I like to tell my clients that Medi-Cal planning is lot like playing chess. It’s easy to understand how all the little pieces are supposed to move, but there are literally billions of ways to play the first few moves of a chess game, it’s always hard to find the best strategy in any given situation, and it’s easy to make mistakes.
Some Medi-Cal planning strategies are amazingly simple (although some are very complex). But every case involves a different array of strategies, with different timings for gifts, sales, applications for benefits, and court petitions, with each involving different types and amounts of property, different tax results, and always with a view to the client’s different family situations, concerns, and goals. Frankly, it’s not hard to understand why it’s easy to make a lot of mistakes.
One of the worse, but unfortunately one of the more common mistakes, is some kind of variation of what I call the “Home Transfer Tax Trap.” Here is an example:
Aunt Mary realized that she would need to go into a nursing home soon, and that she would need to apply for Medi-Cal benefits, in order to receive a decent level of care. But then she got worried, when her friend told her that after she was deceased, Medi-Cal would “take away her home” (which is true). The friend also told Aunt Mary the instead, she could give away her home while she was alive, so that Medi-Cal wouldn’t be able to take it later (which is usually true), and that because homes are an “exempt asset” she would not be penalized for giving away her home (which is also usually true).
So Aunt Mary signed a deed, and gave her home to her loving daughter, Cousin Betty, “to protect it from Medi-Cal Liens.” That was a big mistake…
Aunt Mary (and her late husband) purchased her home in 1969 for $40,000. But after Aunt Mary suddenly passed ways, 12 months after entering the nursing home, the fair market value of her home in Alameda was $640,000. When Cousin Betting sold the home, she found out that she had to pay a capital gains tax of approximately…$180,000!
Cousin Betty felt worse, when she learned that if Aunt Mary had not given away the home, then the Medi-Cal claim would have been only $60,000. Aunt Mary had clearly placed her family in a worse situation by making a “simple” chess move.
Cousin Betty felt even worse still, when she learned that if Aunt Mary had done some authentic Medi-Cal planning, then Aunt Mary would have received better benefits, there would have been no Medi-Cal recovery against Aunt Mary’s estate, and the capital gains tax would have been … $0!