Avoiding a Medi-Cal Recovery Claim on a Personal Residence
In order to qualify for Medi-Cal, an individual must have limited income but may have unlimited assets due to the expansion of Medi-Cal under the Affordable Care Act. Medi-Cal expansion has made it easier for an increasing number of Californians to qualify for Medi-Cal. Although this is welcome news to many, it also presents an unanticipated consequence for many. Note that long term care Medi-Cal, which pays for care in a skilled nursing facility, is still an income and asset tested benefit, meaning that assets are still considered for eligibility purposes. For long term care Medi-Cal, some assets are considered “exempt,” meaning that Medi-Cal will not consider that asset in determining eligibility. For example, the personal residence is an exempt asset.
What is the unanticipated consequence for a Medi-Cal recipient?
Medi-Cal recovery. When a Medi-Cal recipient dies, exempt property remaining in the recipient’s name becomes available for Medi-Cal to seek reimbursement for benefits it has paid out during the recipient’s lifetime. Not everyone who has received Medi-Cal is subject to Medi-Cal recovery, Medi-Cal only seeks recovery for benefits paid out when a recipient is over age 55, or when a recipient of any age is cared for at a skilled nursing facility or other similar institution. Medi-Cal recovery claims are often very large and must be paid by assets left over in the estate.
Many people I speak with are surprised to hear that Medi-Cal recovery is avoidable with proper planning. For purposes of this article, I will be focusing on avoiding recovery of the personal residence since it is typically the most valuable exempt asset and probably the asset Medi-Cal seeks recovery against the most. Perhaps the simplest way to avoid a Medi-Cal claim against the personal residence is to transfer it out of the estate before death or to do a retained life estate. There are some downsides though to these methods. In most cases, we advise transferring the personal residence to an irrevocable Medi-Cal Asset ProtectionTrust (“MAPT”) for the following reasons: (i) IRC Section 121 Exclusion; and (ii) Step-up in Income Tax Basis.
- IRC Section 121 Exclusion
Oftentimes, the personal residence is sold during a Medi-Cal recipient’s lifetime for various reasons. If the home is in the recipient’s name, the personal residence will now be converted to a non-exempt asset, cash, and the recipient will no longer qualify for Medi-Cal. To overcome this result, the recipient may transfer the home to a loved one; however, if this is done, the sale will no longer qualify for the IRC 121 exemption for the first $250,000 of appreciation. The result is similar with a retained life estate as the portion of the sale attributed to the remainder beneficiary will not qualify for the exemption.
If the personal residence is sold after it has been transferred to a MAPT, the sale will not only qualify for the IRC 121 exemption, the cash resulting from the sale will also not be counted as an asset of the recipient. Now the recipient has cash to supplement their care and the sale results in little or no capital gains tax.
- Step-up in Income Tax Basis
Generally speaking, when an appreciated asset is transferred because of death, that asset will receive a step-up in income tax basis, meaning that the tax basis becomes the asset’s fair market value on the decedent’s date of death. Conversely, if an asset is gifted away during lifetime, that asset keeps the same basis that the donor had. With a MAPT, property will receive a step-up in basis on the recipient’s death. A property with a retained life estate will also receive a step-up in basis.
For example, let’s say Suzanne bought her personal residence for $50,000 and it now has a fair market value of $500,000. If Suzanne gifts that property to her children to avoid a Medi-Cal recovery claim and her children then sell the personal residence for $500,000, the children now have to pay capital gains tax on the $450,000 of gain. If the property is transferred to a MAPT and Suzanne dies when the fair market value of the house is $500,000, the children will receive a stepped up basis from $50,000 to $500,000.
There are many other advantages of the MAPT, such as asset protection and retained control and flexibility by the recipient. Planning for Medi-Cal and avoiding a Medi-Cal recovery claim is definitely not a one size fits all approach, it is very important to obtain help from an attorney who is knowledgeable about Medi-Cal rules and who has experience is this area. I have done this type of planning for many clients which has literally saved people hundreds of thousands of dollars in taxes and Medi-Cal recovery claims.
We invite you to contact us any time for an appointment with our legal and tax experts to discuss Medi-Cal planning further. We have offices throughout California, and we offer in-person, phone, and Zoom appointments. Just call (866) 988-3956 or book an appointment online.
James Cunningham Jr., Esq.