Avoiding Medi-Cal recovery and understanding a step up in basis with regard to capital gains tax


Dear Len & Rosie,

My father is 83 and is not in good health. He has put his home into a revocable trust with my brother and I as beneficiaries and cotrustees. My name has been put on his bank accounts as a joint tenant. Will this form of ownership avoid probate, avoid possible Medi-Cal recovery and will the house still receive a step up in basis with regard to capital gains tax? Should his life insurance policy and personal property also be put in the revocable trust?


Dear Brad,

The good news is that everything your father has done so far will allow his home and other assets to avoid probate administration in the courts, and his home will also get a new cost basis upon his death, allowing you and your brother to sell the home after your father’s death and pay no capital gains tax, except on post-death appreciation, if any.

If your father had died prior to January 1, 2017, however, the trust would not have protected his home. While avoiding probate, the home and other trust assets would have been subject to a Medi-Cal Estate Recovery Claim from the California Department of Health Care Services (DHS).

Fortunately, as of January 1, 2017, only the probate estates of deceased Medi-Cal recipients are subject to such estate claims. If a recipient has a surviving spouse, a disabled or blind child, or dies without a probate estate as all of his or her assets pass outside of probate, then there is no claim at all.

In your father’s case, his plain vanilla revocable trust will protect his home from Medi-Cal claims provided that it isn’t sold while he is alive. If he sells the home, which is exempt under Medi-Cal rules, the proceeds of the sale of the home would disqualify him from continued Medi-Cal benefits, but would still be exempt from the Medi-Cal Estate Recovery Claim. Also, if the home is rented out from the revocable trust to generate income, that income will increase your father’s Medi-Cal Share of Cost.

You should not want this to happen. Therefore, if your family is contemplating selling the home during your father’s lifetime or renting it out to tenants, the home should be transferred to an irrevocable trust that would shelter the proceeds of the sale of the home, or any rental income from affecting your father’s Medi-Cal eligibility.

As for your father’s assets, if his checking account names a joint tenant or pay on death beneficiary, it will be exempt from the estate claim. If he owns an automobile, he should sign it over to a family member if he is no longer able to drive. Since the life insurance has beneficiaries, it will be exempt, and Medi-Cal doesn’t collect against personal possessions as they have no registered title so there’s no way of tracking them.

If your father has more than $2,000 in countable assets, he’s not eligible for Medi-Cal. If this is the case, an elder law attorney can help him qualify for benefits and verify that his assets will be exempt from the estate claim.

Len & Rosie