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How Can You Protect Your Assets from a Medicaid Lien?

Kimberly Fowler
By Kimberly FowlerOctober 11, 2016

Stuart Furman, Esq., an elder law attorney in California for over 34 years and author of the “ElderCare Ready Book” and the award winning “ElderCare Ready Pack,” has seen a lot of families with a Medi-Cal recovery lien placed on their home when they thought their home was an exempt asset.

If you or a family member is part of the Medi-Cal program (called “Medicaid” in other states) how can you protect your assets from the Medi-Cal (Medicaid) lien? Learn more.

How to Protect Your Assets from a Medicaid Lien

Given that California is unique in its implementation of the Medicaid program, this interview is related to planning in California only.  However, Mr. Furman indicated that there are planning strategies available in other states that should be addressed with an elder law attorney in that state.

Part of the problem with the Medi-Cal exemptions is that most people have a “false impression that when they apply for Medi-Cal that anything that is exempt in their application for benefits is also exempt from recovery under the Medi-Cal recovery statutes,” Furman says. This is not the case.

“One of the common misconceptions people have is that they confuse the wording used in Medi-Cal. Often, people confuse eligibility exemptions with recovery exemptions. If their house is exempt, and thus not counted for eligibility determination, it doesn’t mean that it is also exempt from the recovery [or lien],” Furman explains.

Your local Medi-Cal or Medicaid office cannot offer advice on how to protect your assets, so it’s important to talk to an elder law attorney about  legal methods to protect your house or other assets from a Medi-Cal lien. Also, options to protect a home vary from state-to-state, not to mention the fact that there is a myriad of issues to address with each strategy, so you should consult with your elder law attorney about your unique situation.

Generally speaking, there are three ways you can protect your home from a Medi-Cal lien:

1. Gift your house to your children or another family member.

Medi-Cal can’t recover what isn’t yours.  However, when you gift your home outright to heirs, your beneficiaries may lose out on the tax benefits that they would receive if they had inherited the house. The Internal Revenue Code (IRC) affords a step-up in basis for appreciated assets that are inherited, which according to Investopedia is “the readjustment of the value of an appreciated asset for tax purposes upon inheritance, determined to be the higher market value of the asset at the time of inheritance. When an asset is passed on to a beneficiary, its value is typically more than what it was when the original owner acquired it, which could allow beneficiaries to recoup these lost tax benefits.” Gifting your house means that your beneficiaries would not be eligible for the step-up-basis.

A word of caution here — you should only gift your house if you have a strong, trusting relationship with your children or other family members. When you gift your house you are subjected to the risks that come with your children’s creditors (including bankruptcy, divorces, the IRS, liens etc…) which can open you up to serious risks. This is not a good option for everyone. You should talk to your elder law attorney about this option in the parameters of your unique situation.

2. Create an irrevocable living trust.

In California, you can transfer your home to an irrevocable living trust to preserve the step-up in basis. This means that your children will still be eligible for the step-up in basis benefit, even if the house doesn’t come to them directly through your estate upon your death.

Transferring your home to an irrevocable living trust also offers other advantages. This type of trust can help you protect your home from Medi-Cal liens. Whereas gifting your home to your children or another person opens you up to the risk of losing your home through your children’s creditors.  Place your home in an irrevocable living trust is much more protected against those risks.

When it comes to estate planning, “California is a great state to plan for seniors compared to others,” Furman says. “In other states, if you transfer your home and apply for Medicaid, you can be denied eligibility for Medicaid. In California you can transfer exempt assets prior to or during the eligibility period, no matter the value of the exempt asset.”

The rules surrounding the creation and execution of trusts vary state-to-state, so you should talk to your elder law attorney about the details in your state and whether a trust is a good idea considering your unique situation.

3.  Life estate.

Another strategy in California is transferring the residence but reserving a life interest in the home.  This affords the step-up in basis described above, and also avoids the Medi-Cal recovery.  However, there are other estate planning issues to address if the home is going to be sold, problems later with the remainder beneficiaries (as they now hold a future interest in the home).  Again, this strategy needs to be addressed with legal counsel in your state.

Living Trusts Changing in California

Furman indicated that in California, a new statute will become law in January 2017 for Medi-Cal recipients that died after December 31, 2016.

“Way back, a residence held in a living trust was exempt from any Medi-Cal recovery. Then, the law was changed to expand the definition of the recoverable estate to include assets transferring by living trusts. Now, starting in 2017, assets transferring through a living trust vehicle are again exempt from the recovery. ” Furman explains.

Given that this new legislation will take effect in January 2017,  “attorneys may not be 100% sure about the intricacies of different circumstances, like how this will play out with regards to transition period or spouses.” However, overall Furman sees this new statute as being a positive one for seniors in California who have living trusts.

Questions Surrounding Medi-Cal

Do you have a choice to opt out of the Medicaid lien?

No. You can’t opt out of the Medicaid lien but you can plan around it by using certain strategies.

There is however, a procedure to request a waiver if certain conditions are met.

However, the granting of the waiver is in the control of the Medi-Cal office.

How does the Medicaid lien affect assets that are jointly held?

In California, usually when assets are jointly held it’s held by spouses and there is no recovery until the second spouse has died. However, “the assets could be traced back to the first person who passed,” Furman warns.

For example, if a house was passed to children, and the first spouse who passed owned 50% of the house then that 50% is considered recoverable by Medi-Cal, even though the house has been passed to the children upon the second spouse’s death. However, in California “there is some uncertainty about how the new statute will affect this process,” Furman says.

It’s important to note that although Medicaid is a federal law, each state implements it differently. You should talk to an elder law attorney or estate law attorney about your unique situation and ask them about eligibility, applications and recovery. “It’s critical that people stay off the Internet when looking for advice about Medi-Cal,” Furman warns. The information found online isn’t always trustworthy and offers general advice, which means it may not apply to your unique scenario. Talk to an elder law attorney to get advice and information that is accurate and trustworthy.

Have you had experience protecting your assets from a medicaid lien? Share your stories with us in the comments below.

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Kimberly Fowler
Kimberly Fowler
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