Families receiving SSI/Medi-Cal benefits often wish to preserve the family home against estate recovery (upon the death of the owner). Under current law, a person receiving SSI and/or Medi-Cal may give away his/her residence prior to death, in order to avoid estate recovery after death, and without losing any SSI and/or Medi-Cal benefits.
Transferring one’s home to family (e.g., one’s children), however, creates the potential hazard that one may be evicted from one’s home due to a falling out with whomever owns the residence, or due to problems befalling whomever now owns the property (such as creditor actions or divorce). What alternative options are available? Three possible solutions are discussed here. The reader is cautioned, however, that none of them comes with a guarantee of success because the law is changing and unclear. Who knows what the state of law will be at the time of anyone’s death.
One solution is to transfer the residence to a family member while retaining a legal right of occupancy. That legal right of occupancy could either be a reserved life estate or an unrecorded occupancy agreement. A life estate is a much more substantial right but has to be contained in the deed of conveyance itself. Currently, California’s Estate Recovery Unit is not pursuing recovery against life estates, although this has been threatened. An occupancy agreement would not have to be recorded (and so is more stealthy), but is a less substantial right. A right of occupancy is akin to an indefinitely long-term lease requiring no payments. Another difference is that whereas the life estate guarantees the family will get a step-up in basis when the original owner dies, the same cannot safely be said regarding the occupancy agreement.
Another solution is to sell the property to one’s family with an understanding that they will allow continued occupancy. This could be done by way of an installment sale that would generate monthly income, which is often preferable to taking a reverse mortgage. A bona fide sale based on a sale price established using a qualified appraisal cannot possibly result in estate recovery claims against. This distinction cannot be said of the other solutions.
The last solution, I will discuss, involves transferring title to the home to a trustee of an irrevocable trust, who can initially be the owner him/herself, and reserving a lifetime right of occupancy. The trust, often known as the Intentionally Defective Irrevocable Trust (‘IDIT’) provides extra flexibility not provided by the other alternatives above. First, the trust is not answerable to the creditors of whomever will eventually inherit the house at death, until such time as they actually inherit (presuming they will receive title outright in their name). Second, the trust allows for the residence to be sold, over time, and the proceeds to be used to buy a replacement residence. That is particularly desirable if one considers possibly moving to another more suitable home and/or more suitable location. Third, the trust allows for the original owner to still be considered the owner for income tax purposes, real property tax purposes, and estate tax purposes (which is now usually relevant insofar as the stepped-up basis at death).
Selecting which option is most appropriate involves careful consideration of factors that may differ very significantly from one situation to another.
Editor’s Note: Attorney Dennis A. Fordham is a Board Certified Specialist in Estate Planning, Trust and Probate Law. Dennis concentrates his practice in the areas of estate planning and various aspects of elder law, including Medi-Cal benefits. Mr. Fordham was qualified as a Certified Specialist in 2009 by the State Bar of California Board of Legal Specialization, and is licensed to practice law in California and New York. He earned his BA at Columbia University, his JD at the State University of New York at Buffalo, and his LLM in Taxation at New York University. His office is located on the 2nd Floor at 55 First Street, Lakeport, California and he can be reached by calling 707-263-3235 or e-mail at Dennis@DennisFordhamLaw.com.