Monday, January 5, 2015

How to Answer the Top Five Legal Questions You Will Get from Family Members at Holiday Gatherings

1. Should Mom and Dad give us the house as a gift now so that they don’t have to “give it to the government” later?

This is a common question that involves technical medical assistance rules. Generally, the best way to answer this question is “no,” and, “You should talk to a lawyer who specializes in this area.” These rules are very complex and often misunderstood.

If you give a home to another person as a gift, that person will receive the home with a tax basis that is the same as your tax basis. In some cases, this can be a very low basis and the built-in capital gains very high. In addition, as the owners are no longer the primary residents, the recipient of the gift will no longer get any kind of exemption on paying some of that capital gain when the house sells. In contrast, if your parents die owning the house, the house will get a fresh tax basis. And if they sell the house while they still own it, they are exempt from paying much of the capital gains.

Further, transactions within a certain period of time are ignored. Your parents could end up without a house, and still be excluded from some government assistance.

Finally, if you and your siblings receive their house as a gift, YOU NOW OWN A HOME WITH YOUR SIBLINGS. And their spouses, really. Who gets along well enough with their siblings to start going into real estate investing? Overall, this is rarely a good idea. 

2. When our daughter, Susie, gets married next year, should we give the couple a down payment on a house?

Again, this is very generous; you have a great family. On the other hand, it can be difficult to navigate the marital property rules, and you could be sharing family assets in a way you don’t intend.

Sometimes a simple traceable gift like cash can be harmless, but if a gift is actually—for example—an interest in an operating business, or a job for a new son-in-law, such a gift should only be made with a prenuptial agreement attached. Especially if someone is going to own a growing business that he or she (or his or her new spouse) will be working at, consult a lawyer about the safest way to make that gift. Any family with operating family businesses or family wealth should discuss the possibility of an agreement or an estate plan that ensures you are protecting the family’s assets and preparing the young couple to be good stewards of that wealth.

3. When grandma died four years ago, she had a will, so we didn’t need to go through probate, right?

Probate is a court-supervised process that transfers property after someone’s death. Even if you have a will, probate is necessary to properly transfer property to the beneficiaries after someone dies. The beneficiaries are either determined by the terms of the will or by state law, but probate is a necessity either way. The only way to avoid probate is to transfer all of your property through beneficiary designations or through a living trust. If any asset is still in the decedent’s name and does not have a designated beneficiary, the only way to transfer it is through probate. Also, if it has been four years, you have to go through a slightly more complex court proceeding instead of the typically simple probate process.

Some people also ask why they need a will if they don’t have millions of dollars. A will does not avoid probate, but it does allow you to select the people who will be in charge of your estate and the people who will benefit from the assets you do have. Your will allows you to select specific assets or dollar amounts and give them to specific people. If you don’t have a will, state intestacy law will direct where your stuff will go. This is based on your living descendants and whether you have a spouse. If you have children, your children will have some interest in your assets, even if you are married. Intestacy tries to mirror what most people may want, but it is rarely applied in the same way that you would choose.

It does matter that you have a will.

4. Speaking of grandma, I can just use her power of attorney to close her bank account, right?  Is having a power of attorney the same as being her executor?

A power of attorney is a document that authorizes someone to make financial decisions and transactions on your behalf, while you are alive. This document is no longer valid once someone has died.

Often, people think they can continue to close accounts or write checks for bills after someone has passed away because they were the power of attorney when that person was living. The executor—or personal representative, as it is called in Minnesota—is the person in charge of collecting assets, paying debts, and distributing a person’s assets after their death. That person has to be appointed by the court through probate, and that can take some time. There is often a gap in time where there is no one legally able to conduct financial transactions on behalf of the person who has died.

5. If I get in an accident, I don’t want to be a vegetable, so you can just pull the plug—right?

Making medical decisions for someone is a very serious matter. Often medical staff will consult with family when important decisions are to be made, but they are starting with the presumption that they should save your life at all costs.

If you have situations where you would prefer that you not be kept alive, you have to put that direction in a legal document, or you have to be sure that you have immediate family that will convey that wish without wavering, and without disagreement among them. A health care directive, or power of attorney for medical purposes, is the best document to outline these wishes and to designate someone to carry them out.

This is also the case if you wish to donate organs or be cremated instead of buried, things like that.  Further, “pulling the plug” could mean that you want to be taken off life support after certain conditions are met or that you do not want to be kept alive by way of a feeding tube, or it may refer to an order not to resuscitate you if that is necessary. A health care directive can cover the first two examples, but does not cover an order not to resuscitate, and that must be done in a separate and specific document.

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