How Your Parent Can Afford Assisted Living and Save the Estate!

Dear Mr. Miller:

My Dad is 70 and is badly in need of assisted living but the cost would quickly wipe him out.  He has $3000 in SSI and another $1500 in pensions.  The facility is quoting $8000 so he’d be digging into his savings at the rate of $3500 per month.  And his savings of $40,000 would be gone within the year.  Other than his house and a rental, he doesn’t really have anything else.  The house is worth $1 million, with no mortgage, as is his rental property of $500,000; but, he has made it clear he wants my brother and I to get those assets as he worked his whole life to make that happen.

What can we do?

Perplexed daughter

Alphabet Soup of Income
Medi-Cal Assisted Living Waiver
Medi-Cal Share of Cost
Capital Gain Tax
QMap Trust
Other issues
Health Care Coordinator Expenses
Give us a call

Dear Daughter:

Alphabet Soup of Income:  First, help is available so don’t despair.  But let’s explain the alphabet soup of income.  SSI stands for supplemental security income.  It is unlikely that he is receiving that as to qualify one can have no more than $2000 ($3000 for a couple) in countable assets.  Although the house probably doesn’t count, the rental would.

That leaves either social security disability income (SSDI) or regular social security.  SSDI stops when one reaches full retirement age, currently 66, and then converts to regular social security.  Since your Dad is 70 the $3000 must be regular social security.  (There  is also an SDI which stands for State Disability Income. It is short term disability insurance and pays for a maximum of 52 weeks to workers who need time off due to a disability.  I doubt that is what he is receiving.)

Medi-Cal Assisted Living Waiver:  California Medi-Cal is the program that would be potentially available to your Dad.  Traditionally, Medi-Cal pays for skilled nursing long term care.  You Dad does not need that.   An alternative program through Medi-Cal is the Assisted Living Waiver program which does cover Assisted Living Facilities (ALF).  The good news is that as of Jan 1, 2o24, the net worth test for eligibility has been eliminated.

Medi-Cal Share of Cost:  We now focus on what Medi-Cal refers to as Share of Cost.  What you and I might call health insurance co-pays.  In other words, how much of the bill is Medi-Cal going to pay and how much will your Dad.  The starting point is that essentially all of your Dad’s income goes to the Share of Cost and Medi-Cal pays the rest.  That would include not only the social security income and pensions ($4500) but also the revenue stream from the savings account, rental and, if the house is sold, the income derived from the sale proceeds (bank interest, stock dividends, etc.).  So the key here is to transfer the revenue streams (or the potential revenue streams) in order to “save them.”  We would want to transfer the savings account, house and the rental.  That’s the easy part but see below for some of the other issues.

Capital Gain Tax:  Whenever we transfer assets we have to think about income tax capital gain.  If the house is sold while your Dad still owns it, he receives a $250,000 exclusion from capital gain if he lived in it 2 of the last 5 years.  Further, if he owns it when he passes, and you and your sister sell it, any pre death appreciation is forgiven by the IRS (technically referred to as a step up in basis).  So let’s say your Dad bought the house for $250,000 and it is now worth $1 million.  If he transfers it to you and you sell it, you have a $750,000 capital gain and pay state and Federal tax on it (at 33% that’s $250,000 in taxes).  No $250,000 exclusion because you did not meet the 2 out of last 5 year rule and if he dies, no forgiveness of the pre death appreciation because your Dad was not the owner when he passed.  The solution is to transfer the house to what we call a QMap Trust.

QMap Trust is one which is written such that the IRS views the house as still owned by your Dad while the Medi-Cal authorities view that house as no longer being owned by your Dad.  (The agencies have different definitions of ownership.)  This allows you to avoid the capital gain tax to the same extent your Dad would have while “saving” the revenue stream from Medi-Cal.  The rental would also wind up in this Trust.

Other issues would include county property taxes, mortgage issues, and title insurance.  But all of these issues can be handled with good legal advice.

Health Care Coordinator Expenses:  With the revenue streams safely in the QMap Trust, the only income left is the social security and pension.  How do we deal with that?  Often times an agreement can be made with someone to act as the health care coordinator; coordinating the care with the ALF, the physicians, occupational nurses, etc.  This expense can be deducted from, and thereby reduce, the share of cost.  And often a family member (you) can act in that capacity; thereby, saving even more income from Medi-Cal.

Give us a call at 760-436-8832 so that we can help resolve your Dad’s problem.