Question:

In California, can I have my parents deed their house to me as compensation for taking care of them? It has been 5 years and I am drowning.

Response:

I don’t practice in California, so I can’t give you a definitive answer. However, there are a lot of issues to consider, including your parents’ potential eligibility for Medicaid (MediCal in California), the tax implications of such a transfer, and whether it would be fair to your siblings, if any.

First, you are entitled to reasonable compensation for the care you provide. “Reasonable,” unfortunately, is a rather indefinite term. You don’t say whether you have siblings, who may have their own opinion of what is “reasonable.” But if everyone can agree, then payment shouldn’t be a problem from that point of view.

Second, if you can show (a) what work you provided, (b) that your parents needed the work, and (c) that the amount you are charging is consistent with costs for caregiving in your region, then Medicaid (MediCal in California) should not pose a penalty for your parents transferring the house to you.

Third, transfer of a house, however, could be problematic. That’s a lump sum payment for services that occurred over time. You don’t say whether the transfer would be for past services only or for both past and future services. It might be better to enter into a contract along with a promissory note and mortgage on the property so that you would be paid when the property is sold. I’m assuming your parents have no cash to pay you.

The fourth issue has to do with retroactive payment. Unless you and your parents agreed that you would be compensated when you began caring for them five years ago, they have no contractual obligation to pay you. They still can, but MediCal may argue that such payment constitutes a gift, making your parents ineligible for benefits for up to five years.

Fifth, if you are paid in exchange for the work you provided, the payment, whether in cash or real estate, this is considered earned income and must be reported on your tax return. This can result in very high taxes if you are paid in one year for work completed over many years.

Sixth, you may be better off inheriting the house rather than receiving it as a gift because then it would receive a step-up in basis upon your parents’ deaths, eliminating any accumulated capital gain. If you were to receive the house as a gift (without reporting as income), you would receive it with the same basis as your parents, which could result in significant capital gain on its sale. After two years you would be able to exclude $250,000 of the gain since it would qualify as your personal residence, which may or may not eliminate any taxes.

Finally, much of the above discussion may be irrelevant if you have been living in the house with your parents since, while you asked the question in terms of “compensation,” your actual question may be whether your parents can transfer the house to you without running afoul of the MediCal transfer rules. If you have been living in the house for at least two years and providing care during that time necessary to prevent your parents from having to move to a nursing home, you should qualify for the so-called “caretaker child“ exception to the transfer rules, but you would still have the capital gains tax issues discussed in the prior paragraph.

Given the complexity of the issues above and the fact that the answer depends so much on California law and practice, you really need to consult with a California elder law attorney. You can find one at www.elderlawanswers.com.

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