In my last blog, I talked about the Home Transfer Tax Trap. Sometimes, when people try to save their homes from Medi-Cal estate recovery claims, they just make matters worse, because they do not think through the estate tax and the capital gains tax implications of what they are doing.
This is an especially big problem for my clients in Alameda, Oakland, and Berkeley, because our home values are high, and our homes will make an especially attractive “target” for recovery claims by the State of California, after we are deceased.
The basic problem is that if we give away our homes to our children and loved-ones, while we are still alive, then we can save the family home from state recovery claims, but at the same time, we are almost always increasing (sometimes very drastically) the capital gains taxes that must be paid when the family home is eventually sold.
What a dilemma!
Wouldn’t it be great if we could legally and ethically shelter our homes from unnecessary capital gains taxes, for the benefit of our children, but without risking the complete loss of our homes to Medi-Cal Estate Recovery Claims?
We can do this! You should know, however, that this is “advanced” estate planning. But it’s advanced estate planning for the middle-class. It can literally save the American Dream for the next generation.
The trick is to give away the family home to other family members, so much that is not “subject to estate recovery” for Medi-Cal purposes, but at the same time, retain enough of the right of “possession or enjoyment of … the property,” so that it will eliminate exposure to capital gains taxes. (IRC §2036(a), see Treas. Reg. §20.2036-1(a)(i).)
You and your attorney will need to complete some careful planning. After that, some or all of the following documents will need to be prepared:
- Grant deed;
- Reservation of Life Estate;
- Affidavit by Grantee regarding Grantor’s Right to Return to Home;
- Occupancy Agreement; and/or
- Irrevocable Grantor Trust