufficient reserve to cover Dick’s growing care costs. It was a good thing that their home had been transferred to their joint trust, since Dick had lost the ability to sign refinancing documents. Because she was the sole trustee, Jane would be able to handle the refinancing by herself.

You might know where this story is going next. If Jane had called us, we could have warned her about the problem that was likely to arise. We don’t expect our clients to call us before making major financial decisions, but in this case it would have been good to hear from Jane. Why? Because the title insurance company insisted that Dick and Jane’s home had to be transferred out of the trust before the refinancing could be completed. And (possibly because the title company was based in Kansas, not Arizona) there was another problem in the documents: the title company’s attempt to create a joint tenancy between Dick and Jane did not comply with Arizona’s requirements. That meant that when Dick died a year later, his one-half interest in the family home had to go through the probate process.

To be clear, that result was not nearly as tragic as Dick’s medical and mental decline and ultimate death. In the scheme of things, the need for a probate proceeding — especially in a state, like Arizona, where probate is a relatively simple process — is more properly characterized as “nuisance” than “tragedy”. But the irony of Dick and Jane’s experience was that they intended to simplify things, and to save money for their heirs — and, despite their best efforts, the result was that Jane actually had to go through extra legal proceedings (since their home was originally in joint tenancy, there would not have been a probate on Dick’s death but for the refinancing following the trust). To be sure, if they had not created the trust and signed powers of attorney, Jane probably could not have refinanced the home at all without a court proceeding to establish authority over Dick’s share of the home, so the net effect was probably beneficial. But the disconnect between the estate plan and the title company’s odd insistence on taking the home out of the trust meant that Dick and Jane missed an opportunity to have their plan work perfectly.

Why do title companies insist on taking homes out of trust for refinancing? This has always puzzled us, too. Apparently, they think that the record is unclear about whether the trustees of a trust have the right to encumber the home with a mortgage — but they are not at all troubled about the trustees’ right to transfer the house outright. Why don’t the title companies then transfer the home back into trust? This one puzzles us, too. Until a decade or so ago, they would do so upon request. Now they typically fail to mention it to their clients at all. And why would a Kansas title company try to practice law in Arizona, creating a defective joint tenancy deed? We have no answer for this one.

Here’s the moral of the Dick and Jane story (or at least this tiny slice of their story — their real story is far, far richer than this one small glitch): if you have established a revocable living trust, be very cautious about titles to your property. Your home, your bank and brokerage accounts, and most of your other assets should probably be titled to the trust (talk to your lawyer — this is not always the case). Once things are titled to the trust, you have to be mindful of any changes you might precipitate, even (especially?) if you did not intend to make any change.

Joint Tenancy with Right of Survivorship, or Community Property?

MARCH 24, 2014 VOLUME 21 NUMBER 12

Which is better? How should we take title to our house? How about our brokerage account?

These questions are really common in our practice. The answer is actually pretty straightforward, but we do need to lay a little groundwork.

Arizona is a community property state. That means that property held by a husband and/or wife is presumed to belong to them as a community. That presumption does not apply if the property existed before the marriage, or was received by a gift or inheritance. There are special rules for property you owned in a non-community property state before you moved here. It’s also possible for a married couple to enter into an agreement that changes the nature of community property, but those agreements are relatively rare.

Historically, there was one great disadvantage to community property ownership, and one great advantage. That is, there was one advantage and one disadvantage if you assume that the couple would never get divorced. If you have substantial separate property and are considering turning it into jointly-held property, is that advisable? That question is beyond our short essay today, and the answer depends on your comfort level with your spouse and marriage. We’re not particularly accomplished marital counselors, and we don’t have any facts for your personal situation.

But assuming you and your spouse live together more-or-less-happily until  one of you dies, here are the competing considerations to holding property as community property:

Advantage: Income taxes. Upon the death of one spouse, property held as community property takes on a new “basis” for calculating future capital gains. If you have stock that you bought at $1,000 and that you now sell for $10,000 (congratulations!), you have “recognized” $9,000 of gain and will pay income taxes based on that amount. But if you held that property in joint tenancy with your late spouse, it got a step-up in basis to his or her date-of-death value; assuming the stock was worth $10,000 on that day, your income tax is only on $4,500 of the total gain. But if you had held that stock as community property with your late spouse, there would be no capital gains tax on the sale at all.

Disadvantage: Probate. Until 1995, community property could not pass automatically to the surviving spouse. That meant that a probate was often required to transfer the deceased spouse’s community property interest to the surviving spouse. Since no probate was required for property held in joint tenancy (the “right of survivorship” part of joint tenancy means the surviving joint tenant receives the property without having to go through the probate process), most married couples opted for joint tenancy rather than community property.

In 1995, the Arizona legislature made the disadvantage to community property disappear — they created a concept of “community property with right of survivorship.” That means a married couple can have it all: they can get the full stepped-up basis for income tax purposes, but avoid probate, on the first spouse’s death.

Does that mean that all property should be titled as community property with right of survivorship? Almost, but not quite. There are a handful of problems that occasionally crop up and have to be considered:

  • Not every married couple intends to leave everything to one another. You can still get the full stepped-up income tax basis and leave your share of community property to someone else — your children from a prior marriage, perhaps, or another family member. In such a case it might make sense to hold the property as “community property” (with no right of survivorship) but have a will or trust to make provisions for each spouse’s share.
  • The income tax benefit does not always appear. Note that the benefit is not a direct tax savings, but only a potential savings. If you get a full stepped-up basis on property that you then hold until your own death, you haven’t really saved any tax money. But the community property benefit just might give you flexibility — you can decide to sell property after your spouse’s death on the basis of good investment advice, rather than the tax effect.
  • The option only applies (this is obvious, but we need to say it) to married couples. “Community property” is not available to anyone else. Is it available to same-sex married couples? We think so (see our articles on the subject over the last few months here, here and here), but we might turn out to be wrong about this.
  • The benefit may not even be necessary for some assets. No growth in your brokerage account? No benefit. You invest only in municipal bonds and certificates of deposit? Minimal to no benefit. But here’s the big one: most people’s biggest growth asset is their home — and there’s already a substantial ($250,000) exemption from capital gains taxes for a single (widowed) person selling their home.
  • Have you already established a trust as part of your estate plan? You may not need to go through the analysis, since the practical effect of your plan may be the same as the benefit of community property with right of survivorship — or better. Ask your estate planning attorney to review this with you.
  • There are sometimes costs to making the change. For real estate, you will need someone to prepare a deed (you can probably get it right on your own, but it makes sense to hire a professional). In addition, there are modest costs to record the new deed.
  • This only applies to Arizona property. No problem with your brokerage or bank account — they are Arizona property if you live here. Your vacation cottage in Montana, or your Mexican condo held in a land trust, are a different matter. But if your vacation cottage is in Alaska, or California, Idaho, Nevada or Wisconsin, you might be able to do something similar. Ask a local lawyer about the possibility.
  • We need to reiterate: if you have separate property and transfer it to community property with right of survivorship to take advantage of income tax benefits, you may have made a gift of half of your separate property to your spouse. Be careful, and make sure you know what you’re doing.

What’s your bottom line? Should you change everything you own from joint tenancy with right of survivorship to community property with right of survivorship? Maybe, but your home is the least urgent thing to tackle. Your brokerage account? Absolutely. Your summer cottage in another state? Check with your lawyer and ask her (or him) to find out whether the other state has community property with right of survivorship.

Note that none of this really helps you deal with retirement accounts, IRAs, 401(k) accounts, separate property you brought from another state or your complex estate planning intentions. For those, you really need to talk with your lawyer. Also, please be clear: we do not know the correct answer if you live in a state other than Arizona — talk to your local lawyer about that.

 

Simple Estate Planning for a Married Couple

AUGUST 12, 2013 VOLUME 20 NUMBER 30

Last week we saw a married couple in our office. The couple had come to us for estate planning. They did not have children with disabilities, or spendthrift sons-in-law or daughters-in-law. Their assets were not unusual (some Arizona real estate, a brokerage account, several bank accounts). Their net worth was well under the $5.25 million that would have made us want to talk about federal estate tax issues. They intend to leave their estates to one another and, on the second death, to relatives and a few charities. In short, they were a pretty typical couple.

This couple already held everything they owned as “joint tenants with right of survivorship.” That, of course, means that on the death of the first partner, the survivor would receive everything without having to go through the probate process. Ordinarily we would have told them that they ought to have fairly simple wills and Arizona powers of attorney. We would have suggested that they transfer all their real estate and brokerage assets into “community property with right of survivorship.” That’s a slight improvement on joint tenancy because on the first death the survivor gets a stepped-up income tax basis on the entire value of assets held as community property. It is an option that is only available to married couples, and it’s usually worth considering.

Though our couple was married, they did have one legal issue that complicates their estate planning. They are both of the same gender. They got married in another state, where same-sex marriages are recognized, and then retired to Arizona. They are looking forward to enjoying the sunshine, outdoor recreation opportunities, and casual lifestyle of The Grand Canyon State. Though Arizona was once known as The Valentine State (do you know why?), our state Constitution expressly invalidates this couple’s marriage.

Or does it? They have arrived in Arizona at a time of legal ferment. The U.S. Supreme Court has invalidated a federal ban on same-sex marriages; is invalidation of Arizona’s ban (and those in place in dozens of other states) far behind? And, more importantly for our couple, what are legally married gay couples supposed to do in the meantime?

Reasonable minds can differ on what our couple should do. In fact, we are fond of saying that if you get ten lawyers in a room and discuss legal issues, you will get at least twenty firmly-held, well-reasoned opinions. But here is what we discussed with our clients:

  • Consider creating a joint revocable trust. Declare in the trust that everything you own is community property, and file any future tax returns on that assumption. The worst that could happen would be that the IRS ultimately disagrees, and then you are back where you would be if you did nothing of the sort. BUT note that the establishment and funding of a trust is more expensive (by, perhaps, a factor of three or four), and opposite-sex married couples don’t have to go through this kind of silliness.
  • At least create reciprocal wills, and guard them more carefully than opposite-sex couples need to. If a couple whose marriage is recognized in Arizona never get around to making a will, or misplace their wills, it is likely that the default rules will follow what they wrote in their wills. If the marriage is not recognized, though, a missing will could mean biological family members of the deceased spouse take in preference over the surviving spouse — or at least that litigation is required to establish the validity of the out-of-Arizona marriage.
  • Critically important for gay couples, married or not, is signing of a document directing funeral arrangements and disposition of remains. Time and again we have seen same-sex partners shut out of funeral and burial arrangements, even by family members who professed affection for the surviving partner in the hours before death. The advent of same-sex marriages might turn out to have eased that kind of pain, but it may be yet another opportunity for litigation, and at a time of high emotional fragility.
  • Go ahead and try putting real estate and brokerage accounts in “community property with right of survivorship.” Expect a little different experience between stockbrokers and the County Recorder; the former is probably used to same-sex community property declarations, and the latter probably thinks it has a responsibility to uphold Arizona’s misguided law. Do you want to be a little bit subversive and act as an agent for positive change, albeit a small change? Talk with us — we like both of those ideas.
  • Review and update your plans more often than other couples need to. We usually counsel that estate plans have about a five-year life, and we expect to actually see clients again in about 7-10 years. Same-sex married couples ought to shorten that to 3-5 years, as there will be changes AND we want to have recent documents in the ultimate time of need (that’s a not-very-disguised euphemism for “when you get sick or die”).

We were very chagrined to have to advise this delightful couple that Arizona is so unwelcoming. We really want to help them secure the benefits of their marriage in Arizona. We can accomplish almost everything that an opposite-sex married couple can get with their Arizona-recognized marriage, except for the (admittedly small) income-tax benefit of “community property with right of survivorship” titling. But we can’t really tell our couple that they have a moral or legal duty to carry the torch for change in this arena, because the reality is that the benefit is modest for most couples. That’s because:

  1. Your real estate may well appreciate during your life, but if the only real estate you own is your residence then you already get a significant income tax avoidance opportunity (up to $250,000 in gain) without regard to your marital status. Be careful about relying on this as your sole tax-avoidance technique, but for most people it means that they will not ever pay taxes on increases in their home’s value anyway.
  2. Although capital gains in your stock holdings do not have the same partial exclusion opportunity, it is still easy to avoid paying income tax on the increased value by simply not selling the stocks. That means that an “unmarried” couple like our clients would have lost flexibility, not cash — still a negative, but not with as obvious a dollar cost.

For our part, we are looking forward to a time (we hope that it is soon) when these kinds of distinctions are no longer necessary. Meanwhile, we wish the very best for all our clients who have retired to The Valentine State.

 

Step-Children and Disinherited Children Might Have Rights — It Depends

NOVEMBER 12, 2012 VOLUME 19 NUMBER 41
A prospective client asks: “Can my mother cut me out of her will after my father dies? His will leaves everything to the children after her death.” That deceptively simple question comes in a number of variations (like: “My mother’s will left everything to her children, but her estate was not probated. After her husband, my stepfather, died, we learned that everything went to his children from a prior marriage. Can we do anything about that?” Or: “Our father and stepmother had a joint trust leaving everything to all of their children — my siblings and my step-siblings — when the second one of them died. After my father’s death, my stepmother changed the trust to go only to her children. What rights do I have?”

To each of those questions the answer is almost certainly the same: “It depends.” That’s the classic lawyer’s answer, but it reflects a reality that we deal with whenever we talk to a new client or prospective client. We almost never have enough information to give a definitive answer after the initial consultation, and that is particularly true with these questions.

What does it depend on? State law, sometimes. The actual wording of documents, in most cases. Titling of the property, pretty often. The cost of pursuing the issue weighed against the value of the “lost” inheritance, almost every time.

Please remember that what we describe here is based on Arizona law. It’s what we know; we don’t know enough about other states’ laws to do more than speculate about whether the same answer would be true in another state. Heck, sometimes we don’t know enough to determine whether Arizona or some other state’s laws even apply to the question. So check these answers with a qualified lawyer in your state (or the state where your parent(s)/step-parent lived and died).

Disclaimers aside, let’s look at some of the more-common scenarios:

1. Herb and Vonda signed identical wills, leaving everything to one another and, on the second death, to their three children in equal shares. Herb died. No probate was even filed, since everything was owned as joint tenants with right of survivorship. All Vonda had to do was distribute Herb’s death certificate and everything was transferred to her name. Five years later Vonda changed her will to leave everything to one of the three children.

Vonda’s will might be subject to challenge based on undue influence or lack of testamentary capacity, but it is unlikely to be set aside based on Herb’s intention that his property be divided equally among his children. He left everything to Vonda — both in his will and by the joint tenancy designations. She was probably free to do what she wanted with what then became her own property.

Herb and Vonda might have signed an agreement to keep their wills the same. Their wills might have even included a provision that promised the survivor would not change her will after the first spouse died. But such a provision would be rare (not unheard of, but rare). Even if there was such a provision it’s not completely clear that it would apply in these circumstances, since Vonda did not acquire Herb’s interest in the jointly held property by his will — she got it by operation of the joint tenancy arrangement.

2. Richard and Fern signed a joint revocable trust. It provided that on the first spouse’s death, the survivor would have complete control over the trust and the property in the trust — including the right to amend the trust. If the trust was not amended, it would leave everything to Richard and Fern’s only son, Ralph. All their assets were transferred into the trust.

After Fern died, Richard amended the trust to leave everything to a neighbor. At least that’s what Ralph suspects. The neighbor is named as trustee and refuses to even give Ralph a copy of the amended trust. Ralph wants to know if he has a right to at least Fern’s half of the joint estate, and how he can find out about the circumstances of any amendment. He has a copy of the old trust showing him as beneficiary (though the copy he has does not show that it was actually signed). The lawyer who prepared that draft trust won’t return his phone calls.

Can Ralph get a copy of the new trust? Not necessarily. If he has been completely eliminated from the trust, the trustee is under no obligation to give him anything. How does he know if that’s the case? He doesn’t. He could bring a court case to have the Judge interpret the validity of the suspected amendment, but if it is as the neighbor says he will probably lose — he probably won’t get a copy of the trust document and he may end up paying the neighbor’s legal fees in addition to his own.

To be clear, if the neighbor consulted us we would advise that it’s easier to show Ralph the amended trust and be done with it. But we would also tell him (assuming Ralph has been excluded and the document appears to have been properly prepared) that he is not obligated to do so. Ralph is likely to get further by being reasonable and friendly than by being confrontational. Oh, and he is probably not entitled to any portion of “Fern’s estate,” since she appears to have left it all to Richard.

3. Grant and Julia were each married once before they got together. Grant has two children from the first marriage, Julia has three and the two of them had one child together. They signed a joint revocable living trust and transferred all their assets into the trust’s name. It provided that on the death of one of them, the entire trust estate was to be divided into two shares — with half of the combined assets assigned to each share.

One share of the trust would continue to be completely under the control of the surviving spouse (the trust refers to this as the “Survivor’s Trust Share”). The other (the “Decedent’s Trust Share”) is held in trust for the benefit of the surviving spouse (he or she is entitled to all the income and, if he or she needs it, principal of this trust share). On the death of the second spouse, according to the trust document, the “Decedent’s Trust Share” is to be divided equally among all six children. The surviving spouse is named as trustee of the Decedent’s Trust Share, but has no power to modify or amend it.

After Grant died, Julia continued to administer both halves of the trust. She never provided any accountings to any of the children, though her oldest daughter did help her keep bank records and took documents to the accountant for tax preparation every year. None of the children wanted to confront her about how she was handling the money, and so no one every challenged her.

When Julia died (more than a decade after Grant’s death), it turned out that the Decedent’s Trust Share was empty. Julia had withdrawn most of the money in the last five years of her life, and had used it to fix up her house (it was titled to the Survivor’s Trust Share) and to make substantial gifts to two of her children (including the one helping out with the accounting). She had also incurred significant medical bills, and had even paid for in-home care for most of her last two years. Most of the children — and especially Grant’s children — felt like she should have moved into an assisted living facility to save money during that period.

When Grant’s oldest son asked for more information, Julia’s daughter (who, it turned out, had been named as successor Trustee) blew up at him and accused him of just being about the money — not caring what his father would want or what his step-mother needed. He wants to know now what he is entitled to.

Can he get account information? Almost certainly — especially for the Decedent’s Trust Share. Is he entitled to information about the Survivor’s Trust Share? Maybe, if he is still a beneficiary (or if the finances of the Survivor’s Trust Share would affect what Julia had needed from the Decedent’s Trust Share).

We always encourage clients to ask themselves one more question, though: will Grant’s son be happy with any likely outcome? Probably not. The cost of pursuing his step-mother’s estate and his step-sister will likely be high, and the resolution will not give him everything he is entitled to receive. Depending on the size of the estate and the portion at issue, it might be financially worth pursuing. Basically: “it depends.”

I Just Want to Put My Daughter’s Name On My Deed

NOVEMBER 5, 2012 VOLUME 19 NUMBER 40
We hear that request all the time. “I want to make it easy for her when I die — just put my daughter’s name on the deed,” client after client insists. When we resist, they think we are acting too much like lawyers.

There are no statistics out there, but we think that most of the time this arrangement works out just fine. But most of the time isn’t a very comfortable place to be. We counsel clients not to put their children’s names on the title to their property — any property, but especially real estate and most especially the home — while the client is still alive. Let us try to explain ourselves, and offer up some alternatives.

First, what do clients mean when they say something like “put my three sons’ names on the deed”? Do they mean that they want to put the property in joint tenancy, with the client and three children as co-owners? Or do they mean that they want to continue to own the property themselves, but have it pass automatically to the three sons on the client’s death? Because if they get us to put the property in joint tenancy, that is a completed gift now, not a contingent gift that becomes completed at death. If the client decides in two years to remove one of her sons, or to sell the house, or to leave one son’s share to his kids rather than his wife — it’s too late. The deed has been done, as the saying appropriately suggests. Any later change will require the agreement — and signatures — of all three sons.

That was the problem that faced Hazel Jackson (not her real name) in a case decided by the Arizona Court of Appeals recently. Hazel had asked her lawyers (not our firm) to put her daughter’s name on her deed, and they had prepared a deed transferring her Sun City winter home into joint tenancy between her and her daughter. A decade later, she figured out that she had made a mistake — she had meant, she said, to sign a “beneficiary deed” (more about those later) so that her daughter would receive the property easily at her death. She hadn’t meant to give her daughter a present interest in the home.

Hazel asked her daughter to sign over the interest that Hazel had inadvertently given to her, but the daughter refused. Hazel filed a lawsuit to compel her daughter to return the gifted interest, but the court threw out her lawsuit. The Court of Appeals agreed, ruling that unless Hazel could show that the deed she had signed was actually invalid (e.g.: not properly signed, not witnessed correctly, or the product of duress or fraud) the lawsuit was properly dismissed. Hazel’s “misunderstanding of the legal effect of the warranty deed is not a legitimate basis on which to invalidate the deed,” said the Court. Johnson v. Giovanelli, October 25, 2012.

Note that Hazel was arguing that she had signed a deed different from the one she intended to sign. Her claim would have been even weaker if she had argued “yes, I meant to sign a deed when I did — but things have changed and I no longer want my daughter’s name on the title to my house.”

The Court of Appeals decision does not explain what has changed between Hazel and her daughter to make her want to change the title to the house. We can only report that we see similar concerns raised from time to time — often because family relationships change, or a parent decides a child’s inheritance should be protected from spouses, children, or creditors.

What about the “beneficiary deed” that Hazel claimed she had meant to sign? Would that have solved the problem? Perhaps — it would at least be worth considering, and would have allowed her to change her mind a decade later.

Beneficiary deeds require some explaining, too. They are unfamiliar to many people — the very concept is only about two decades old (that’s very young in property and estate planning law, which was mostly laid down five or six centuries ago). Only about a third of the states have approved the idea — including Arizona, which was one of the early adopters, but not the first. We have written about beneficiary deeds before, and often prepare them for our clients. But they are not the perfect solution for every “put my daughter’s name on the deed” situation.

When is a beneficiary deed not the right answer? It is not the best way to handle children who can not handle money, or who receive public benefits. It can create more trouble than benefit in larger families (eight siblings owning equal interests in a property can be a formula for gridlock that even a Congressperson could admire). It may not deal very well with the possibility that a child dies before you do (would you want his share to go to his wife, his kids or back to your other children? What if he remarries first? What if he is in the process of getting a divorce?). But for Hazel, who apparently had only one child and who intended her daughter to receive everything outright, it might well have been the easiest and best answer.

What’s the other choice? A living trust. They aren’t the answer to all problems, either, but if you have lots of different pieces of property, or lots of children, or a desire to benefit children and others unequally, or a child with special needs, creditors, an unhappy marriage or other reasons not to leave property to them outright — in all of those cases a living trust is more likely to be the right answer for you. Let’s talk. But please understand that if we start the conversation with “I just want to put my daughter’s name on my deed” you’re likely to get a little pushback from us. It’s because we want to do a good job for you, and we have seen some things.

[By the way: much of what we say here also applies to your bank accounts, brokerage accounts, and other assets. We just wanted to focus on the deed to your house right now.]

Joint Tenancy Does Not Always Mean Equal Ownership

NOVEMBER 8, 2010 VOLUME 17 NUMBER 35
Elder law attorneys often see some version of the same story. Parents put child’s name on the deed to their home “just in case.” Dispute between parents and child breaks out when child asserts ownership interest. Sometimes litigation ensues. Child claims that joint ownership of the home means just that — the child owns an interest. The parents claim that putting the child’s name on the deed was just a convenience, or an estate planning device, or a mistake.

The resolution of the recurring story will depend very heavily on individual facts. It should be easy to see that evidence of conversations between the parents and child will tip the result one way or the other, and that written agreements will be even more persuasive than remembered conversations. Again and again, though, we see cases where family members just couldn’t imagine having disagreements in the future. Sometimes the analysis is complicated by the family’s failure to be clear about complicated legal relationships from the outset.

A good illustration of this repeating story is reported in a Missouri appellate case from a few weeks ago. Evan and Evelyn Hoit, who had lived on a Kansas farm for nearly four decades, decided to move closer to their two daughters in Kearney, Missouri. They told Mrs. Hoit’s son (from a prior marriage), Brent Rankin; he and his wife thought it might be a good idea to move closer to family, too. The Rankins suggested that the Hoits could look for a home in Kearney for them, too.

The Rankins had been pre-qualified for a loan, and had hired a real estate agent to find them some likely candidates. They asked the Hoits to check out a couple of the best candidates. The Hoits did, but also went looking for their own place; they found a house that they thought would be perfect for them, and told the Rankins they were going to buy it. The Hoits offered to let the Rankins live in the lower level, but Mrs. Hoit told her son that they intended to buy the house in any event.

The Rankins thought the house would work for them, too; they suggested that the Hoits buy it and let them live there. The Hoits put down 25% of the purchase price. The Rankins agreed to borrow the remainder, since they had pre-qualified for a loan and the Hoit’s farm had not yet sold. No one discussed exactly how the title would be taken, though everyone understood that when the Hoits died the Rankins would inherit the house. Mrs. Hoit later explained that she had intended to leave her other assets — all the couple’s cash and investments — to their two daughters.

Although the couples did not explicitly discuss the title arrangements, the lender apparently made a decision that it would be important to get all four names on the property (and the loan). The result: the four individuals ended up owning the property as joint tenants with right of survivorship.

When the Hoit farm in Kansas sold two months later, they paid off the mortgage with the proceeds. But when they tried to move into the house, they found that the Rankins had taken over one upstairs room that Mrs. Hoit had expressly reserved for her piano, and that there was little space for them to put the rest of their furniture. The family relationships began to fray almost immediately.

Within a few months the Hoits were demanding that the Rankins move out of the house. The Rankins refused, claiming that they owned the property. The Hoits ended up buying another house in Kearney and moving into it. Then they filed a lawsuit asking the courts to decide how much of the first home belonged to them, and how much (if any) to the Rankins.

The trial judge ruled that the Hoits had paid almost the entire cost of purchasing and maintaining the home — their contribution had been $192,734.26, as compared to the $2,757.48 paid by the Rankins. He awarded the home to the Hoits and imposed a lien against it in favor of the Rankins for their small contribution. The Rankins appealed, arguing that they owned half of the home.

The Missouri Court of Appeals affirmed the trial court holding. It noted that, though there is a presumption of equal ownership in joint tenancy titling, that presumption can be overcome by showing the unequal contributions of the joint owners. The appellate court expressly noted that one of the choices available to the Hoits would have been a “beneficiary deed” (recognized in Missouri, as in Arizona and about a dozen other states), but that the evidence showed that the choice of deed was made not by the Hoits but by the lender. Hoit v. Rankin, September 28, 2010.

Though both the trial judge and the appellate court agreed that the evidence was clear that the Hoits did not intend to make a present gift of the property, that successful (for them) outcome may be beside the point. This family, which once got along well enough to experiment with a shared living arrangement, has now spent thousands of dollars in legal fees and two years in the courts battling over what they intended when they started their experiment. Would they have gotten a happier result if one or both couples had talked with a lawyer in advance, and considered what might happen if things didn’t work out as well as they hoped?

Reciprocal Wills Enforceable After Death of One Spouse

JULY 26, 2010 VOLUME 17, NUMBER 23
Imagine a couple, each married for the second time. Perhaps each has children from a first marriage. Perhaps the couple has been married for years — even decades. They think of all the children as “their” children, even though they fully understand that the other spouse’s children are stepchildren.

One of the spouses — let us say the husband — dies. He leaves his interest in the family home, together with all the couple’s accumulated wealth, to his widow; his will specifies that on the second death all of the children share the estate equally. His children remain in contact with their stepmother for the next decade, though that contact lessens over time. When she dies, what happens to the home, the bank accounts and the remaining wealth?

This scenario plays out again and again. Most often, the deceased husband’s will is irrelevant. If the property all passed to the wife without restrictions, she is free to change her will, to transfer the property into trust, to spend it or even to give it away. But that is not always the case.

Ralph and Elaine Lawson married in 1971. They owned 12 acres of Iowa land as “joint tenants with right of survivorship.” They had three children between them: Ralph’s son and daughter Roger and Le Ann, and Elaine’s son Lonnie. Just to complicate things further, Ralph later adopted Lonnie.

In 1987 Ralph and Elaine signed identical wills. Each left everything to the other. On the second death, the wills provided that fifty percent of the combined estate would go to Lonnie, twenty percent each to Roger and Le Ann, and ten percent to the couple’s church. The wills contained an unusual provision: each included language that indicated the couple had agreed “that neither will change our will” without the other’s consent.

Ralph died first. The property passed to Elaine automatically because of the joint tenancy title, so Ralph’s will was not filed with the Iowa probate courts.

A few years later Elaine changed her estate plan. First she transferred the acreage to her son Lonnie, reserving a life estate for herself. Then she signed a new will, leaving the same proportions of her estate to Lonnie (50%), Roger (20%) and Le Ann (20%), but changing the church which would receive the remaining 10%. Shortly after that, Elaine died.

Roger and Le Ann sued to enforce the terms of their father’s and stepmother’s original wills. They alleged that the wills amounted to a contract, that Elaine’s transfer of the property to Lonnie violated that contract, and that the court should impose a trust upon the property to secure its return to the original beneficiaries. The trial judge reviewed the two wills and agreed with Roger and Le Ann.

The Iowa Court of Appeals upheld that ruling, ordering the imposition of a trust on the 12 acres. The language of Ralph’s and Elaine’s wills made it clear, according to the appellate judges, that their intent was to prevent the survivor from changing the estate plan by a new will or by transferring property during lifetime.

Lonnie argued, unsuccessfully, that the reciprocal wills should not prevent transfers of the acreage because it did not come into Elaine’s estate by virtue of Ralph’s will. The court dismissed that objection, noting that the language of the wills was broad enough to encompass any estate planning technique, whether it might be a will, a gift, or a living trust. The appellate judges also rejected Lonnie’s argument that his parents’ wills should not have been admitted to the court proceeding; the wills were not being admitted to probate, said the judges, but were being admitted to prove a contract. Consequently, the standards and requirements for admission were those governing contract documents rather than wills. Cunningham v. Lawson, July 14, 2010.

Would Arizona courts reach the same result? It is not completely clear, since the law of reciprocal wills (sometimes called mutual or contractual wills) is not well developed. What is clear in Arizona law is that reciprocal wills can be enforceable; what is less clear is whether they might prevent lifetime transfers of property by the surviving spouse.

One reason that the law is less than clear is that truly reciprocal wills are uncommon. Arizona’s probate code makes clear that the mere fact that wills are identical does not mean they embody a contract not to change the terms; in order to make the agreement binding it must be expressly stated in the wills or in a contractual document. Because that is uncommon, there is little law interpreting such terms.

What is more clear is that the question we hear so often is usually easy to answer. “Does my stepmother [or stepfather] have the right to leave the house she inherited from my dad [or mom] to her kids from her prior marriage?” Absent a clear contract not to change the will, or a trust provision prohibiting the transfer, the answer is likely to be: “I’m sorry, but yes.”

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