Medicare and Medi-Cal eligibility

An annoyance of mine is when I see a non-attorney make a legal determination involving an ostensibly simple matter that is wrong and consequential. While reading through appellate opinions, I stumbled upon a case involving such a a scenario.

Wong v. Tam, Los Angeles County Superior Court, Case # BC541794.   

In this case, the plaintiff and defendant agreed to purchase a property for their elderly parents (presumably they were brother and sister). According to a declaration by the defendant:

"At a wedding reception in December 1999, plaintiff told the parties' parents and siblings that their parents would need to divest their assets in order to qualify for Medicare and Medicaid and suggested they and defendant buy a home in a new senior living community in Walnut, California. Defendant expressed interest in purchasing a home in that community because it would allow him and his wife to use the home when he retired or earlier in order to live closer to their children. He and his father also said they were open to purchasing the home provided it was not sold for the lifetimes of the parents' children and "hopefully" their grandchildren, which stemmed from the Chinese cultural tradition of passing family homes through generations. With that understanding, defendant, plaintiff, and their parents orally agreed that defendant and their parents would pursue buying a home."

This declaration is wildly inaccurate in terms of qualifying for benefits, i.e. the parts in bold

Medicare, the medical insurance program for the elderly, is an entitlement. If you earn enough credits, you are eligible to receive it. It makes no difference whether you are a billionaire or living a meager existence. If you pay for it, you get it. It is as simple as that.

Conversely, "Medi-Cal," the name California uses for the federal program known as "Medicaid," is a medical insurance program for the poor and disabled. Medi-Cal is not an entitlement. Essentially you have to be poor and/or disabled to qualify for it. Therefore, Medi-Cal is described as a needs-based public benefit.   

While the case did not turn on benefits eligibility, it does demonstrate the defendant's ignorance of the law on this topic. This can be particularly damaging because of the legal adage "ignorance of the law is no excuse." A person is stuck with their mistake, whether they knew the law or not. This can be a sobering reality for the legally uninformed.  

Medi-Cal Reimbursement

When Congress enacted the Social Security Act of 1965, it created two public benefit programs, Medicaid, known as Medi-Cal in California, and Medicare. Medi-Cal is the government-sponsored medical program for largely the poor and disabled. Medicare is the government-sponsored medical program for those 65 and over, or those with disabilities. 

A key distinguishing feature of Medi-Cal is the mandatory reimbursement of funds, subject to certain conditions, expended for the benefit of the patient once the patient passes away. Welf & I C §14009.5. Medicare has no such reimbursement feature. In other words, the state of California is entitled to be repaid what it spent on the patient once the patient has died, subject to certain qualifications. If the patient had assets when they passed away, the state of California will seek recovery whether such is a short or lengthy endeavor. The following case illustrates how long the process can take.

Bunnie R. Gregoire was the owner of a home in Brisbane, CA. In 1997 she transferred this home into her restated revocable trust. She named her granddaughters, Selena H. Firth and Jennifer C. Martin, the beneficiaries. In 2001, Firth applied for Medi-Cal benefits on behalf of Gregoire given her advanced age of 90. On the application form, Firth acknowledged that "the State has the right to seek reimbursement from my estate for all Medi-Cal benefits I received after age 55."

In 2002, the San Mateo County Public Guardian was appointed conservator of the person and estate of Gregoire. In 2005, Gregoire died and the Public Guardian tendered notice to the State Department of Health Care Services (DHCS) that Gregoire had died (this is required by law). On the schedule of assets, the Public Guardian erroneously listed the value of Gregoire's estate as "0.00." An official from the DCHS then did a public records search which revealed that Gregoire owned a home in Brisbane. Over the next couple of years, the DCHS sent notices to the Public Guardian to explain the discrepancy, albeit to no avail. In 2007, the successor trustee sold the Brisbane home and distributed the funds in accordance with Gregoire's trust. 

Eventually the DCHS filed suit in 2008 against the beneficiaries for Medi-Cal reimbursement given that it believed that Gregoire's estate was solvent when she died. The beneficiaries objected to the claim by the DCHS because they believed that the DCHS should have filed suit sooner. Ultimately in 2011, the beneficiaries lost on appeal because they used the wrong law to support their statute of limitations argument. I will spare you the boring legal arguments. Just know that the beneficiaries lost. End of story.

My takeaway from this case is that it is demonstrative of the phrase "the long arm of the law." Gregoire died in 2005 but the validity of her Medi-Cal reimbursement liability was not settled until 2011, six years later.  

Special Needs Trust

Since writing a post about special needs trusts a few months ago, I noticed that it has been a common reading item. In response, here are some additional issues that arise in the special needs trust context. 

1. How does a disabled-beneficiary qualify for public assistance?

A disabled-beneficiary may qualify for public assistance through two methods: needs-based or entitlement. For needs-based, a disabled-beneficiary will qualify out of necessity so to speak. For example, food stamps are an example of a needs-based public benefit because only those with very modest incomes are eligible to receive food-stamps. Conversely, an entitlement public benefit is where the recipient qualifies just for the sheer fact that they are a member of a certain class of individuals. For instance, Medicare is an example of an entitlement benefit because anybody 65 or older will qualify.

Needs-based public benefits include Supplemental Security Income (SSI) and Medi-Cal, while entitlement benefits include Social Security Disability Insurance (SSDI) and Medicare. Since SSI and Medi-Cal are needs-based public benefits, a recipient of those public benefits will require a special needs trust in order to maintain eligibility should they be the beneficiary of some other person’s estate plan. 

2. What are some important on-going requirements for a special needs trust?

Two important on-going requirements of a special needs trust are tax returns and accounting.

Generally speaking, a special needs trust must file a California tax return if the net taxable income is over $100 or the gross income exceeds $10,000, regardless of the net taxable income. Rev & T C §18505(e)-(f). A federal tax return must be filed if the trust has any taxable income or has gross income of $600 or more, regardless of the amount of taxable income. IRC §6012(a)(4). Since this involves a microscopic threshold, it is almost certain that any trust with require the filing of a federal and state tax return.

As for the accounting, a special needs trust needs to periodically provide an accounting to each disabled-beneficiary. The frequency of the accounting is dependent upon whether or not the trust is court-supervised. If the trust is not court-supervised, then the trustee must annually account to the disabled-beneficiary unless the trust instrument provides otherwise or the disabled-beneficiary waives such right in writing. Prob C §16062; Prob C §16064(a); Prob C §16064(c). If the trust is court-supervised, then the trustee must account no less frequently than biennially, unless otherwise ordered by the court. Prob C §2620(a). In most cases, an annual accounting will be required.

3. What happens to the trust assets after the passing of the disabled-beneficiary?

The main consequence is that the State may entitled to reimbursement for the Medi-Cal coverage it provided the disabled-beneficiary. The answer depends upon whether the trust is first-party or third-party.

A first-party trust is one personally created by the disabled-beneficiary. An example of this would be where a disabled-beneficiary was the recipient of a large court settlement which would otherwise jeopardize their eligibility for public benefits if not for the creation of the special needs trust. A third-party trust is one created by a person other than the disabled-beneficiary. An example of this would be where parents create a trust for their disabled child.

If the trust is a first-party special needs trust, federal law requires that "the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid." 42 USC §1396p(d)(4)(A). This is known as Medi-Cal reimbursement. Basically, the State will recoup all the money it has provided the disabled-beneficiary over the years through Medi-Cal.

However, if the trust is a third-party special needs trust, then there is no Medi-Cal reimbursement.

4. Can a special needs trust be terminated?

Yes, a special needs trust could be terminated for a number of reasons. For instance, the disabled-beneficiary could pass away, the trust assets could run out or the disabled-beneficiary could lose their eligibility for public benefits despite the creation of the special needs trust.

5. Can a special needs trust purchase a home with maintaining the disabled-beneficiary’s eligibility for public benefits?

Yes, a special needs trust can purchase a home while maintaining the disabled-beneficiary’s eligibility for public benefits. Federal and California law says that a personal residence is an exempt asset and will not be counted against the disabled-beneficiary for eligibility purposes. 20 CFR §416.1212 (SSI); 22 Cal Code Regs §50425 (Medi-Cal). However, there are a multitude of issues that would confront a trustee during the process. First, the trust would require liquidity in order to purchase a home. Second, the trustee would most likely need to procure financing for the home purchase. Third, the trustee would need to allocate the responsibilities for improvements and repairs to the home amongst the affected parties.

6. How long does a special needs trust last?

Generally speaking, a special needs trust will last for the lifetime of the disabled-beneficiary.

7. How does a trustee make a distribution to a disabled-beneficiary?

There are a couple of ways in which a trustee could make a distribution to a disabled-beneficiary. For illustrative purposes, assume that the trustee would like to buy the disabled-beneficiary a couch. The trustee could purchase the couch personally and have it delivered to the disabled-beneficiary, or the trustee could purchase a furniture store gift card which they would later provide to the disabled-beneficiary.

8. Can the attorney who writes the special needs trust be the trustee?

Yes, theoretically the drafting attorney could serve as the trustee but given the legal hurdles that must be cleared, it is doubtful that a prudent attorney would serve as trustee. One reason why this situation is problematic is because the attorney is considered a “disqualified donee”, whereby the approval of another attorney is needed to cure the perceived conflict of interest. Another reason why an attorney-trustee is undesirable is because the attorney would typically not be entitled to compensation as both trustee and attorney, double-dipping. Prob C §15687. Hence, even though the attorney would serve two roles, they would only be compensated for one role.

9. Is court supervision of a special needs trust mandatory?

No, there is no requirement that a special needs trust be subject to the continuing supervision of a local superior court. Consequently, this means that parents could establish a special needs trust for their child and the trust’s administration would never require the approval of court order. 

Special Needs Trust

Over the years, a few clients have asked about a special needs trust (SNT) because they have a child with a disability. Here are some common questions/answers:

1. What is a special needs trust?

A special needs trust is an irrevocable trust in which the disabled beneficiary's assets are sheltered from general use in order to allow the disabled beneficiary to remain eligible for government benefits such as Supplemental Security Income (SSI) and Medi-Cal. For example, if Hal and Wendy had a daughter, Diana, who was blind, it would be prudent for Hal and Wendy to create a special needs trust for Diana. Otherwise, Diana would later become ineligible for government benefits should she inherit her parents' estate. The reason for this is because the eligibility requirements for SSI and Med-Cal are needs-based, whereby a person will become ineligible for benefits if they have too many assets.

2. Are their different types of special needs trust?

Yes, there are two kinds of SNTs, first-party SNT and third-party SNT.

In a first-party SNT, the trust is self-funded by the person with a disability. For example, if a disabled person won a large court judgment against someone, they would establish a first-party SNT with the proceeds from that judgment. Conversely, in a third-party SNT, the trust is established with the assets of someone other than the person with a disability. For instance, from the example above, Hal and Wendy would create a third-party SNT for their daughter Diana by leaving their estate to her in trust.

3. What can a special needs trust be used for?

SNT assets can only be used for special items such as a vehicle, a computer, furniture, laundry, audio equipment, electronic devices, medical care not covered by Medi-Cal, etc. The reason for this is because general items such as food, shelter and basic medical care are meant to be paid for by SSI funds and Medi-Cal. 

4. Who can be the trustee of a special needs trust?

Generally speaking, there is no prerequisite for being the trustee of a special needs trust. In most cases, a family member is selected to be the trustee. 

However, the responsibility of a trustee of a special needs trust is significantly greater than that of a trustee of a regular revocable trust. This stems from the fact that the trustee of a special needs trust not only has to follow the duties of being a trustee, (See Prob C §§ 16000-16015), they must also keep attuned to the ever-charging laws of public benefits, namely the Social Security Act law and regulations and the Program Operation Manuel System (POMS). In short, being the trustee of a special needs trust is not something to take on casually. Furthermore, it is common to select a professional trustee to handle such a role.

5. What happens if a special needs trust is not created for my disabled child?

Since SSI and Medi-Cal are needs-based government benefits, the disabled child will most likely lose those benefits because their inheritance will make ineligible for them due to the fact that they will exceed the eligibility threshold. In particular, to maintain eligibility for SSI, the countable resource limit is $2000 for an eligible individual and $3000 for an eligible couple. 20 CFR §416.1205(c).  As for Medi-Cal eligibility, an individual cannot have more than $2000 in countable resources and a couple cannot have more than $3000. 22 Cal Code Regs §§50419-50420. Of note, a bank account constitutes a countable resource for both SSI and Med-Cal. For illustrative purposes, from the above example, if Diana inherited a $10,000 bank account from her parents' estate, this inheritance would make her ineligible for SSI and Medi-Cal.