CALIFORNIA IRREVOCABLE TRUST: A Preferred Strategy for Protecting the Family Residence from Medi-Cal Recovery Claims

by Conrad M. Wilkinson, Esq. and Patricia J. Wilkinson, Esq.^*

Under current California Medi-Cal regulations, the family residence is considered an "exempt asset" for purposes of qualifying an owner for state long term care assistance. Home ownership does not preclude an owner from qualifying for Medi-Cal if he or she would otherwise qualify. However, when the home owner dies following receipt of Medi-Cal benefits, the property remaining in the home owner’s name becomes a resource for Medi-Cal recovery claims and liens. Surprisingly, a donative transfer of the home does not invoke a "period of ineligibility" under the Medi-Cal regulations if the donor retains or is given a legal right to return to the home even if he or she is institutionalized and a Medi-Cal beneficiary.¹ The Department of Health Services (DHS), the state of California Medi-Cal administering agency, has made it clear that a mere affidavit or sworn declaration by the donee is sufficient to make the transfer exempt.² Hence, the home owner receiving Medi-Cal benefits may decide to give away the house during his or her lifetime so that the house is protected from a Medi-Cal estate recovery claim at the home owner’s death.

This article will discuss the donor control, creditor protection and tax issues surrounding three different forms of donative transfers which have the effect of protecting the family residence from Medi-Cal recovery claims: (1) outright gift, (2) gift deed with retained powers, and (3) gift to an irrevocable grantor trust.

I. OUTRIGHT GIFT