Recent changes to Medi-Cal regulations could have a significant impact on individuals with an irrevocable Medi-Cal trust. If you or a loved one established such a trust, it’s critical to review it in light of these updates to avoid potential financial pitfalls. Keep reading to learn about these important changes and how they could affect your assets.
What Is an Irrevocable Medi-Cal Trust?
An irrevocable Medi-Cal trust was traditionally a useful tool for shielding assets and helping individuals qualify for Medi-Cal benefits. Medi-Cal, California’s Medicaid program, offers low- or no-cost healthcare for eligible individuals, with eligibility often tied to having minimal assets in your name.
For many years, irrevocable trusts allowed people to shelter their assets while still meeting Medi-Cal’s strict financial requirements. However, two major changes to Medi-Cal regulations in 2024 could make these trusts more risky—and even costly—especially for your heirs.
Major Changes Affecting Medi-Cal Trusts in 2024
The Asset Test Has Been Eliminated
As of January 1, 2024, the California Department of Health Care Services has eliminated the asset test that was once a key requirement for Medi-Cal eligibility. In the past, individuals needed to reduce their countable assets to qualify for Medi-Cal coverage. This prompted many people to create irrevocable trusts to safeguard their property and financial resources.
Now, with the removal of the asset test, there is no longer a need to shelter assets in order to qualify for Medi-Cal. You can have an unlimited amount of assets in your name and still qualify for Medi-Cal benefits. This change dramatically alters the landscape for anyone with an existing irrevocable Medi-Cal trust, making the original purpose of these trusts obsolete.
Loss of Step-Up in Basis for Inherited Assets
One of the more critical financial risks posed by irrevocable Medi-Cal trusts involves taxation on inherited assets. Under previous laws, assets within the trust were eligible for a step-up in basis when passed to heirs after death. A step-up in basis adjusts the value of an inherited asset to its market value at the time of the decedent’s death, helping heirs avoid or minimize capital gains taxes on the appreciation of the asset.
However, this is no longer the case. Assets held within an irrevocable Medi-Cal trust do not qualify for a step-up in basis upon death. As a result, your heirs could face substantial capital gains taxes on the increased value of those assets, which could drastically reduce the inheritance you intended to pass on.
The Home Sale and Tax Implications
Another significant downside involves the sale of a primary residence held in an irrevocable Medi-Cal trust. Typically, the sale of a primary residence may qualify for the personal residence exclusion under IRC Section 121, which allows homeowners to exclude up to $250,000 ($500,000 for married couples) of capital gains from the sale of their home.
However, a home owned by an irrevocable Medi-Cal trust may not qualify for this exclusion. This means the appreciation on the value of the home could be subject to substantial taxes upon sale, further increasing the financial burden on your heirs.
What Should You Do?
Given these recent developments, it is essential to reassess the need for an irrevocable Medi-Cal trust. The original purpose of these trusts—sheltering assets for Medi-Cal eligibility—has been eliminated, and the tax consequences for your heirs could be significant.
Each situation is unique, so it’s crucial to consult with a qualified trust attorney who understands the nuances of these changes and can offer personalized guidance based on your specific needs. If you or a family member have an irrevocable Medi-Cal trust, we strongly recommend having it reviewed as soon as possible.
Contact MeyerPink Law at (209) 270-5841 to schedule your trust review today and ensure your assets and heirs are properly protected in light of these new rules.
