Medi-Cal and Trust Planning

More than 13 million Californians – a full third of the state’s population – use Medi-Cal, the state-specific Medicaid program for California.

Like all Medicaid programs, Medi-Cal is intended to cover medical costs and nursing home care for a wide array of low-income and vulnerable people. But while this may sound noble, Medi-Cal is not some freebie given out by the government.

The truth is, after you die, the state of California will do its best to take back all of the assistance that it gave you. It does this through the Medi-Cal Estate Recovery Program, which seeks repayment of these costs from your estate.

Of course, recovering these assets from your estate after you die won’t affect you directly… but it will be a major blow to your loved ones who stand to inherit your estate. We’ve seen all sorts of cases in which families, immediately after losing a loved one, are put through the bureaucratic hassle of dealing with the Estate Recovery Program, and end up severely shortchanged.

In a sense, it’s just like the estate tax… except instead of only applying to the wealthiest estates, it hits everyone who uses Medi-Cal, including many people who are struggling. And we imagine that you’d rather not put your family through that.

So, that’s one problem with Medi-Cal. It catches you in a bind between forgoing Medi-Cal payments and being unable to afford the medical and long-term care you need, or taking Medi-Cal and forgoing the basic privilege of planning your estate that almost all citizens enjoy.

The other problem with Medi-Cal is even more obvious, and it is that a lot of people who need and deserve Medi-Cal do not qualify for it. If you are reading this and your income falls above the qualifying level for Medi-Cal, then you might believe that none of this applies to you.

In fact, both of these problems can be solved by creating a Medi-Cal trust. If properly drafted, such a trust can not only protect your assets from the Estate Recovery Program, but actually help you qualify for Medi-Cal when you previously did not.

So, how can a trust do both of these things? Read on to find out.

How Medi-Cal Trusts Work

Protecting Your Assets

First, though, let’s back up a few steps.

As you may know, there are two major types of estate planning documents: wills and trusts. A will is required to go through the legal process known as probate, which is typically long, stressful, and affords you no privacy. The main advantage of a trust is that it can bypass probate entirely.

Trusts are tripartite agreements: you, the settlor, place assets within the control of a trustee, who will then distribute those assets to the beneficiaries of the trust in accordance with its terms. The role of trustee is roughly analogous to that of executor of a will, except that the trustee has more direct control over the assets with no court oversight unless a dispute arises.

There are also two major types of trusts: revocable and irrevocable. A revocable trust can be amended at any time by the settlor, while an irrevocable trust cannot be amended (except in rare circumstances and with a lot of difficulty). When you place assets within an irrevocable trust, they are effectively no longer yours, but are under the purview of whoever you selected to be trustee.

Now, why would anyone create an irrevocable trust when they could create a revocable one? The answer is that irrevocable trusts can do a few things that revocable ones cannot, and one of the most important of these involves protecting your assets.

When you create a revocable trust, the assets that you have placed in the trust are still legally in your possession. This means that if you are sued or find yourself in another type of debt, creditors will find it very easy to get their hands on those assets.

When you create an irrevocable trust, however, you cannot access the assets in the trust. And while this may be inconvenient, it also makes it much harder for creditors to get ahold of those assets – because you will be able to legitimately claim that they are not in your possession.

You can probably see where this is going. It’s not just conventional private creditors who can be stymied by an irrevocable trust: by creating one, you can protect your assets from being claimed by the Estate Recovery Program without having to give up your Medi-Cal benefits.

But that isn’t all…

Qualifying for Medi-Cal

Like a lot of government programs, Medi-Cal is designed to be used by the less fortunate. While this can include certain classes of people such as the elderly, disabled, and pregnant, many people who qualify for Medi-Cal do so because they are low income.

In order to qualify for Income-Based Medi-Cal, your income must be no higher than 138% of the federal poverty level.

What does that mean? Well, it depends on how many people are in your family. You can read the full chart for qualifying for Medi-Cal on the Department of Health Care Services website, but if you are a single person, you must be earning no more than $16,395, if your family has two people, you must be earning no more than $22,108, and so on.

Now, you might notice that these numbers aren’t very high – the federal poverty level is fairly low, and that’s doubly true in a state as expensive as California.

As a result, there is a very large portion of the population which is too wealthy to qualify for Medi-Cal, but not wealthy enough to afford the exorbitant costs of medical benefits, nursing home costs, and so forth. It’s very possible – in fact, likely – that you yourself fall in that category.

Not only that, but a lot of private health insurance plans, as well as Medicare, will not cover these long-term care costs. So unless you’re fairly wealthy, and can afford to pay out of pocket, you might be left up a creek.

Here, once again, a trust can help. If you find yourself within the portion of the population which doesn’t qualify for Medi-Cal but can’t afford these costs, then placing your assets in an irrevocable trust – and therefore outside of your possession – can help you qualify for Medi-Cal.

SB 833 and its Effects on Medi-Cal Trusts

We mentioned above that in order to evade Estate Recovery, you generally need an irrevocable trust. But that isn’t strictly true anymore.

SB 833, which was signed in 2016 and took effect at the beginning of 2017, made things a bit easier for Medi-Cal recipients looking to protect their assets. The law placed several limits on the ability of Medi-Cal to recover assets after a recipient’s death, including:

  • If a Medi-Cal recipient is survived by their spouse, then Estate Recovery will not be able to collect from the estate of that spouse once they have died (assuming, of course, that the spouse did not collect Medi-Cal themselves).
  • Estate Recovery will not be able to recover a “homestead of modest value,” meaning a home which is valued at no more than half of the average value of homes in that particular county on the date when the Medi-Cal recipient died.
  • Estate Recovery must waive claims if the decedent has a surviving child under the age of 21 or disabled.
  • The only services which may be recovered by Estate Recovery are those required by federal law, and no more. This means that the state of California may only seek recovery for long-term care, and not for unrelated medications or other treatment costs.

These limits can be found under Section 22 of the bill, if you want to read them in full.

Most importantly for our purposes, however, SB 833 prevents Medi-Cal from recovering any assets that are not part of the probate process.

Remember, all assets placed in a trust, whether revocable or irrevocable, will avoid probate. This means that even if your trust is not irrevocable, your assets within the trust will be protected from Medi-Cal.

Does this mean that you should do away with the irrevocable trust entirely? Not quite. While it is now easier to protect your assets, this law does not affect the other major function of a Medi-Cal trust: making you eligible for Medi-Cal in the first place. To achieve both of these functions at once, an irrevocable trust will likely be your best option.

Also, even if you do decide to go with a revocable trust, know that this is not necessarily an easier option. While it will provide you with easier access to your assets, a revocable trust, just like any form of trust, is a complicated document that must be drafted carefully if it is to be effective. No matter what type of trust you are drafting, you will almost certainly need the help of an attorney.

The Look-Back Period: Why Planning Ahead Is Essential

In order to determine whether you qualify for Medi-Cal, the state of California will look at your finances: not just your present finances but your past ones as well.

In order to prevent people from defrauding the system, Medi-Cal has a look-back period. If you transferred any assets out of your possession, or sold them for under fair market value, within the look-back period, then the state may not only deny your application but impose an additional penalty period for which you will have to wait before becoming eligible to receive Medi-Cal payments.

How long is the look-back period? In California, it’s two and a half years (30 months). In this regard, we’re actually more fortunate than the residents of many other states, who typically have a look-back period of five years.

This doesn’t prevent you from using a Medi-Cal asset protection trust, of course. It just means that you have to be careful about planning. Asset protection is all about planning ahead, and that goes for every aspect of it, not just this one. If you want to use a trust to take full advantage of your Medi-Cal benefits, then you will need to arrange this at least a few years in advance.

You can never predict with certitude when a particular medical condition will strike. But there are a few indicators, including family history and past use of alcohol or tobacco, that can help you determine your level of risk.

Remember, even if you are young and healthy, it is never too early to begin planning your estate… and the longer you wait, the more urgent the question becomes. Also remember that estate planning should be an ongoing process rather than a one-time task.

Major Considerations in Drafting a Medi-Cal Trust

Choosing a Trustee

If you are creating a trust, then the choice of trustee is important. But it is doubly important if you are creating an irrevocable trust, because the assets will be entirely out of your control. Furthermore, you will not be able to change the trustee, at least not without the trustee’s permission (and probably that of the beneficiaries as well).

You likely have some idea already of who your beneficiaries will be: your spouse, children, possibly grandchildren, and any other loved ones. The trustee must be a party who you can trust to have the best interests of the beneficiaries at heart, and to put those interests before their own if and when the two come into conflict.

The other factor that you should consider is competence. Regardless of any party’s good intentions, if they are not capable of doing the difficult work that comes with enacting the terms of the trust, then they will not be a good choice.

This is a question that you should give serious consideration before finalizing a trust, and it is important to think with your head and not your heart. No matter how much you might feel drawn to having a particular person as trustee, if you see any sign that they are intellectually or ethically unfit, then you should immediately take note.

Choosing an Attorney

Choosing an attorney to help you draft your trust is just as important as choosing a trustee. Since you will only be able to draft an irrevocable trust once, there’s no backup option for you to find a better attorney later if your first one makes a mistake. You have to get it right the first time.

This choice involves the same two major considerations as the choice of trustee: competence and morality. First, is my attorney competent and well-versed in the relevant law? Second, do they have a strong ethical foundation, and can I trust them to not lead me into inadvertently breaking any laws or hurting anyone I care about?

In order to determine whether an attorney is right for you and your estate planning needs, you should get multiple different perspectives and think the question through carefully.

We at Bohm Wildish & Matsen, LLP have been drafting Medi-Cal trusts, as well as a number of other types of trusts, for decades. We know how to write them so that they achieve their intended goals, and if you are looking for an attorney, we would offer up our firm as a good place to start the search.

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