The QMap Trust and Medi-Cal
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Step Up in Basis
QMap Trust-Other Benefits
Most people are aware that the home is typically exempt for Medi-Cal purposes. (See our Medi-Cal basics page.)
Medi-Cal Eligibility issue: However, what most people don’t realize is that the home, although exempt for qualification purposes, is not exempt for recovery purposes. In other words, after the Applicant (and his spouse) dies, Medi-Cal wants its money back and the house is a prime (and sometimes the only) asset available for repayment. In that case, Medi-Cal gets the house (up to what is owed) and the children get what is left over. That is not the desire of most of our clients.
Medi-Cal Recovery issue: Further, if the home is sold while the Applicant is alive, the proceeds of sale are not exempt. If the Applicant is receiving Medi-Cal when the proceeds are received, he will be disqualified due to having too much net worth. He can give the proceeds away to his children but this will typically cause a period of ineligibility for Medi-Cal. If the person is not yet receiving Medi-Cal he will have to either spend the proceeds (not a desirable result) or give them away before he is eligible. As with someone already receiving Medi-Cal, this gift will typically cause a period of ineligibility for Medi-Cal.
These problems can be avoided by transferring the house to the children before the house is sold or, if not sold, before the Applicant (and his spouse) dies. In most cases, this gift does not cause any difficulties with Medi-Cal and resolves the Medi-Cal eligibility issue and the Medi-Cal recovery issue. Assuming the children sell the house, and the children intend to use the proceeds to assist the Applicant, then, at first glance, the problems have disappeared. But other problems exist.
Exclusion: This procedure will work but, unfortunately, the exclusion from capital gain for income tax purposes (up to either $500,000 or $250,000 depending on whether the Applicant is married or not) will not be available and tax will have to be paid. This additional tax could cost the family as much as $100,000 assuming a 15% Federal and 5% state income tax. This places the family in a dilemma: allow the house to continue to be subject to Medi-Cal recovery or transfer the house to the children and pay extra income tax.
Step Up in Basis: If the house is not sold prior to the Applicant (and his spouse) dying, the step-up in basis for capital gains purposes will not be available. Assume the house was purchased for $100,000 many years ago and is now worth $600,000 when the Applicant dies. If the children now sell the house the gain is $500,000. The State and Federal income tax based on the tax rates above would be $100,000. This places the family in the same dilemma as above.
What about Living Trusts? Are they a solution? Basically, when a client has more than one goal, in this case, avoid Medi-Cal recovery and avoid paying extra income tax, a Trust of some type is the answer. It is, too, with this problem. However, your garden variety Living Trust will not work. Assets in that type of Trust are totally within the control of the Applicant and, therefore, looked upon by the Medi-Cal authorities as still owned by the Applicant. Therefore, upon death of the Applicant (and his spouse) the assets will be available for recovery.
Irrevocable Trusts, however, are different. This type of Trust typically places the assets beyond the control of the Applicant. There are many reasons that these types of Trusts are being used in lieu of simply transferring all of the Applicant’s assets to his children. For example, cases in which the Applicant has more than one child but the desire is for only one to manage the assets, one of the children is a spendthrift or cannot handle money, the Applicant desires to protect the assets being transferred from being taken by his child’s “ex” in a divorce or by a creditor of his child in a lawsuit. Sometimes the Applicant just likes the idea of the assets being in a Trust rather than in the children’s pockets, at least until the Applicant dies. Although Irrevocable Trusts can help in the above circumstances, typically they do not avoid the increased income tax problem when the home is sold.
The QMap Trust resolves this difficulty. By adding several special clauses, the Trust avoids the increased income tax by allowing the Applicant to claim the exclusion from capital gain. It, also, avoids Medi-Cal recovery.
QMap Trust-Other Benefits
There are a number of other benefits to it, also. If the family is not sure whether the house will have to be sold or not, the QMap will be a much superior method than the alternative. Many times, Medi-Cal has not yet been received, but is something about which the family is concerned. Traditionally, in these situations, the house simply continues to be held by the Applicant. But if the Applicant has lost mental competence when the time comes to sell the house, there will be a problem. In many cases there will be no documents in place, or the wrong documents to resolve the problem. So the family will have to go to court to obtain a court order allowing the sale. This may cost many thousands of dollars. Further, the problem usually will not be recognized until a buyer is found. What if the buyer is lost while the court case is being processed (a few weeks to a couple of months)? Will another extended period for marketing be necessitated?
With the QMap, the house can be sold without the Applicant’s signature, so his mental incompetence will cause no delays in the sale. And if the house never needs to be sold to raise cash to take care of the Applicant, on the Applicant’s death the children can sell the house and avoid all income tax on the pre-death capital gain (referred to as the step up in income tax basis). And as a bonus, the Applicant can retain some control on the assets and the children with a QMap.
Maybe an even more important benefit exists. Once the house is sold and the proceeds received, the Applicant, as the recipient of the proceeds, will have too much net worth to qualify for Medi-Cal. Although there are many procedures available to bring this net worth down to acceptable levels without spending it all, with the QMap Trust the Trust receives the proceeds rather than the Applicant and this problem is avoided entirely.
Rev 4/10/2010 © 2010, Merwyn J. Miller, J.D, Attorney at Law.