In Part 4, we covered how to get the government to pay the skyrocketing costs of long-term care by qualifying for Medi-Cal. In this article, we will discuss the most important part of Medi-Cal planning — how to protect the family home from a future estate recovery claim.

Most important? You bet! For most families, their home is the most valuable asset in their estate. Yet, many families have lost their homes to estate recovery claims because nobody told them that they could legally protect it. Therefore, unless the family seeks help from a qualified Medi-Cal planning attorney, there will likely be an estate recovery claim.

“But Judd, isn’t that how the ‘system’ is suppose to keep replenishing itself?” That’s true. But I have never met a parent who told me they wanted their home to go to the State of California instead of their own children. One-hundred percent of the time (in my experience), parents want to protect their homes for their children’s sake if legally possible (and it is).

Now some of you will recall in the last article, Part IV, we said that your home is an exempt asset. That’s “exempt” for Medi-Cal eligibility purposes. Not exempt from recovery. Any assets left in a Medi-Cal beneficiary’s name at the time of death will be subject to recovery by the State of California.

“But my home is not in my name, it’s in my living trust.” Don’t be misled. A living trust is not an asset protection device, it’s a probate avoidance device. Property placed in a living trust will be subject to recovery (so as joint tenancies, tenancies in common, and “revocable” life estates).

The best way to avoid an estate claim is to have nothing in the Medi-Cal beneficiary’s estate at the time of death. The state can only claim for the amount of Medi-Cal benefits paid or the value of the estate, whichever is less. The “estate” is composed of what is in the beneficiary’s name at the time of death.

This includes your redress money, which is also exempt for Medi-Cal eligibility purposes, but not exempt from recovery. If your $20,000 redress money is still in your name upon your death, the State of California can still recover against it. Best to get the exempt redress money out of your name during your life.

Protecting the home from recovery usually involves the transfer of title out of the Medi-Cal beneficiary’s name. “But Judd, didn’t you say in Part IV that gifting assets can result in a three-year waiting period?” Guess what? There is no three-year penalty waiting period for a transfer of an exempt asset, i.e., it’s exempt.

Contrary to the popular myth that the home must be transferred to a spouse, or a son or daughter under age 21, or who is blind or permanently disabled, the home may be transferred to anyone. The key is that the home was “exempt” at the time of transfer. What makes the home “exempt” is that you and/or your spouse are living in it.

Even if no one is living in the home, the home is still exempt and can be transferred as long as you check “yes” on the Medi-Cal application concerning “intent to return home.” If the home is transferred while the Medi-Cal beneficiary is alive, there will be no estate claim on the home.

“What if the social worker at the nursing home helped me fill out the Medi-Cal application and we checked ‘no’ on the ‘intent to return home’?” Then you or your legal representative may (should) correct the application. This must be done while the Medi-Cal beneficiary is still alive.

“But Judd, Grandma has Alzheimer’s and requires 24/7 care. The doctor says she will never be able to return home.” Doesn’t matter. It’s a subjective test. Even if the doctor says “objectively” that Grandma won’t return home, anyone can “subjectively” have the intent to get better and return home, i.e., the home is exempt.

“Hey Judd, I want to give my home to my son, but I’m not too fond of my daughter-in-law.” No problem. You can transfer title to your son, “a married man as sole and separate property.” That means you’re not giving half of your home to your daughter-in-law. If they get divorced in the future, she can’t claim half of your home.

Others of you have multiple children and want to give to all your children equally. The problem is that one of your children: (1) has a drinking problem; or (2) may be getting a divorce; or (3) may be filing for bankruptcy. One possible solution is to transfer title to your home to only one child, and have that child promise (by written contract) to divide it to all the children upon your death.

“But Judd, I heard about a lady who gave the home to the son and the next week, all her belongings were on the front lawn — the son had sold the home.” It would be nice if you had a child you could trust. But, the child(ren) you transfer the home to will have to give you a “lifetime right to occupy” the home.

“Sounds good, but will my child have to pay income taxes if I put their name on my home?” No. The home wasn’t “income” to the child, it was a gift from the parent. “OK, will I have to pay gift taxes if I put my child’s name on my home?” Probably not. Currently, there is a $5 million lifetime gift exemption. Unless your home is over $5 million, no gift taxes either.

“I’m under Prop. 13. I only pay $1,000 per year in property taxes. Will my property taxes go up if I put my child’s name on my home?” Nope, there is a “parent-child” reassessment exclusion. Your Prop. 13 property tax will be passed on to the child. However, this is not automatic. You must file the proper forms with the County Assessor’s Office.

Finally, if you’re a CPA, you’re probably slapping your head, saying, “You just blew your step-up in basis. If the parent paid $12,000 for the home 50 years ago, and the child(ren) sells the home for $412,000 after the parent’s death, they’ll have to pay capital gains tax on a $400,000 gain.”

Not so. That’s where the “lifetime right to occupy” agreement comes in. The United States Tax Court, in a landmark decision (Linderme v Commisioner 52 T.C. 305, 1969), ruled that the residence would be includable in the parent’s estate under IRC Section 2036. As a result, the child still receives the “step-up in basis” upon parent’s death.

In conclusion, any transfer of real property can have tax consequences that may outweigh a Medi-Cal estate claim. Currently, there are a number of legal options available to avoid probate, avoid tax consequences and avoid estate claims. Anyone considering a transfer of real property should consult an attorney experienced in the Medi-Cal rules and regulations.

Judd Matsunaga, Esq., is the founding partner of the Law Offices of Matsunaga & Associates, specializing in Estate/Medi-Cal Planning, Probate, Personal Injury and Real Estate Law. With offices in Torrance, Hollywood, Sherman Oaks, Pasadena Fountain Valley, he can be reached at (800) 411-0546. Opinions expressed in this column are not necessarily those of The Rafu Shimpo.

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