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What Can Counsel Do When Assets Pass to Unintended Beneficiaries That Inherit?
1. The Problematic Situation You represent the personal representative of an estate where the decedent made one person their joint tenant on real property, accounts, stocks, or other assets. It becomes clear upon reading the decedent’s will, which was prepared after the creation of the joint tenancy accounts, that the decedent did not actually intend for the co-tenant to take a 100% beneficial interest in the property at the decedent’s death. Rather through the prior conversations with the co-tenant and others, the decedent was merely trying to avoid the probate process and wanted to assign the responsibility for the re-distribution of the jointly owned assets to one person: the surviving joint-tenant. Unfortunately, the decedent may not have realized or may have forgotten that when the first co-owner of joint tenancy property passes away, the surviving joint tenant takes title to 100% of the legal and beneficial interests in the jointly owned property. This may create an unintended consequence where the surviving joint tenant wishes to “normalize” the inherited assets and redistribute them among the beneficiaries stated, for example, in the decedent’s will. The unintended consequence is that the surviving joint tenant will incur gift taxes (and possible estate taxes if the interest passed is large enough), upon distributing the inherited assets to the intended beneficiaries. One possibility for mitigating the burden on the surviving joint tenant is to argue that the assets were in fact held in a “resulting trust.” 2. Illinois Law Under Illinois law a resulting trust can be created by operation of law when property is transferred to a person who did not pay for the property, and it is implied that that person hold the property for the benefit of another person. Resulting trusts should not to be confused with “constructive trusts,” even though they are both judicially imposed “trusts.” A constructive trust arises when a wrongdoer party has taken title to property rightfully owned by another. That party is then ordered to transfer the property back to the rightful owner. In a resulting trust, however, the party vested with the mistakenly inherited assets (for example a surviving joint tenant) is acting like a mere trustee, and did not commit any wrongdoing to obtain title to the property. Under Illinois law, a resulting trust is a trust created by operation of law based on the intent of parties.[i] Resulting trusts arise when property is bought with the money of one person, but the title is taken in the name of another.[ii] The creator of the resulting trust must not intend to give the recipient a present interest.[iii] Illinois law further provides that although there is a presumption that transfers between family members are gifts, the presumption can be overcome by showing the intentions of the family members.[iv] If the property was (1) purchased solely with the creator’s own funds, (2) the recipient did not contribute to the taxes, management, or maintenance for the property, or (3) the property was put in joint tenancy for the purpose of probate avoidance, these factors contribute to overcoming the presumption of a gift.[v] The recipient’s understanding of the arrangement is also a factor that Illinois courts consider.[vi] If the recipient believed that she had no present interest in the property that, along with the other factors, contributes to the court’s finding a resulting trust.[vii] When a resulting trust is established, the recipient has title to the property in name only and is acting instead as a trustee. (Emphasis added).[viii] 3. Practical Applications So, what are the practical applications of the use of the resulting trust? The first application relates to the elimination of potential gift taxes when the unintended sole beneficiary, the surviving joint tenant, wishes to reallocate or redistribute the assets to the true intended beneficiaries of the decedent’s estate as expressed. In these cases, I think it may be possible to make a resulting trust argument to the IRS. I think the resulting trust argument would apply specifically in cases where the personal representative of the estate was listed as a joint owner on assets belonging to the decedent, despite the fact that the personal representative did not contribute any of their own money towards the purchase of the assets, nor did the personal representative assist in their maintenance or pay any of the taxes on the property. This application and argument is further bolstered by evidence that the decedent (a relative) who passed away had expressed during his lifetime that he did not want his estate to go through probate, but merely wanted the personal representative to handle distributions to other family members, for example, in a well-executed will subsequent to the creation of the joint tenancy. We all know that gratuitous transfers will be viewed as gifts from the transferor, thereby either causing gift taxes to be paid or, at a minimum, creating a charge against their lifetime exclusion amount, assuming that the gift exceeds the annual exclusion amount. Thus, we believe that by arguing for a resulting trust, we will be able to spare the surviving joint tenant from incurring the unwanted gift taxes, or perhaps estate tax at death, by gratuitously re-conveying the assets received through joint tenancy to the intended beneficiaries described in the decedent’s will that a decedent may subsequently have prepared after creating the “temporary” or “convenience-type” joint tenancy asset with the surviving joint tenant. A second application may arise in the handling of matters pertaining to the elderly. One may use the resulting trust argument to posit to the state Medicaid agencies that an asset held by a Medicaid applicant is not a “countable asset” because it is being held merely in a resulting trust. Of course, some practitioners of Medicaid eligibility law will argue: “Why not just make a complete return of the asset prior to application?” The implication of this argument is that the asset will be out of the Medicaid applicant’s estate; thus, no problem with ineligibility. Generally, I would agree with this line of argument, but, there are some assets that cannot be returned at least on a timely basis. Sometimes Medicaid eligibility is something that is required immediately with greater urgency because of lack of other funds. Furthermore, practitioners of Medicaid eligibility should be aware of the potential counter-argument by the State Medicaid agency that indicates that any asset held by the Medicaid applicant that is available, but is instead disclaimed or transferred without compensation, will result in a possible penalty for uncompensated transfers. While practitioners are well aware of this prohibition, the essence of the resulting trust argument is that the Medicaid applicant was never intended to be in possession of this asset or countable resource in the first place, thus creating the resulting trust and thus eliminating the need for a disclaimer or a compensated transfer. 4. Conclusion In conclusion, one hopes that both the IRS and Illinois state Medicaid agency can see and agree to practical applications and usage of the resulting trust argument: 1) for avoidance of IRS imposed gift taxes on the re-distribution of assets inadvertently held by the surviving joint tenant taxpayer who erroneously came into title through joint tenancy, and 2) in the avoidance of having a State Medicaid agency consider an asset inadvertently acquired by operation of law to be a countable asset for Medicaid eligibility purposes and thereby delaying or preventing the eligibility that a senior needs. [i] Suwalski v. Suwalski, 40 Ill. 2d 492, 495 (1968). [ii] Id. [iii] In re Estate of Wilson, 81 Ill.2d 349, 355 (1980). [iv] See In re Estate of Koch, 297 Ill. App. 3d 786, 789 (1998) [v] Ludwig v. Ludwig, 413 Ill. 43, 52 (1952). [vi] Id. [vii] Id. [viii] In re Estate of Koch, 297 Ill. App. 3d at 789.