Medi-Cal Estate Recovery and California Living Trusts

Medi-Cal Estate Recovery and California Living Trusts: What You Need to Know

For many Californians, Medi-Cal provides essential healthcare coverage, including long-term care services. However, many beneficiaries and their families are unaware that after a recipient’s passing, the state may seek reimbursement for certain benefits received, a process known as Medi-Cal Estate Recovery. This can significantly impact the inheritance intended for loved ones.

Fortunately, proper estate planning—especially through living trusts—can help protect assets from Medi-Cal recovery. This guide explains how Medi-Cal estate recovery works in California, how living trusts can safeguard assets, and additional strategies to prevent government claims on an estate.

What is Medi-Cal Estate Recovery?

Medi-Cal Estate Recovery is a California state program that allows the government to recoup costs for medical services provided to a deceased Medi-Cal recipient. This applies to individuals who received benefits after age 55 or for long-term care services, regardless of age.

Scope of Recovery

Medi-Cal estate recovery generally applies to:

• Nursing home care
• Home and community-based services
• Hospital and prescription drug costs related to long-term care

However, not all assets are subject to Medi-Cal estate recovery. As of January 1, 2017, California law limits recovery to assets that pass through probate. This means that assets held in a living trust, joint tenancy, or with named beneficiaries (e.g., life insurance policies, retirement accounts) are exempt.

Understanding California’s Definition of “Estate” for Recovery Purposes

California’s narrowed estate definition affects how Medi-Cal estate recovery applies.

Assets Subject to Recovery:

• Assets solely owned by the deceased at the time of death.
• Assets that require probate proceedings to transfer ownership to heirs.

Assets NOT Subject to Recovery:

• Assets held in a properly established living trust.
• Jointly owned property (e.g., real estate held in joint tenancy or community property with right of survivorship).
• Accounts and investments with named beneficiaries (e.g., life insurance, IRAs, 401(k)s).
• Property transferred before death.

Since living trusts bypass probate, they effectively shield assets from Medi-Cal estate recovery.

The Role of Living Trusts in Medi-Cal Planning

A living trust allows individuals to transfer assets into a trust while retaining control during their lifetime. Upon death, these assets transfer directly to beneficiaries, avoiding probate and preventing Medi-Cal recovery.

Types of Living Trusts and Their Benefits

1. Revocable Living Trusts

• Most commonly used estate planning tool in California.
• Allows full control over assets during the grantor’s lifetime.
• Can be amended or revoked at any time.
• Upon death, assets pass directly to beneficiaries, avoiding probate and Medi-Cal recovery.

2. Irrevocable Trusts

• Cannot be altered or revoked once established.
• Assets transferred to an irrevocable trust are no longer part of the estate.
• Shields assets from Medi-Cal recovery and creditors.

3. Special Needs Trusts

• Ensures individuals receiving government benefits remain eligible.
• Medi-Cal cannot recover assets held in a properly structured Special Needs Trust.

By placing assets in a living trust, individuals protect their estate from Medi-Cal claims and ensure their beneficiaries receive their intended inheritance.

Key Benefits of Using a Living Trust to Avoid Medi-Cal Estate Recovery

1. Probate Avoidance

• Living trusts bypass probate, which is the primary mechanism that allows Medi-Cal recovery to occur.
• Heirs receive their inheritance faster and without court involvement.

2. Privacy Protection

• Probate proceedings are public records, but living trusts are private.
• Using a trust keeps estate details confidential.

3. Control and Flexibility

• A revocable trust allows modifications if circumstances change.
• The trust can specify how and when beneficiaries receive assets.

4. Asset Protection for Future Generations

• Trusts can safeguard wealth from creditors, lawsuits, or mismanagement by beneficiaries.
• Assets remain protected for multiple generations.

Considerations and Limitations of Using Living Trusts for Medi-Cal Planning

1. Timing of Asset Transfers

• Transferring assets to a trust too late in life may not provide full protection.
• Advance planning ensures assets are shielded well before Medi-Cal services are needed.

2. Proper Funding of the Trust

• A trust is only effective if assets are transferred into it.
• Deeds, titles, and financial accounts must be correctly re-titled in the trust’s name.

3. Medi-Cal’s Look-Back Period

• Currently, California does NOT impose a look-back period for asset transfers.
• However, future federal policy changes could introduce penalties, making early planning essential.

Additional Strategies to Protect Assets from Medi-Cal Estate Recovery

While living trusts are highly effective, additional estate planning tools provide further protection:

1. Joint Ownership

• Holding property in joint tenancy or community property with right of survivorship allows assets to pass directly to the surviving owner, avoiding probate and Medi-Cal recovery.

2. Life Estate Deeds

• A life estate deed allows a person to retain the right to live in their home, but ensures it transfers automatically to a named heir upon death.
• Avoids probate and Medi-Cal recovery while allowing continued residence in the home.

3. Payable-on-Death (POD) or Transfer-on-Death (TOD) Designations

• Beneficiary designations on financial accounts ensure assets pass directly to heirs without probate.

Recent Changes to Medi-Cal Recovery Laws in California

California has implemented significant reforms to Medi-Cal estate recovery laws that benefit beneficiaries:

• 2017 Law Change: Limits recovery to probate assets only.
• Exemptions Expanded: Surviving spouses and certain disabled heirs are automatically exempt.
• Hardship Waivers Available: Families facing financial hardship can apply to reduce or eliminate estate recovery claims.

These changes make living trusts an even more effective tool for protecting assets from Medi-Cal claims.

Protect Your Estate with a Living Trust

Medi-Cal estate recovery can place a significant financial burden on families, but strategic estate planning can eliminate this risk. Establishing a revocable living trust and utilizing additional asset protection strategies ensures that your estate remains intact for your loved ones.

If you need assistance with Medi-Cal planning and want to protect your assets, contact an experienced estate planning attorney today. Planning ahead ensures your wealth is preserved for future generations.

Would You Like a Free Consult With an Estate Planning Attorney?

If you wish to speak with an experienced estate planning lawyer, please contact us online or call us directly at (951) 587-3737. Ironclad Living Trusts is honored to serve clients throughout all of Southern California.