Daniel E. Hanley
Attorney at Law for Elder Law

San Jose, California, Elder Law Attorney at Law since 1974 and licensed Real Estate Broker and Private Lender since 1980. In addition to elder law, I specialize in estate planning law, real estate transaction law and small business matters. Call me now for a free phone consultation.

Do you or a family member need advice and assistance regarding qualifying for California Medi-Cal or private disability insurance?

At the San Jose, California, Law Offices of Daniel E. Hanley, we can help qualify your spouse, parent, or loved one for Medi-Cal and SSI benefits and provide the knowledgeable advice and helpful information needed to understand these programs and avoid common pitfalls that may negatively affect eligibility.

The cost of long term care continues to skyrocket, and the ability to afford such care is a major concern for seniors and their families. Contact our San Jose elder law planning attorney today to find out how we can help ensure that you or your loved one continue to receive the care you need without fear of financial ruin.

Some of the ways in which our firm can help include:

Making sure that your home and other assets are safe from attachment or levy by the State of California.

Preparing a Special Needs Trust to protect trust assets from creditors while qualifying for governmental benefits program.

Preparing Durable Powers of Attorney and Trust Instruments that provide flexibility to later qualify a mentally disabled spouse, parent or loved one for governmental benefits without risking estate assets.

Providing counsel and advice regarding asset allocation, asset planning, and income planning in order to qualify for Medi-Cal.

Inform you of what to watch out for in terms of transactions and events that could negatively affect Medi-Cal eligibility.

Establishing conservatorship status to enable a family member or loved to make financial decisions.

Factual Scenario:

Mrs. Palmer, a widow, lives in San Jose, CA. She owns a home worth $850,000. (loan paid off) that she bought with her late husband in 1960 for $19,500.

Mrs. Palmer's late husband died in 1990. The home had a fair market value at the date of Mr. Palmer's death of $200,000.

The home has a current real property tax assessment base of $205,000. (this might be relevant – see New Developments).

Amanda, Mrs. Palmer's unmarried daughter, who lives with Mrs. Palmer, can no longer care for her mother due to her mother's declining health.

Both Mrs. Palmer and Amanda decide that it is time to move Mrs. Palmer to a long term care facility to provide for Mrs. Palmer's needs. The monthly cost is $6,000.

Mrs. Palmer receives $1,100. from social security and another $600. from her late husband's pension plan. Mrs. Palmer has no other income or assets other than her home.

Contrary to popular belief, neither Federal Medicaid Program, nor medical insurance covers long term care. Long Term Care Insurance is available but few people apply for it.

Medi-Cal is a governmental program designed to help pay for Long Term Care of public assistance recipients and other low income people with few assets. Eligible persons are allowed to keep $2,000. in non exempt assets (cash, stocks, etc.) and $35. per month income.

Can Mrs. Palmer qualify for Medi-Cal owning a home worth $850,000.?

Under current Medi-Cal regulations, a family residence is considered an "exempt asset" for purposes of qualifying an owner for long term care assistance.

In other words, Medi-Cal treats the home as having a zero value for qualification. Mrs. Palmer can qualify for State Aid even if she owns a home. For more detailed information, please see California Advocates for Nursing Home Reform (CANHR).

Mrs. Palmer has "income" of $1,700. from social security and a pension plan – can she qualify for Medi-Cal?

Yes. Under Medi-Cal, Mrs. Palmer is allowed to keep $35. per month in income. The difference of $1,665. is Mrs. Palmer's "share of cost," which will go to her care.

If the Medi-Cal facility charges $6,000./month, the state (Department of Health Services) pays $4,335./month – Mrs. Palmer pays $1,665./month.

Can the State file a lien to reimburse for Long Term Care Costs?

If Mrs. Palmer resides in a long term care facility for 10 months and then dies, the state has a right to seek reimbursement. If the payments over the 10 month period are $60,000., then the state would file and enforce a lien against Mrs. Palmer's home.

How can Mrs. Palmer avoid a State Lien?

Transferring the home prior to death will avoid a state lien.

Does the transfer of the home need to occur prior to Mrs. Palmer's relocation to a long term care home?

No. Remember, the home is exempt for Medi-Cal resource purposes (however, see New Developments). Mrs. Palmer is eligible because the home does not count. Mrs. Palmer can qualify for Medi-Cal. The strategy is to have the home out of her estate before her death.

The transfer can be accomplished before or after Mrs. Palmer is relocated to a long term care home – as long as it is done before death.

Why is there "no period of ineligibility"?

Gift transfers of resources (non-exempt assets – such as cash) will cause a period of ineligibility.

A gift transfer of a family home does not cause a "period of ineligibility" because the home is an exempt asset (however, see New Developments).

If Mrs. Palmer sold the home for cash, would this effect her entitlement to Medi-Cal?

Yes. Cash is not exempt. It is considered a resource. Mrs. Palmer would not be eligible until she "spent down" her cash to the sum of $2,000.

To avoid this, could Mrs. Palmer give the cash to her daughter? No. Since cash is not an exempt asset, Mrs. Palmer would be "ineligible" for up to 60 months.

Surprisingly, a gift of the home during life, if done properly, will avoid Medi-Cal lien after Mrs. Palmer's death.

Mrs. Palmer must evidence an "Intent to Return Home" both in her Medi-Cal application and on the transfer of the home to make the transfer exempt to her daughter (Amanda).

Can Amanda sell the home after the transfer from Mrs. Palmer while Mrs. Palmer is alive and evidenced her "Intent to Return Home"?

Yes. For more detailed information, please see California Department of Health Care Services document Implementation of the Spousal Impoverishment Provisions of the Medicare Catastrophic Coverage Act of 1988 Relating to Property, Questions 7 and 8. You will need to have the free Adobe Reader installed on your computer in order to view the pdf file.

Probably the hardest part of this process is not what we are discussing here, but locating a proper long term care home. It is important to note that not all long term care homes will accept Medi-Cal. For more detailed information, please see California Advocates for Nursing Home Reform (CANHR) document Nursing Home Guide.

Once a suitable home is located, Mrs. Palmer would complete and file her application for Medi-Cal benefits. Check the white pages under county governmental offices – usually entitled (County) Department of Social Services (i.e. Santa Clara County Department of Social Services) for further information.

The application of Mrs. Palmer would indicate by checking the appropriate box of her "Intent to Return Home."

Whether Mrs. Palmer is ever able to return home or not is irrelevant. Even if she is incompetent, Mrs. Palmer's conservator can complete this for her. The point is that she should indicate her intention to return home.

Do not sell the home. If the family needs cash, Mrs. Palmer should transfer the home to Amanda. Amanda could then sell the home for cash. As long as Amanda is not found to have an "arrangement" to provide this money for her mother, then Mrs. Palmer could retain Medi-Cal benefits. There are tax consequences, however (see below).

The transaction should be clearly and thoroughly understood by Mrs. Palmer to avoid a claim of elder abuse.

There are three tax considerations to take into account:

Property tax

Gift tax

Income tax

Since Amanda is Mrs. Palmer's daughter, on the transfer of the family home, Amanda would be able to keep her mother's current property tax assessment. Amanda would need to complete and file the proper forms with the county tax assessor.

Mrs. Palmer is allowed to make a gift transfer of up to $13,000. per person without having to file a tax return.

The gift to Amanda here would be $850,000. A gift tax return (IRS Form 709) is required.

Assuming Mrs. Palmer made no other gifts, then even though Form 709 is required to be filed with IRS, no gift tax is due because Mrs. Palmer can give up to $1,000,000. during her life (over and above the annual $13,000. gift) without having to pay gift tax.

It gets a little complicated at this point. A few basic rules are as follows.

For income tax purposes, capital assets (the home) have a tax cost or "basis." The "basis" is the measuring point to determine whether there is a gain or loss on a sale. Usually, the basis is the purchase price.

In our case, Mrs. Palmer and her late husband bought the home for $19,500. in 1960. This was the basis in the home.

However, if one acquires an asset from a decedent, the basis is the fair market value at the date of death. This applies to spouses, who hold property as community property.

If one "gifts" the asset to a third party the third party takes the same basis as the donor. So, if Mrs. Palmer transfers the home to Amanda, Amanda would pick up the same basis in the home as Mrs. Palmer. Here, it is $200,000. (see below).

In 1990, when Mrs. Palmer' husband died, she "inherited" the remaining Community property interest in the home from him. Her basis in 1990 was raised from $19,500. to $200,000. This would be Amanda's basis on a gift transfer on the home to her.

Now, fast forward to the current date. Mrs. Palmer wants to avoid an estate Medi-Cal lien, so she transfers the home to Amanda. The transaction, as stated above, is exempt from Medi-Cal.

What are the income tax consequences if Amanda sells the home after the transfer?

Under tax rules, Amanda receives the same tax basis as her mother – in this case, $200,000. If Amanda sells the home for $850,000. (assume no closing costs), Amanda will have a capital gain of $650,000.

However, there are income tax strategies that would allow Amanda to eliminate or reduce her income tax if handled properly.

Transferring the Home to an IGT where Mrs. Palmer retains certain tax powers will accomplish the following:

The transfer to IGT for Medi-Cal purposes removes the home from the system. The result is no recovery lien for state payments for home care.

The transfer does not disqualify Mrs. Palmer from receiving continued Medi-Cal benefits.

Any financial difficulties Amanda may have in her personal dealings will not affect the home as none of Amanda's creditors can attach these assets while the home is held in trust by Amanda.

Property structured so there are no increase in property taxes on the home.

The transaction although complete for Medi-Cal recovery is not complete for federal income, gift, or estate tax purposes.

As a result of the last case, there are some beneficial tax consequences as follows:

No gift tax returns is required to be filed.

On death, the home receives a "free" step-up in basis as to the fair market value as of date of death resulting in elimination of pre-death capital gains.

Property taxes remain the same.

Home owners exclusion is available ($250,000. exclusion from capital gain) if the home is sold while Mrs. Palmer is alive and the transaction otherwise qualifies.

On 2/8/06, President Bush signed the Deficit Reduction Act (DRA) of 2005, which has a major impact in this area of planning.

Prior to this new federal legislation, the state would treat all homes as an exempt asset regardless of the equity in the home. This means that the home could be transferred to family without adverse effects.

Under the DRA, the new law does not exempt the home if the "equity" is in the range of $500,000. to $750,000., depending on how each state wants to treat this issue.

The Federal Law allows each state to implement the law with some flexibility:

As of July 2007, information from Sacramento indicates that California will treat as an exempt asset the home equity below $750,000. once the law is in place through state statutes and regulations.

The regulations have not been promulgated as of 11/1/10.

Currently (2010), home equity rules do not apply, so an owner of a home with more than $750,000. can not only qualify for Medi-Cal, but can also avoid a Medi Recovery claim letter.

Critical questions remain on how the State will treat those parties that are approved under the current rules, but later might be disqualified for transferring a non-exempt asset to obtain Medi-Cal benefits.

It appears that the State will not apply the DRA retroactively.

In the past, the State has not applied new law retroactively, but there are no guarantees when it comes to implementation of the DRA.

As a precaution for those homeowners whose equity exceeds the $750,000. limit, it is advised that an appraisal be obtained at the time of the transaction.

Another issue is how the state will define "equity."

Currently, real property "equity" for other real property (rentals, commercial or industrial) equity is defined as the "assessed value" of the property as determined by the county tax assessor, which in most cases, is less than the real value.

It appears that the State will adopt the "assessed value" as the "equity."

In Mrs. Palmer's case, since her assessed value is $205,000. and if this is how the state would define "equity," then the transaction would qualify.

There are many options available for elders who wish to take advantage of the Long Term Care available to them, while carrying out their intentions through carefully crafted estate planning.

For information about Social Security, please see AARP's Complete Guide to Social Security and 10 Things You Should Know About Social Security.

In addition to elder law, our firm also offers a full range of legal, real estate and loan related services including bankruptcy, foreclosure, estate planning, probate, real estate exchanges, real estate loans, real estate transactions and small business matters.

If you have questions about elder law issues, long-term disability insurance, and Medi-Cal eligibility, please do not hesitate to contact our San Jose elder law planning attorney and estate planning lawyer today. Call us now for a free phone consultation at 408-293-0344 or contact us via e-mail by filling out the form on the Contacts page and a representative from our office will reply immediately.

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