The Medi-Cal Homestead Trap

Did you know that when a Medi-Cal beneficiary dies, they can lose their home without proper planning?

Medi-Cal applicants and their children are often confused about the estate recovery process and whether Medi-Cal can "take" the family home after the death of a Medi-Cal recipient. This newsletter provides a brief overview of the Medi-Cal recovery process and explains how you can prevent the loss of your family home.

After a Medi-Cal recipient has died, the state can make a claim against the estate for all benefits paid after the recipient's 55th birthday.  The definition of estate is very broad for purposes of the claim.  The estate includes assets that pass through probate as well as assets held in living trusts, joint tenancy, tenancy in common, and annuities.  The amount of the recovery is limited to the amount of benefits paid or the value of the beneficiary's estate, whichever is less.

There are several exceptions to the estate claim.  The State cannot make a recovery while the surviving spouse of the deceased Medi-Cal beneficiary is alive.  When the surviving spouse dies, the recovery can be made against the estate of the surviving spouse, but only against assets that passed to the surviving spouse by distribution or survival.  In addition, no recovery can be made when the recipient is survived by a minor, blind or disabled child of any age.

Most recipients of Medi-Cal will have limited assets with the exception of their home.  Under current law, a recipient is allowed to have a property reserve of $2000 and a home of any value.  While Medi-Cal will be granted to pay nursing home care of a person who owns a home, the estate recovery is a trap for those who die while still owning the home.

Fortunately, proper planning can ensure that the home will stay in the family and not be lost to the estate recovery.  The simplest way to avoid an estate recovery is by making an outright transfer of the home to one's children or other loved ones.  Since the home will not be owned by the recipient on death, there can be no recovery.  An outright transfer has two major disadvantages.  First, the step up in basis is lost on the death of the recipient and may lead to a substantial tax bill on the eventual sale of the home.  Second, the value of the home becomes subject to the creditors of the donee.

Another option is to transfer the home subject to a reserved life estate or right of occupancy.  Such a transfer gives the recipient the right to live in the home until death.  This retained right of possession will cause inclusion in the estate of the recipient and a step up in basis under the Internal Revenue Code.  In addition, the State's recently issued regulations have made clear that there will be no recovery in the case of an irrevocable transfer with a retained life estate or right of occupancy.

The final option to protect the home is through the use of an irrevocable trust.  The advantage of using a trust is that it can be structured as a grantor trust (meaning owned by the recipient for income tax purposes).  If the house is sold prior to the recipient's death, the recipient can claim the IRC section 121 capital gains exclusion.  Irrevocable Trusts are becoming a favored planning technique among Elder Law Attorneys.