Medi-Cal Planning options to protect the principle residence.

      Occasionally
someone calls and tells me they are convinced that they should transfer their
home into an irrevocable trust to avoid Medi-Cal estate recovery.  They are “sold” on that approach, but is it the
right decision under present law?  Transferring
ownership on the remote chance of receiving Medi-Cal is usually ill
advised.  What if one never receives
Medi-Cal and one’s home is lost? Questions to first ask include: (1) Should I
transfer my house, if so when; (2) To whom should I transfer my house; and (3)
How should I transfer my house?

          Only
assets in which a Medi-Cal recipient had some ownership at death are subject to
recovery claims.  While one’s principle
residence is exempt for purposes of determining Medi-Cal eligibility, it is
subject to Medi-Cal estate recovery after the Medi-Cal recipient and spouse die.  Transferring such residence before death prevents
future Medi-Cal recovery. 

          That
said, anyone who expects to receive Medi-Cal soon and wishes to protect their
residence should examine their options.  One
should act while they still have legal capacity to sign a deed.  Many hedge their bets by using instructions in
their power of attorney and living trust that authorize gifting. 

          Then
there are income tax considerations.
Gifting means that all appreciation in the home’s value since it was
originally purchased may be taxed to the beneficiary when they later sell the
home.  If the property were inherited at
the owner’s death, rather than gifted during lifetime, then any appreciation in
the owner’s hands is eliminated from income taxation because the death
beneficiary gets a so-called “stepped-up” basis for inherited assets.  For example, if someone purchased his home in
1980 for $75,000 and it is worth $175,000 at his death, then when the child who
inherits avoids income tax on the $100,000 appreciation when he sells.

Gifting entails transferring
ownership.  Married persons typically
transfer their residence to their spouse; if they are incompetent, then a court
order is needed unless legal authority for gifting is already in place.  When children from prior relationships exist,
concerns over disinheritance by a step-parent arise.  In such case, the home may instead be instead
left to their own children subject to a life estate, or right of occupancy, favoring
their spouse. 

The gift to one’s
children can either be through a deed to the children, as (equal or unequal) tenants
in common, or through a transfer in to a trust for their benefit.  Either approach can also be combined with a
retained life estate that allows the transferor to continue to live in (or
rent) the residence until they die, and for their beneficiaries to receive a
“stepped-up” basis at their death. 

An irrevocable trust can
serve multiple purposes.  Like a reserved
life estate, it can protect the donor’s right to live at home.  In addition, a trust can further allow for the
home to be sold and for a new home to be purchased while the donor is alive,
and/or for the sale proceeds to go to other beneficiaries, either immediately
or over time.  It can also retain and
protect the assets of the beneficiaries from their creditors.  Again, a life estate can be used in combination to get a
“stepped-up” basis.

Currently, an irrevocable
trust is often unnecessary.  One can
either transfer the home with a reserved life estate or sell the home and gift
the proceeds over time (“stacked gifting”) without creating any ineligibility
period.  Gifting all the proceeds as a
lump sum within the present thirty (30) month look-back period, however, creates
an ineligibility period.  Eventually,
when California implements the 2006 Federal DRA changes, all gifting of non exempt assets will create
an ineligibility period.  For now flexibility
exists.  Lastly, consult a qualified attorney
before proceeding.