You may be afraid of losing your home if you have to enter a nursing home and apply for Medi-Cal. While this fear is well-founded, transferring the home to your children is usually not the best way to protect it.
Although you generally do not have to sell your home in order to qualify for Medi-Cal coverage of nursing home care, the state could file a claim against the house after you die. If you get help from Medi-Cal to pay for the nursing home, the state must attempt to recoup from your estate whatever benefits it paid for your care. This is called “estate recovery.” If you want to protect your home from this recovery, you may be tempted to give it to your children. Here are the reasons not to:
Medi-Cal ineligibility. Transferring your house to your children (or someone else) may make you ineligible for Medi-Cal for a period of time. In most states, transfers are scrutinized for a period of time. If you made a transfer for less than market value within that time period, the state may impose a penalty period during which you will not be eligible for benefits. Depending on the house’s value, the period of Medi-Cal ineligibility could stretch on for years, and it would not start until the Medi-Cal applicant is almost completely out of money.
There are circumstances under which you can transfer a home without penalty, however, so consult with an estate lawyer before making any transfers. You may freely transfer your home to the following people without incurring a transfer penalty:
- Your spouse
- A child who is under age 21 or who is blind or disabled.
- Into a trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medi-Cal applicant, under certain circumstances.)
- A sibling who has lived in the home during the year preceding the applicant’s institutionalization and who already holds an equity interest in the home.
- A “caretaker child,” who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant’s institutionalization and who during that period provided care that allowed the applicant to avoid a nursing home stay.
Loss of control. By transferring your house to your children, you will no longer own the house, which means you will not have control of it. Your children can do what they want with it. In addition, if your children are sued or get divorced, the house will be vulnerable to their creditors.
Adverse tax consequences. Inherited property often receives a “step up” in basis when you die, which means the basis is the current value of the property. However, when you give property to a child, the tax basis for the property is the same price that you purchased the property for. If your child sells the house after you die, he or she may have to pay capital gains taxes on the difference between the tax basis and the selling price.
Take Care to Avoid Common Mistakes
While it’s important to plan ahead for nursing home care, you and your entire family must be aware of unintended consequences. To find out the best option in your circumstances, including whether or not to transfer your home before entering a nursing home, call me at 916.247.6868 to schedule a consultation.