How to Protect Your Loved One's Home from a Medi-Cal Claim
Aging is inevitable, but lucky for us, medical technology continues to improve, which has increased our life expectancy. As we live longer, long-term medical care costs continue to raise. The super wealthy in America can easily pay for their long-term medical costs and thus the focus of their estate planning is on how to minimize their estate taxes because their estate will be taxed at a rate of 40% of the amount that is over the federal estate tax exemption of $5.45 million per person.
However, for most middle class Americans, one of the major ways of financing their long-term medical costs is through Medi-Cal planning because for them to pay for their own long-term medical care would deplete their lifetime savings. Most people do not have sufficient money to pay for long-term care. One of the benefits of Medi-Cal is that it pays for long-term care, whereas, Medicare does not pay for long-term care. California is projected to receive $17.1 billion in federal Medi-Cal funds for the 2015-2016 year.
Medi-Cal planning is crucial and ideal for the baby boomer generation to figure out how to tap into some of this money to take care of their long-term medical care and at the same time save their homes to pass on to their children. This article will briefly summarize the popular techniques that attorneys use to not only qualify homeowners for Medi-Cal but to also preserve their homes for their children or loved ones.
- Protecting Your Home
Currently, you can own a house of any value and qualify for Medi-Cal. On February 8th, 2006, President Bush signed into law the Deficit Reduction Act (DRA) which put a limit on a person's home equity. California is slow in implementing the provisions of the DRA. Once the DRA provisions are fully implemented in California, a lot of the windows for Medi-Cal planning will be closed. California might implement the provisions of the DRA in 2016. If the DRA provisions were implemented in 2015, the home equity limit would have been $828,000, and that would be adjusted yearly for inflation. But even when the DRA is implemented, the home equity limit will not apply if the home is being occupied by the spouse, a disabled child, blind child, or a child under age twenty-one.
Until the DRA rules are implemented, you can own a house with equity of $500,000, $5 million, or more and still be qualified for Medi-Cal. However, once you die then Medi-Cal will come after the house for all the applicable medical costs that Medi-Cal paid on your behalf. The State of California, namely the Department of Health Care Services, can file a claim against the estate of an individual who was 55 years of age or older at the time he or she received Medi-Cal benefits or who (at any age) received benefits in a nursing home, unless there is a surviving spouse or a minor, blind or disabled child.
Therefore, if you are using Medi-Cal and you own a house, then potentially that house might belong to the State of California. So how do you have your cake and eat it too? How do you use some of that $17 billion dollars that California receives per year that is earmarked for Medi-Cal and still pass the house on to your children when you die? Click here to read more.......
Here are some options to keeping your house away from Medi-Cal:
- You can give your primary home to your children or loved one simply by signing over the grant deed. The reason you can do this is because your primary home is considered an exempt asset and exempt assets can be gifted to anyone without any interference from received Medi-Cal benefit. However, this is not the best way. It will escape Medi-Cal recovery but you will not have a place to live if your loved one decides to put you into a nursing home. Your loved one will have to pay the capital gains on the appreciation on the house because normally gifted assets (homes) pass to children with "pass through cost basis". The children receive the house with the parent's cost basis. This is a very rudimentary way of escaping Medi-Cal recovery and definitely not a wise method for Medi-Cal planning. You lose immediate control, your child ends up paying a huge unnecessary capital gains tax, and the home given to your child is now exposed to the child's creditors or predators.
- A better way of escaping Medi-Cal recovery is to create an Irrevocable Medi-Cal Trust and transfer your primary home into this trust where it will escape the arm of Medi-Cal recovery and your loved one who is receiving your house will not have to pay any capital gains tax because their cost basis will be stepped-up to the fair market value at the date of your death. This is because the Irrevocable Medi-Cal Trust is written in a such a particular manner so as to "pull" the house back into your estate to satisfy the IRS code to escape the capital gains tax but yet, be out of the reach of the State of California for Medi-Cal recovery purposes. Because the federal estate exemption is so generously high at $5.45 million per person, it allows for this type of planning. Putting the house in the Irrevocable Medi-Cal Trust means giving the house away to your loved one and thus takes out the possibility of it going to the State of California because we are able to incorporate an occupancy agreement where the trust is obligated to allow you to live in it until you die, thus, your loved one cannot sell your home out from under you because it is still your primary residence.
Gifting your home to your children via an Irrevocable Medi-Cal Trust also protects the house from your children's creditors and predators. This is accomplished by a “spendthrift” provision which states that the home is not subject to the children's creditors, foreclosure, wage garnishment, or any laundry list of creditors' rights against your children. If you give your house straight to your children, then it is fair game for the children's creditors to attack.
Another benefit of gifting your house to an Irrevocable Medi-Cal Trust is the ability to make the house a "non-countable asset" so that your child, who is to receive the house, does not get disqualified from any governmental benefits that he or she is currently getting, such as Medicaid or SSI. It is a sad fact that an individual would receive inheritance but would get disqualified from much needed governmental benefit because the receiving of that asset makes the child ineligible for governmental help. Therefore, it is important to revise your current trust to make sure that you are not leaving money to a disabled child who would be disqualified from Medi-Cal or other governmental benefit that he or she disparately needs.
- Gifting Assets to Qualify for Medi-Cal
If you own a home, you can still qualify for Medi-Cal. But what if you own a home and also have $250,000 cash in the bank? You would not qualify for Medi-Cal because Medi-Cal only allows you to have $2,000 of cash in the bank. You could give the $250,000 to your child in a lump sum, but you would have to be very careful of the look-back period.
Medi-Cal has rule against individuals from transferring all their assets out just to qualify for Medi-Cal. Currently, Medi-Cal has a 30 months "look-back" period. When California implements the DRA, then this "look-back" period will become 60 months. So currently, if you transfer out non-exempt assets, such as the $250,000 cash to your child then the transfer penalty will be invoked and you will be denied of Medi-Cal benefit for a certain amount of time. Furthermore, California rules define the start date for the penalty period as the beginning of the month the transfer was made, whereas the DRA defines the penalty period as beginning once the Medi-Cal applicant applies.
So, how should one proceed when cash must be transferred First, by understanding how the penalty period is calculated. There is a formula that is used to determine the number of months that you will be disqualified from Medi-Cal as a result of gifting away your assets. The formula is calculated by taking the fair market value of your gift and dividing it by the "average private nursing facility rate" in California (which is currently $8,092 for 2016).
Whatever the numeric answer is, gets rounded down to the next full number. In our example, if mom wrote one check in the amount of $250,000 to her son, we would take $250,000 divided by $8,092 and the answer is 30.89, which would be rounded down to 30. Thus, mom would be disqualified from using Medi-Cal for 30 months. If you understand this rule, this methodology can become a remarkable and aggressive California Medi-Cal planning technique known as "gift stacking".
Now that we understand the rule, lets replay the same fact above and take advantage of the "gift stacking" technique. Instead of writing one check for $250,000 to her son, mom writes 31 checks on consecutive days each with an amount of $8,000. So mom gives $8,000 each day to her son for 31 days straight and at the end of the 31 days, mom would have given her son a total of $248,000, leaving her a perfect $2,000 for her to qualify for Medi-Cal.
But what about the 30 months "look-back" period?
Using our formula above to calculate the penalty transfer: we would take the $8,000 gift and divide that by $8,092, which yield .98 and according to California current rule we would round it down to the next full number, which would be zero. Thus, this phenomenal "gift stacking" strategy does not affect mom's eligibility for Medi-Cal at all even though she gifted $248,000! BUT once California implements the DRA provisions, this remarkable strategy will be an artifact of the past.
If mom does not want to give the $248,000 to her son, she could use the $248,000 to buy a Ferrari and still qualify for Medi-Cal while driving around in a Ferrari because Medi-Cal allows one vehicle. But, of course, mom is infinitively wise so she could choose to take the $248,000 and pay down her mortgage on the house or mom could use the $248,000 for home improvements to make the home more elder safe. Mom could also sell her main residence, take that proceeds along with the $250,000 cash in the bank and buy a more expensive home or buy multiple units and live in one of the units and that multiple unit complex would qualify as a main residence because she is living in one of the units (this is known as "asset repositioning" in the Medi-Cal planning world).
California Medi-Cal benefits are among the best in all states. There are many Medi-Cal planning opportunities but the key is to plan early and plan often. If you have questions regarding this article, please feel free to call Paul Horn, who is a licensed California probate attorney and a CPA, at 626-695-7310.