Editor’s note: This is the third installment of an occasional series about common misconceptions by consumers about the Medi-Cal Long Term Care program which provides financial assistance in paying for care in a skilled nursing facility.
As many of our clients already know, we regularly assist families who are facing care issues for a family member who may need long term care including advice and assistance in obtaining benefits available under certain Veterans and Medi-Cal programs.
In our last report, we addressed some common misconceptions about home ownership and Medi-Cal long term care eligibility. We also discussed some practical problems that can arise with the continued ownership of a home after someone has obtained Medi-Cal long term care benefits, moved to a skilled nursing facility and will not be returning home.
As was shown in the second installment, numerous problems can arise when there is a now empty home. Leaving the home vacant exposes the property to a higher risk of damage from accident or vandalism. It may also cause the property insurance to be cancelled. Renting the home has its own set of concerns, especially for those who have never before been a landlord. Finally, selling the home outright will almost always result in a loss of eligibility as Medi-Cal will, in most cases, view the sale proceeds as an available asset to pay for long term care costs and will, accordingly, deny further Medi-Cal benefits.
What to do? The short answer is to consult with an experienced and qualified elder law attorney with significant experience in Medi-Cal planning. Depending on the circumstances, there are some very good options for most families.
A strategy we employ for many clients is to establish what we call a “house trust”. But you may say I already have a living trust and my house is titled in that trust. Isn’t that enough?
While a living trust is a very effective and valuable tool for, among other thing, avoiding expensive and time consuming legal proceedings in the event of your incapacity or death, it does not provide the protection that may be needed for Medi-Cal planning.
How does a living trust differ from a “house trust”? There are a number of ways. One major distinction is that the former is a revocable trust and the latter is an irrevocable trust. This is an important distinction as Medi-Cal will count as available the assets in a revocable trust, but not so the assets in an irrevocable trust.
A house trust also contains very specific tax-related provisions that make it a unique form of irrevocable trust. The reason for including this language is to allow for a great reduction or, in some cases, complete elimination, of capital gains taxes when the home is sold, either before or after death.
Another advantage of a house trust is the favorable treatment of rental income should the home be rented. Renting a home outside of a house trust could increase the Medi-Cal beneficiary’s co-pay (or share of cost) for his or her care. Not so if the home is rented after it has been placed in a house trust.
In addition, as compared to an outright gifting or sale of a home to the children, holding the home in a house trust can avoid exposing it to the potential problems of the children such as creditor problems, tax problems, divorces, substance abuse, etc.
Finally, a house trust protects the home against Medi-Cal estate recovery efforts. This is the procedure followed by Medi-Cal after the death of the Medi-Cal beneficiary to recover from his or her estate the cost of the Medi-Cal benefits paid on behalf of the beneficiary, which often amounts to hundreds of thousands of dollars. Put simply, when properly created and administered, a house trust protects the home from such efforts.
The creation and ongoing administration of a house trust is not a do it yourself endeavor. Given the sophisticated and technical legal and tax provisions required to make it work as contemplated, you should work with an experienced and qualified elder law attorney who has significant experience with Medi-Cal eligibility and recovery strategies.
In our next report, we will continue our discussion about common misconceptions about Medi-Cal planning.