Medi-Cal Estate Recovery versus Special Needs Payback

          Medi-Cal has different rules governing Medi-Cal reimbursement when a Medi-Cal recipient dies.  One set of rules applies to assets owned by the deceased Medi-Cal recipient’s estate.  Another set of rules apply to assets held in a self-settled first party Special Needs Trust and pooled Special Needs Trust funded by the trust beneficiary in order to maintain eligibility to receive Medi-Cal.          

          As of January 1, 2017, Medi-Cal estate recovery only applies when estate (assets) are subject to probate and there is no surviving spouse.  Otherwise there is no Medi-Cal estate recovery.  Estate recovery reimburses Medi-Cal for benefits paid to Skilled Nursing Home or for Medi-Cal community based benefits (doctors, hospitals and prescription benefits) paid after age 55.  Important exceptions limit to Medi-Cal’s rights to estate recovery.

          Thus, a decedent’s home – an exempt asset for Medi-Cal eligibility purposes during the Medi-Cal beneficiary’s lifetime — can always be protected from Medi-Cal estate recovery by avoiding a probate.  Probate can be avoided by transferring the residence into a revocable living trust or gifting it while alive, preferably subject to a reserved life-estate.

          A small estate under one-hundred and fifty thousand dollars ($150,000) are usually settled using simplified administration procedures without a probate.

          Assets owned by either a First party Special Needs Trusts or a Pooled Special Needs Trusts, however, are subject to mandatory federal Medi-Cal “Pay-Back” that apply when the special needs beneficiary dies or the trust terminates.  Federal law allows a Medi-Cal (Medicaid) beneficiary to transfer assets – such as inheritances and personal injury awards — into such trusts to qualify for needs based Medi-Cal benefits if such trusts contain the “Pay-Back” provisions. 

          “Pay-Back” provisions, however, are not required – and should not be used — in either a Revocable Living Trust or in a Third Party Special Needs Trust – i.e., a special needs trust established by a family member, or friend, and funded with assets belonging to someone other than the special trust beneficiary. 

          In Gonzalez v City Nat’l Bank (2019) 36 CA5th 734, California’s Second District Court of Appeals, recently addressed whether the mandatory Pay-Back provisions required of first party special needs trust apply to a particular type of Special Needs Trust established with personal injury settlements or judgments for minors or disabled persons under section 3600 et. seq. of California’s Probate Code.  Two prior decisions from two other District Court of Appeals courts – i.e., Shewry v. Arnold (2004) 125 Cal.App.4th 186 (Shewry) and Herting v. State Dept. of Health Care Services (2015) 235 Cal.App.4th 607, 609 (Herting) — have opposite holdings to each other.

          In Shewry, the Court ruled that the First Party Special Needs Trust established by a Court order to receive a personal injury award was not subject to the Pay-Back provisions because section 3605 Probate Code (regarding death of a beneficiary) provides that, “the trust property is subject to the claims of the . . . Department . . . to the extent authorized by law as if the trust property is owned by the beneficiary or is part of the beneficiary’s estate.”   Accordingly, the trust assets were treated as assets of the deceased beneficiary’s estate.  Thus, the limitations on Medi-Cal estate applied – and not the Pay Back provisions. 

          In Herting, the Court ruled that section 3605 is subordinate to subsequently enacted federal law requiring a first party special needs to contain a mandatory “Pay Back” provision subjecting trust assets to Medi-Cal reimbursement for all costs paid by Medi-Cal upon the death of beneficiary or trust termination.

          The recent Gonzalez Court’s decision agrees with the Herting Court’s decision that Pay-Back provisions in a Special Needs Trust under section 3600 et. seq. are enforceable notwithstanding any contrary provisions in California’s Probate Code.  Until the California Supreme Court rules on the issue the outcome of whether Pay Back provisions apply will depend on which county the special needs trust is administered.

Dennis A. Fordham, attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at dennis@DennisFordhamLaw.com and 707-263-3235.