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Saving The Home - Elder Law
Mrs. Smith, a widow, lives in San Jose,CA. She owns a home worth $350,000.00 that she bought with her late husband in 1960 for $19,500.00. Mrs. Smith's husband died in 1990. The home had a value at that time of $200,000.00. Gloria, Mrs. Smith's unmarried daughter, who lives with her, can no longer care for her mother due to her mother's declining health. Both Mrs. Smith and Gloria decide that it is time to move Mrs. Smith to a long term care facility to provide for Mrs. Smith's needs. The monthly cost is $4,500.00. Mrs. Smith receives $1,100.00 from social security and another $600 from late husband's pension plan. Mrs. Smith 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. What is Medi- Cal? Medi-Cal is a governmental "needs based" 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. Smith qualify for Medi-Cal owning a home worth $350,000.00? 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. Smith can qualify for State Aid even if she owns a home (see: www.canhr.org). Mrs. Smith has "income" of $1,700.00 from social security and a pension plan - can she qualify for Medi-Cal? The answer is yes. Under Medi-Cal, Mrs. Smith is allowed to keep $35 per month in income. The difference of $1,665 (her "monthly income of $1,700.00 less $35.00) is Mrs. Smith's "share of cost", which will go toward to her care. If the Medi-Cal facility charges, $4,500.00/month, the state (Department of Health Service) pays $2,825/month - Mrs. Smith pays $1,665.00/month (a total of $4,500.00/month). Can the State file a lien to reimburse for Long Term Care Costs? If Mrs. Smith resides in 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 $28,300, then the state will file and enforce a lien against Mrs. Smith's home. How can Mrs. Smith 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. Smith's relocation to long term care home? The answer is no - remember the home is exempt for Medi-Cal resource purposes. Mrs. Smith is eligible because the home does not count. Mrs. Smith 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. Smith is relocated to a long term care home - as long as it is done before death. Why is there "no period of ineligibility"? Gifts transfers of "resources" (non-exempt assets - such as cash) will cause a period of ineligibility for up to thirty months (this will change to 36 months under new regulations). A gift transfer of a family home does not invoke a "period of ineligibility" because the home is an exempt asset. If Mrs. Smith sold the home for cash, would this effect her entitlement to Medi-Cal? Yes, it would. Cash is not exempt. It is considered a "resource." Mrs. Smith would not be eligible until she "spent down" her cash to the sum of $2,000.00. To avoid this, she could give the cash to her daughter? The answer is no. Since cash is not an exempt asset, Mrs. Smith could be "ineligible" for up to 30 months (soon to be 36 months). Surprisingly, a gift of the home during life, if done properly, will avoid a Medi-Cal lien after Mrs. Smith's death. Mrs. Smith 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. Can Gloria sell the home after transfer from Mrs. Smith while Mrs. Smith is alive and evidenced her Intent to Return Home? The answer is yes (see All County Letter 90-01 Questions 7 & 8)(www.canhr.org{check Medi- Cal Long Term Care then All County Welfare Directors Letters}). What are the mechanics? 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 tern care homes will accept Medi-Cal (see www.nursinghomeguide.org) Once a suitable home is located, Mrs. Smith 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. Smith would indicate, by checking the appropriate box of her "Intent to Return Home." Whether she is ever able to return home or not is not relevant. Even is she is not competent, her conservator can complete this for her. What NOT TO DO Do not sell the home. If the family needs cash, Mrs. Smith should transfer the home to Gloria. Gloria could then sell the home for cash. As long as Gloria is not found to have an "arrangement" to provide this money for her mother, then Mrs. Smith could retain Medi-Cal benefits.There are tax consequences (see below). Are there tax consequences? Yes there are. There are three tax considerations to take into account:
Property Tax Since Gloria is the daughter of Mrs. Smith - on the transfer of the family home, Gloria would be able to keep her mother's current property tax assessment. Gloria would need to completeand file the proper forms with the county tax assessor. Gift Tax Mrs. Smith is allowed to make a gift transfer of up to $11,000 per person without having to file a tax return. The gift to Gloria here would be $350,000. A gift tax return (IRS Form 709) is required. Assuming Mrs. Smith made no other gifts, then even though Form 709 is required to be filed with IRS, no gift tax is due. Why? This is because Mrs. Smith can give up to $1,000,000 during her life (over and above annual $11,000 gift) without having to pay tax. In 2004, this goes up to $1,500,000. Income Tax It gets a little complicated at this point. A few rules are in order. 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 of loss or sale. Usually, the basis is the purchase price. In our case, Mrs. Smith and her late husband bought the home for $19,500 in 1960. This was the initial "basis". However if one acquires an asset from a decedent, the basis is the fair market value at date of death. This applies to spouses, who hold property as community property. When Mrs. Smith husband died in 1990 the home value was $200,000. This is the new basis for the property. If one "gifts" the asset to a third party the third party takes the same basis as the donor. So if Mrs. Smith transfers the home to Gloria, Gloria would pick up the same basis in the home as Mrs. Smith. It this case, it is $200,000 (see below). In 1990, when Mrs. Smith's 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 Gloria's basis on a gift transfer on the home to her. Now, fast forward to the current date. Mrs. Smith wants to avoid an estate Medi-Cal lien so she transfers the home to Gloria. The transaction as stated above is exempt from Medi-Cal. What are the income tax consequences if Gloria sells the home after the transfer? Under tax rules, Gloria receives the same tax basis as her mother - in this case, $200,000. If Gloria sells the home for $350,000 (assume no closing costs) - Gloria will have a capital gain of $150,000. However there are income tax strategies that would allow Gloria to eliminate or reduce her income tax if handled properly. Conclusion There is a surprising range of options available for elders who wish to avail themselves Long Term Care, while carrying out their estate planning for their heirs. Property, Gift, Estate and Income Taxes can be eliminated or minimized with proper planning. Retaining competent Elder Law Attorney is critical. New Development On May 11, 2004 the Assembly Budget Committee passed AB 2102 which would change the current law as reflected in this article. Please consult a qualified attorney before you proceed. Daniel E. Hanley, Esq. The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation. Copyright © 2008Law Offices of Daniel E. Hanley. All rights reserved. You may reproduce materials available at this site for your own personal use and for non-commercial distribution. All copies must include this copyright statement. |  |            |