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Lawyers, Trusts and Money

What is it about IDITs that have made them so attractive to estate planning attorneys over the past few years? What is it about IDITs that so many estate planning attorneys will recommend an IDIT for Medi-Cal planning purposes – even if only to transfer a home - to the exclusion of all other planning options?

Is it the only way to avoid Medi-Cal recovery? Obviously not, since an irrevocable grant deed with a retained life estate is expressly immune from recovery in the regulations. (22 CCR §§50960.26, 50961(i)

Is it the only way to retain the step up? No, since it is settled statutory law under IRC §2036 that a retained life estate is sufficient to preserve the date of death value as the basis.
Is it other tax considerations? IDITs perhaps make sense for high-net-worth clients. But for Medi-Cal beneficiaries whose only major asset is a home that they wish to preserve for their children, an IDIT can be a complicated and costly approach, particularly if there are no major tax issues or complicated family dynamics.

Is it the cost of an IDIT v. the cost of a grant deed with a retained life estate? Maybe.

There is a concern that there is now a large and growing contingent of attorneys who are promoting IDITs as a one size fits all solution. One of our LRS attorneys wrote about a client who came to his office last year after her mother died. The mother was in a nursing home on Medi-Cal, had a house that was paid off and occupied by one of her two devoted daughters. The home was worth $1 million when the mother died. Another attorney had drafted an IDIT for the mother for a fee of $7,500 six months before she died, then quoted the daughter a 1% fee to administer the estate at her mother’s death. A simple life estate would have cost $1,500 including consults and an opinion letter with one recorded Affidavit of Death required at death. This would result in a full step-up in basis at death and guaranteed estate claim avoidance supported by law.

The problem is not with IDITs per se, as they certainly have their place in estate planning. The problem is that too often clients are told that the only approach is an IDIT, and they are not given a choice of estate planning approaches. There are advantages and disadvantages with the use of any approach to the transfer of the home, but the client needs to know them along with the cost of each approach. As one attorney noted, his practice is to give the client a menu of choices, including an IDIT, with all the pros and cons. Clearly, a life estate is the cheapest plate on the menu and generally the most popular for low and middle-income clients despite any potential disadvantages. IDITs are obviously useful estate planning tools, but an ethical attorney will provide his/her clients with the information necessary to make an informed choice – not because they can justify a higher fee.

Clients searching for legal assistance with Medi-Cal planning are already worried about losing their homes to Medi-Cal recovery. They deserve to be told all of their options and should not have to be worried about being fleeced by an attorney unwilling to provide them with the less expensive choices.