Gonzalez v. City National Bank ( 2019 )

Filed 6/24/19
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
JOSUE GONZALEZ et al., B284521
Plaintiffs and (Los Angeles County
Appellants, Super. Ct. No. 17STPB02129)
v.
CITY NATIONAL BANK, as
Trustee, etc.,
Defendant;
STATE DEPARTMENT OF
HEALTH CARE SERVICES,
Claimant and
Respondent.
APPEAL from a judgment of the Superior Court of
Los Angeles County, Lesley C. Green, Judge. Affirmed.
Barton, Klugman & Oetting and Thomas Beltran for
Plaintiffs and Appellants Josue Gonzalez and Juanita Gonzalez
Garcia.
No appearance by Defendant.
Xavier Becerra, Attorney General, Julie Weng-Gutierrez,
Senior Assistant Attorney General, Jennifer M. Kim and
Jacquelyn Y. Young, Deputy Attorneys General, for Claimant and
Respondent State Department of Health Care Services.
_________________________
Josue Gonzalez and Juanita Gonzalez Garcia (Plaintiffs)
appeal from the probate court order denying their request,
following the death of their daughter, that the remainder of their
daughter’s special needs trust be distributed to them rather than
to the Department of Health Care Services (Department) as
reimbursement for Medi-Cal payments for their daughter’s
medical care. The court properly found the Department was
entitled to reimbursement for these Medi-Cal expenses.
Therefore, we affirm.
FACTUAL AND PROCEDURAL BACKGROUND
1. Special Needs Trust
Brenda Gonzalez (Brenda or Beneficiary) suffered
complications at birth that left her severely disabled. A medical
malpractice lawsuit brought on Brenda’s behalf yielded a
$2.4 million settlement. On October 13, 1999, a federal district
court placed these proceeds in a special needs trust (the Trust)
pursuant to Probate Code sections 3604 and 3605, which allow
courts to approve payment of settlements or judgments to special
needs trusts established for minors or disabled persons.
The purpose of placing these proceeds in the Trust was to
preserve Brenda’s eligibility for Medi-Cal benefits while
sheltering assets to be used for her special medical needs that
2
would not be covered by Medi-Cal. The Trust thus sets forth that
“[f]or purposes of determining the Beneficiary’s Medi-Cal
eligibility . . . no part of the principal or income of the trust estate
shall be considered available to said Beneficiary.” The Trust
provides that its “intent and purpose . . . is to provide a
discretionary, spendthrift trust, to supplement public resources
and benefits when such resources and benefits are unavailable or
insufficient to provide for the Special Needs of the
Beneficiary. . . . This is not a trust for the support of the
Beneficiary. All payments made under this Trust must be
reasonably necessary in providing for this Beneficiary’s special
needs . . . .” The Trust further provides that “[t]he Beneficiary
has no interest in the income or principal of the trust, other than
as set forth herein,” and “because this trust is to be conserved
and maintained for the Special Needs of the Beneficiary, no part
of the principal or income of the trust shall be construed to be
part of the Beneficiary’s ‘estate.’”
The Trust was set up to terminate upon Brenda’s death. It
sets forth that “[n]otwithstanding any provisions of this
instrument to the contrary, this trust is subject to the provisions
and requirements of California Probate Code Sections 3604 and
3605, which require that notice of the Beneficiary’s death or the
trust termination be given . . . to . . . [the Department].” The
Trust includes the following provision commonly referred to as a
“payback” provision: “In accordance with 42 U.S.C.
§ 1396p (d) (4) (A), upon termination, whether by death or
otherwise, and after payment of provision has been made for
expenses of administration, the remaining trust estate shall be
payable to any state, or agency of a state, which has provided
medical assistance to the Beneficiary under a state plan under
3
Title XIX of the Social Security Act [(SSA)], up to an amount
equal to the total medical assistance paid on behalf of the
Beneficiary under such state plan.” Only after such
reimbursements to the state would any remaining funds be
distributed to Brenda’s legal heirs.
Tracking the requirements of Probate Code section 3604,
subdivision (b), the federal district court’s order establishing the
Trust provides: “Brenda Gonzalez is likely to have special needs
related to her disability, as described in the Petition, that will not
be met without the Trust,” and “[t]he money to be paid to the
Trust does not exceed the amount that appears reasonably
necessary to meet her special needs.” The order reiterates that
the Trust “shall be subject to the provisions and requirements of
California Probate Code Sections 3604 and 3605.”
2. The Department’s Claim for Reimbursement from the
Trust for Medi-Cal Payments
Brenda died on April 21, 2016, at age 21. At the time of her
death, approximately $1.6 million remained in the Trust. The
Department received notice of Brenda’s death on or about
April 22, 2016 and, on May 6, 2016, filed a creditor’s claim with
the probate court. The creditor’s claim sought reimbursement
from the Trust for Medi-Cal payments for medical care for
Brenda in the amount of $3,972,501.21.
3. Petition Seeking Distribution of Trust Remainder to
Heirs
On March 10, 2017, Plaintiffs filed a petition seeking an
order directing the trustee to distribute the Trust remainder to
Plaintiffs, Brenda’s heirs. Relying on former Welfare and
4
Institutions Code section 14009.5, subdivision (b)(2)(c), 1 which
sets forth the Department’s right to reimbursement for Medi-Cal
payments from deceased beneficiaries’ estates, Plaintiffs argued
that, because Brenda received the Medi-Cal services when she
was under 55 years old, the Department had no right to recovery
from the Trust remainder for those expenditures. In the
alternative, Plaintiffs argued that the charges erroneously
included medical expenses incurred prior to the establishment of
the Trust, as well as expenses for special education services
pursuant to the Individuals with Disabilities Education Act
(IDEA) and regional center services pursuant to the Lanterman
Developmental Disabilities Services Act (Lanterman Act).
The Department opposed the petition, contending federal
and state law mandated it be reimbursed from the Trust for
Brenda’s Medi-Cal expenses and that former Welfare and
Institutions Code section 14009.5 did not apply to limit the
Department’s recovery. The Department further argued it was
not seeking reimbursement for services rendered before the Trust
was created. Finally, the Department argued Plaintiffs had not
carried their burden to prove Brenda received special education
or regional center services and, in any event, the Department was
entitled to recover for such services.
1 References in our opinion to former Welfare and
Institutions Code section 14009.5 are to the text of that statute as
amended effective October 4, 1995. (Stats. 1995, ch. 548, § 2,
pp. 4248-4249.)
5
The probate court denied the petition and ordered the
trustee to pay the Department’s creditor’s claim of $3,972,501.21
from the remaining assets of the Trust. 2
Plaintiffs timely filed a notice of appeal.
DISCUSSION
Plaintiffs contend the Department has no right to
reimbursement from the Trust remainder for Medi-Cal payments
for medical services provided to Brenda. They assert that the
Department’s right to reimbursement is governed by the Medi-
Cal provisions applicable to a decedent’s estate, found at former
Welfare and Institutions Code section 14009.5, which did not
permit reimbursement for Medi-Cal payments where the
decedent was under age 55 at the time the services were
provided.
The Department asserts those provisions governing estates
are inapplicable and special provisions applicable solely to special
needs trusts give the Department a right of reimbursement. The
proper resolution of this issue requires reconciliation of federal
statutes governing Medicaid with state Medi-Cal statutes and
regulations as well as provisions in the Probate Code. The two
published decisions to date that endeavor to reconcile these
federal and state laws, 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), reach opposite
conclusions.
I. Statutory Overview
2 Obviously, the Department’s actual recovery was limited to
the amount remaining in the Trust—approximately $1.6 million.
6
A. Medicaid and Medi-Cal
“The Medicaid program, which provides joint federal and
state funding of medical care for individuals who cannot afford to
pay their own medical costs, was launched in 1965 with the
enactment of Title XIX of the [SSA], . . . 42 U.S.C. § 1396 et seq.”
(Arkansas Dept. of Health and Human Servs. v. Ahlborn (2006)
547 U.S. 268, 275 [126 S. Ct. 1752; 164 L. Ed. 2d 459] (Ahlborn).)
“[S]everely impaired individuals” are among those eligible for
Medicaid assistance. (42 U.S.C. § 1396a(a)(10)(A)(i)(II)(bb); 3
Belshe v. Hope (1995) 33 Cal. App. 4th 161, 173.)
“States are not required to participate in Medicaid, but all
of them do. The program is a cooperative one; the Federal
Government pays between 50% and 83% of the costs the State
incurs for patient care, and, in return, the State pays its portion
of the costs and complies with certain statutory requirements for
making eligibility determinations, collecting and maintaining
information, and administering the program.” (Ahlborn, supra,
547 U.S. at p. 275; see Herting, supra, 235 Cal.App.4th at p. 610
[“‘[a]lthough participation in the Medicaid program is entirely
optional, once a State elects to participate, it must comply with
the requirements of Title XIX,’ many of which are set forth in . . .
section 1396a et seq.”]; Will v. Kizer (1989) 208 Cal. App. 3d 709,
715 [“[t]he Federal Government shares the costs of Medicaid with
States that elect to participate in the program. In return,
participating States are to comply with requirements imposed by
the Act and by the Secretary of Health and Human Services”].)
Thus, “as a participant in the federal Medicaid program, the
3 All further undesignated statutory references are to title 42
of the United States Code.
7
State of California has agreed to abide by certain requirements
imposed by federal law.” (Olszewski v. Scripps Health (2003)
30 Cal. 4th 798, 804 (Olszewski); see Maxwell-Jolly v. Martin
(2011) 198 Cal. App. 4th 347, 353; Bolanos v. Superior Court
(2008) 169 Cal. App. 4th 744, 757.)
“The California Medical Assistance Program, Medi-Cal
(Welf. & Inst. Code, §§ 14000-14198), ‘represents California’s
implementation of the federal Medicaid program . . . .’”
(Olszewski, supra, 30 Cal.4th at p. 804.) “The Department is the
single state agency designated to administer the Medi-Cal
program.” (Robert F. Kennedy Medical Center v. Belshé (1996)
13 Cal. 4th 748, 751.)
B. Treatment of special needs trusts under
Medicaid/Medi-Cal
A special needs trust is used to set aside assets to pay for
the special medical needs of a severely disabled beneficiary.
(Conservatorship of Kane (2006) 137 Cal. App. 4th 400, 405.) The
purpose of a special needs trust is “to enhance the beneficiary’s
quality of life through the purchase of additional goods and
services that are not covered or adequately provided by SSI
[(Supplemental Security Income)] and Medicaid.” (Rosenberg,
Supplemental Needs Trusts for People with Disabilities: The
Development of a Private Trust in the Public Interest (2000)
10 B.U. Pub. Int. L.J. 91, 94-95 (Rosenberg).) Prior to 1993, if a
disabled person received a lump sum of money—such as the
proceeds of a settlement or a judgment—and those assets were
placed in a trust, the trust assets could render the disabled
beneficiary ineligible for Medicaid due to these funds being
considered an “available asset” for purposes of calculating
eligibility. (Rosenberg, supra, 10 B.U. Pub. Int. L.J. at p. 95.) In
8
the Omnibus Budget Reconciliation Act of 1993 (OBRA) that
revised the Medicaid system (Pub.L. No. 103-66, 107 (Aug. 10,
1993) Stat. 312), Congress aimed to remedy that problem, while
also addressing the abusive use of trusts by wealthy older
individuals. (See Belshe v. Hope, supra, 33 Cal.App.4th at p. 175;
Lewis v. Alexander (3d Cir. 2012) 685 F.3d 325, 343 (Lewis) [in
enacting the OBRA, Congress’s “primary objective was
unquestionably to prevent Medicaid recipients from receiving
taxpayer-funded health care while they sheltered their own
assets for their benefit and the benefit of their heirs. But its
secondary objective was to shield special needs trusts from
impacting Medicaid eligibility”]; Wiesner, OBRA ‘93 and
Medicaid: Asset Transfers, Trust Availability, and Estate
Recovery Statutory Analysis in Context (1995) 19 Nova L.Rev.
679, 682-683) [noting the OBRA’s objective to reduce
manipulation by “well-to-do elders” who were “obtaining public
payment of their nursing home care while preserving their
financial security and their ability to transmit wealth to younger
generations”].)
Congress thus established a general rule that trust assets
would be counted for purposes of determining Medicaid
eligibility, but exempted qualifying special needs trusts from this
general rule, with some conditions. (§ 1396p(d)(1),(3),(4);
see Herting, supra, 235 Cal.App.4th at p. 612.)
Section 1396p(d)(4)(A) provides that in determining eligibility for
Medicaid, states should not consider the assets in a trust
established for “an individual under age 65 who is disabled . . .
and which is established for the benefit of such individual by the
individual, a parent, grandparent, legal guardian of the
individual, or a court if the State will receive all amounts
9
remaining in the trust upon the death of such individual up to an
amount equal to the total medical assistance paid on behalf of the
individual under a State plan under this title.”
(§ 1396p(d)(4)(A).) Therefore, so long as the state will recover for
the Medicaid services provided to the special needs trust
beneficiary during her lifetime, the beneficiary remains eligible
for such services, even if the amount in the trust otherwise would
disqualify the beneficiary from receiving such benefits. (See
McMillian v. Stroud (2008) 166 Cal. App. 4th 692, 695; Herting, at
p. 610 [special needs trusts “enable a disabled person to qualify
for Medi-Cal benefits by sheltering money that exceeds the limit
of the individual’s eligibility”].)
Federal law requires that “[a] State plan for medical
assistance . . . comply with the provisions of section 1396p of this
title with respect to liens, adjustments and recoveries of medical
assistance correctly paid, transfers of assets, and treatment of
certain trusts.” (§ 1396a(a)(18); see Citizens Action League v.
Kizer (9th Cir. 1989) 887 F.2d 1003, 1005.) Under California law,
for the purpose of determining eligibility for Medi-Cal, “resources
shall be determined . . . in accordance with the federal law
governing resources under Title XIX of the [SSA]. Resources
exempt under Title XIX of the [SSA] shall not be considered in
determining eligibility. . . . Medically needy individuals and
families may retain nonexempt resources to the extent permitted
under Title XIX of the [SSA].” (Welf. & Inst. Code, § 14006,
subd. (c).) Thus, the requirements of section 1396p(d) govern
whether trust assets are properly considered in determining a
trust beneficiary’s eligibility for Medi-Cal. California regulations
also provide that for a qualifying special needs trust to be
considered “not available” when determining Medi-Cal eligibility,
10
the trust must be set up so that “the State receives all remaining
funds in the trust, or respective portion of the trust, upon the
death of the individual or spouse or upon termination of the trust
up to an amount equal to the total medical assistance paid on
behalf of that individual by the Medi-Cal program.” (Cal. Code
Regs., tit. 22, § 50489.9, subds. (a)(3)(C), (b)(2).)
Sections 3604 and 3605 of the Probate Code, enacted in
1992 and effective as of January 1, 1993, govern special needs
trusts established by a court after it approves a monetary
settlement or enters a judgment that includes monetary damages
for a minor or a person with a disability. (Prob. Code, §§ 3600,
3604, 3605.) Thus, “when a court approves a settlement of an
action to which an incompetent person is a party, the conservator
may petition the court for an order that money owed to the
incompetent person pursuant to the settlement not become part
of the conservatorship estate, but instead be paid to a special
needs trust established under Probate Code section 3604.”
(Shewry, supra, 125 Cal.App.4th at p. 194.)
Pursuant to Probate Code section 3604, “[a] special needs
trust may be established and continued under this section only if
the court determines all of the following: [¶] (1) That the minor
or person with a disability has a disability that substantially
impairs the individual’s ability to provide for the individual’s own
care or custody and constitutes a substantial handicap. [¶]
(2) That the minor or person with a disability is likely to have
special needs that will not be met without the trust. [¶] (3) That
money to be paid to the trust does not exceed the amount that
appears reasonably necessary to meet the special needs of the
11
minor or person with a disability.” 4 (Prob. Code, § 3604,
subd. (b); Herting, supra, 235 Cal.App.4th at p. 610;
Conservatorship of Kane, supra, 137 Cal.App.4th at pp. 405-406.)
Probate Code section 3605 provides that “[n]otwithstanding
any provision in the trust instrument, at the death of the special
needs trust beneficiary or on termination of the trust, the trust
property is subject to claims of the [Department], the State
Department of State Hospitals, the State Department of
Developmental Services, and any county or city and county in
this state to the extent authorized by law as if the trust property is
owned by the beneficiary or is part of the beneficiary’s estate.”
(Prob. Code, § 3605, subd. (b), italics added.)
The California Law Revision Commission Comment to
Probate Code section 3605 states in part, “On the death of the
special needs trust beneficiary or on termination of the trust,
trust property may become subject to reimbursement claims
under federal or state law. See, e.g., 42 U.S.C. § 1396p(b)(1)(B)
(Medicaid); Welf. & Inst. Code § [] 14009.5 (Medi-Cal) . . . . For
this purpose and only this purpose, the trust property is treated
4 Probate Code section 3604 also includes a requirement that
“[a] court order under [Probate Code] Section 3602 or 3611 for
payment of money to a special needs trust shall include a
provision that all statutory liens in favor of the [Department], the
State Department of State Hospitals, the State Department of
Developmental Services, and any county or city and county in
this state shall first be satisfied.” (Prob. Code, § 3604, subd. (d).)
The district court’s order establishing the Trust included this
required provision. Because this provision concerns liens in
existence prior to the creation of the special needs trust, as
opposed to claims for reimbursement after a beneficiary’s death,
it is not applicable in this matter.
12
as the beneficiary’s property or as property of the beneficiary’s
estate.” (Cal. Law Revision Com. com., 52B West’s Ann. Prob.
Code (2009 ed.) foll. § 3605, p. 154.)
C. Estate recovery provisions of Medicaid and Medi-Cal
As part of the OBRA, “Congress enabled states to recover
the costs for medical services from the estate of the former
recipient. (42 U.S.C. § 1396p(b)(1)(B).)” 5 (Bontá v. Burke (2002)
98 Cal. App. 4th 788, 789 (Burke).) “In compliance with federal
law, state law requires the [Department] to seek reimbursement
from the deceased recipient’s estate,’’ except in certain
enumerated circumstances. 6 (Maxwell-Jolly v. Martin, supra,
5 The purpose of the mandatory estate recovery provision
included in the OBRA was “‘to counterbalance rocketing Medicaid
expenditures and overall budget and deficit reductions.
[Citation.] Congress sought a way to stymie the growth in state
Medicaid expenditures without depriving eligible recipients of
much-needed care. [Citation.] Thus, although states could allow
Medicaid recipients to retain their homes during their lifetime,
Congress began requiring states to recoup benefits from the
estates of certain deceased Medicaid recipients as a condition of
receiving Medicaid funds. [Citations.]’ [Citation.] Specifically,
OBRA ‘93 required each state to include in its state plan a
provision for making recoveries from the estates of specified
classes of Medicaid recipients. (42 U.S.C. § 1396p(b)(1).) States
that fail to do so risk losing all or part of their Medicaid funding.
(42 U.S.C. § 1396c.)” (California Advocates for Nursing Home
Reform v. Bontá (2003) 106 Cal. App. 4th 498, 508-509.)
6 “According to federal law, the term ‘estate,’ with respect to
a deceased individual, ‘(A) shall include all real and personal
property and other assets included within the individual’s estate,
as defined for purposes of State probate law; and [¶] (B) may
include, at the option of the State . . . any other real and personal
property and other assets in which the individual had any legal
13
198 Cal.App.4th at p. 353; see Burke, supra, 98 Cal.App.4th at
p. 792.)
Whereas subdivision (d) of section 1396p concerns the
treatment of trust assets, subdivision (b) of section 1396p sets
forth the circumstances in which a state must or must not seek
reimbursement from the estate of a deceased recipient of
Medicaid services. As relevant here, section 1396p(b) provides:
“(1) No adjustment or recovery of any medical assistance
correctly paid on behalf of an individual under the State plan
may be made, except that the State shall seek adjustment or
recovery of any medical assistance correctly paid on behalf of an
individual under the State plan in the case of the following
individuals: [¶] . . . [¶] (B) In the case of an individual who was
55 years of age or older when the individual received such
medical assistance, the State shall seek adjustment or recovery
from the individual’s estate . . . .” (§ 1396p(b)(1)(B).)
Tracking these federal requirements, former Welfare and
Institutions Code section 14009.5 generally prohibits the
Department from seeking reimbursement for Medi-Cal
expenditures from the estate of a decedent who was under age 55
when services were received. (Former Welf. & Inst. Code,
title or interest at the time of death (to the extent of such
interest) . . . . (42 U.S.C. § 1396p(b)(4).)” (Burke, supra,
98 Cal.App.4th at p. 790.) “California utilizes the federal
definition of ‘estate’” (ibid.), so that “estate” is defined as “all real
and personal property and other assets in which the decedent
had any legal title or interest at the time of death (to the extent
of such interest) . . . .” (Cal. Code Regs., tit. 22, § 50960.12,
subd. (a).)
14
§ 14009.5, subds. (a), (b).) 7 A “decedent” is defined as “a
beneficiary who has received health care under this chapter . . .
and who has died leaving property to others either through
distribution or survival.” (Id., subd. (d)(1).)
II. Standard of Review
“[I]n reviewing a trial court’s interpretation of a statute, we
apply a de novo, or independent, standard of review. [Citation.]
In independently interpreting a statute, our task is to ascertain
and effectuate the law’s intended purpose. [Citation.] In
interpreting a statute, we look first to the statute’s words.
[Citation.] The statutory language is generally the most reliable
indicator of legislative intent. [Citations.] If the statutory
language is unambiguous, we will presume the Legislature
meant what it said and the plain meaning of the statute will
prevail unless its literal meaning would result in absurd
7 Former Welfare and Institutions Code section 14009.5 thus
provides in pertinent part: “(a) . . . [T]he department shall claim
against the estate of the decedent, or against any recipient of the
property of that decedent by distribution or survival an amount
equal to the payments for the health care services received or the
value of the property received by any recipient from the decedent
by distribution or survival, whichever is less. [¶] (b) The
department may not claim in any of the following circumstances:
[¶] (1) The decedent was under 55 when services were
received . . . .” (Former Welf. & Inst. Code, § 14009.5,
subds. (a), (b)(1).)
Both section 1396p(b) and former Welfare and Institutions
Code section 14009.5 also prohibit the Department from seeking
reimbursement from a decedent’s estate during a surviving
spouse’s lifetime or where the decedent has a child who is blind,
disabled, or under 21 years of age. (§ 1396p(b)(2)(A); former Welf.
& Inst. Code, § 14009.5, subd. (b)(2)(A), (B), (C).)
15
consequences that the Legislature did not intend. [Citations.] [¶]
However, if the statutory language is ambiguous and is
reasonably susceptible to more than one meaning, we look to a
variety of extrinsic aids, including the ostensible objects to be
achieved, the evils to be remedied, the legislative history, public
policy, contemporaneous administrative construction, and the
statutory scheme of which the statute is a part. [Citation.] Our
ultimate objective in interpreting a statute is to construe
16
the statute in a way that most closely comports with the
apparent intent of the Legislature.” (People v. LaDuke (2018)
30 Cal.App.5th 95, 100.)
“‘“‘We consider portions of a statute in the context of the
entire statute and the statutory scheme of which it is a part,
giving significance to every word, phrase, sentence, and part of
an act in pursuance of the legislative purpose.’”’” (Hassell v. Bird
(2018) 5 Cal.5th 522, 540.) “We examine the statutes . . . with
other legislation on the same subject. [Citation.] If they conflict
on a central element, we strive to harmonize them so as to give
effect to each.” (Collection Bureau of San Jose v. Rumsey (2000)
24 Cal. 4th 301, 310.)
III. Pertinent Authority
Relying in part on the Court of Appeal’s analysis in Shewry,
discussed further below, Plaintiffs focus primarily on the portion
of Probate Code section 3605 providing that special needs trust
property is “subject to 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.” (Prob. Code,
§ 3605, subd. (b), italics added.) Because Probate Code
section 3605 directs that special needs trust assets be treated as
part of the beneficiary’s estate, they contend the probate court
should have applied the estate recovery rules under former
Welfare and Institutions Code section 14009.5, under which
assets from the estate of a deceased Medi-Cal beneficiary under
age 55 are exempt from recovery.
By contrast, the Department contends that section 1396p
mandates special treatment of the remainders of special needs
trusts, so that instead of being subject to the reimbursement
rules for a Medi-Cal beneficiary’s estate, a blanket mandatory
17
reimbursement rule applies to the assets remaining in all such
trusts, up to the amount paid by Medi-Cal for the beneficiary
during her lifetime, no matter her age when she received the
services. The Department relies on the analysis and holding of
Herting, which is squarely on point but reaches a different
conclusion than Shewry.
A. Shewry v. Arnold
In Shewry, the Department sought reimbursement from
the assets of a special needs trust for health services paid for by
Medi-Cal, after the trust’s beneficiary passed away. (Shewry,
supra, 125 Cal.App.4th at p. 191.) The trust instrument in
Shewry provided that on the death of the beneficiary, the
remaining principal and income was to be distributed to the
beneficiary’s only living child, Brenda Arnold, after “‘[a]ll valid
liens’” in favor of the Department and other entitled agencies had
been “‘satisfied,’” “‘even to the extent of exhausting any
remaining [principal] or income.’” (Id. at pp. 191-192.) After the
beneficiary died, Arnold, who herself was permanently disabled,
withdrew the remaining money in the trust—approximately
$284,000. The Department demanded Arnold pay it
approximately $90,000 for Medi-Cal expenses incurred for her
mother. After Arnold refused, the Department filed suit against
her, as the recipient of property from a Medi-Cal beneficiary, to
enforce and collect money due on a creditor’s claim pursuant to
Probate Code section 3605. The Department filed a motion for
summary judgment, which was granted, and the court ordered
Arnold to pay the Department its full claim. (Shewry, at p. 192.)
On appeal, Arnold argued that after the beneficiary’s
death, “the remaining assets of the special needs trust were
treated as part of the [the beneficiary’s] estate, and the property
18
of an estate that is distributed to a decedent’s adult disabled
child is exempt from Medi-Cal reimbursement claims” under
section 1396p(b)(2)(A) and former Welfare and Institutions Code
section 14009.5, subdivision (b)(2)(C). 8 (Shewry, supra,
125 Cal.App.4th at p. 196.) The Department contended that
reimbursement of its Medi-Cal payments for the beneficiary was
required based on subdivision (d) of section 1396p, which
provides that amounts in such trusts will not be considered for
purposes of Medicaid eligibility “if 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 on
behalf of the individual under a State plan under this title.” The
Department emphasized that Medi-Cal is required to comply
with this federal Medicaid requirement, and contended that “the
assets of a special needs trust may be disregarded for purposes of
Medi-Cal eligibility only if the state is assured of reimbursement
from any remaining assets.” (Shewry, at p. 196.)
Our colleagues in Division Five rejected the Department’s
position as “not persuasive,” and instead held the more limited
reimbursement provisions set forth in former Welfare and
Institutions Code section 14009.5 applied because the assets in
the special needs trust are deemed part of the beneficiary’s
estate. (Shewry, supra, 125 Cal.App.4th at p. 197.) The court
relied on subdivision (b) of Probate Code section 3605, which
8 The exemption for services to a beneficiary under 55 years
old, invoked by Plaintiffs in the instant case, is set forth in the
same federal and state provisions as the exemption applicable
where the deceased beneficiary has a surviving adult disabled
child. (See § 1396p(b)(1)(B); Welf. & Inst. Code, § 14009.5,
subd. (b)(1).)
19
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.” (Prob. Code, § 3605, subd. (b), italics added.) The court
also noted the Law Revision Commission comment to Probate
Code section 3605 providing in pertinent part: “‘On the death of
the special needs trust beneficiary or on termination of the trust,
trust property may become subject to reimbursement claims
under federal or state law. [(See, e.g., 42 U.S.C. § 1396p(b)(1)(B)
[Medicaid]; Welf. & Inst. Code §[] 14009.5 [Medi-Cal] . . .).] For
this purpose and only this purpose, the trust property is treated as
the beneficiary’s property or as property of the beneficiary’s
estate. . . .’ (Cal. Law Revision Com. com., . . . Prob. Code
(2005 supp.) foll. § 3605, p. 42.)” (Shewry, at p. 195, italics
added.)
The court reasoned as follows: “The provisions of
subdivision (d) [of section 1396p] relate to eligibility for medical
assistance. In determining an individual’s eligibility for state
medical assistance, the assets of a special needs trust are to be
disregarded if the state is entitled to be reimbursed from the
trust. The nature of that right to reimbursement is not set forth
in subdivision (d). Reimbursement provisions are found in
subdivision (b), which expressly excludes assets distributed to an
adult disabled child. These reimbursement provisions are
generally applicable to all reimbursement for medical assistance
payments. The Department has put forth no persuasive
argument that reimbursement from special needs trusts should
be treated differently than other reimbursements. We conclude
such trusts should not be treated differently. Thus, qualification
of a state plan for medical assistance under the federal Medicaid
20
provisions does not require reimbursement from special needs
trust assets distributed to an adult disabled child.
“The analysis is similar under California law. The assets of
a special needs trust are disregarded in determining an
individual’s eligibility for Medi-Cal benefits. Upon the death of
the beneficiary of a special needs trust, any remaining assets in
the trust are treated as part of the beneficiary’s estate for
purposes of Medi-Cal reimbursement. (Prob. Code, § 3605,
subd. (b).) The Department may not seek Medi-Cal
reimbursement from the estate of a decedent if there is a
surviving child who is permanently and totally disabled. (Welf.
& Inst. Code, § 14009.5, subd. (b)(2)(C).)
“The clear and unambiguous language of the special needs
trust and Medi-Cal reimbursement statutes establishes that
upon the death of a special needs trust beneficiary, any
remaining trust assets are treated as part of the beneficiary’s
estate and distributions from the estate to the decedent’s adult
disabled child are exempt from the Department’s reimbursement
claims. The clear language of the statutes is also supported by
the comment of the Law Revision Commission to Probate Code
section 3605. . . .
“This construction of the statutes also comports with sound
public policy. Special needs trusts cannot be used to shelter
excessive assets, because the probate court will approve only the
amount that appears reasonably necessary to meet the special
needs of the incompetent person. Both the federal and state
Legislatures have determined that distributions from estates to
adult disabled children should be exempt from Medi-Cal
reimbursement claims because enforcement of such claims would
likely result in hardship. We can discern no reason that the
21
remaining assets of a court-approved special needs trust should
be treated differently than any other assets of an estate.”
(Shewry, supra, 125 Cal.App.4th at pp. 197-198.) The court thus
held that “upon the death of the beneficiary of a special needs
trust, any remaining trust assets are treated as part of the
beneficiary’s estate pursuant to Probate Code section 3605,
subdivision (b).” (Id. at p. 191.)
B. Herting v. State Dept. of Health Care Services
In Herting, the superior court established a special needs
trust on behalf of 19-year-old Alexandria with proceeds from the
settlement of a negligence claim against third parties. (Herting,
supra, 235 Cal.App.4th at pp. 610-611.) The trust instrument
stated that its purpose was “‘to provide for the special needs of
the Beneficiary, a disabled adult. . . . The Beneficiary either
receives or is entitled to receive public benefits on account of her
disabilities. In general, this trust is therefore intended to
supplement, and not to supplant, the public benefits that would
be available to the Beneficiary if this trust did not exist.’” (Id. at
p. 616, fn. 5.) Further, the trust provided: “‘It is the intention of
this trust to satisfy Medi-Cal and [SSI] program requirements so
that its establishment and funding do not prejudice the
Beneficiary’s eligibility for such public benefits.’” (Id. at p. 616.)
The court noted “the trust expressly stated that it complied with
section 1396p(d)(4)(A), Probate Code sections 3600-3613, and
California Code of Regulations, title 22, section 50489.9,
subdivision (a)(3). Accordingly, in the trust directions for
administration upon the beneficiary’s death, article seven,
section 1, prescribed the order of distribution of trust assets,
‘[s]ubject to’ state notice and reimbursement requirements.
Those requirements were delineated in the ‘Notice and Payback
22
Provisions’ section of article seven, which acknowledged that
compliance with section 1396p(d)(4)(A) and California Code of
Regulations, title 22, section 50489.9 was mandatory in order to
enable Alexandria to maintain her eligibility for Medi-Cal. After
giving the Department notice of the beneficiary’s death, the
trustee was required to ‘first distribute to [the Department], then
to any other appropriate state agency entitled to Medi-Cal
reimbursement from the remaining principal and income of this
trust, up to the amount remaining in this trust, an amount equal
to the total medical assistance paid on behalf of the Beneficiary
by the Medi-Cal program.’” (Id. at p. 616.)
After Alexandria’s death at age 23, the Department sought
approximately $417,000 for Medi-Cal payments from remaining
trust assets of approximately $1.3 million. (Herting, supra,
235 Cal.App.4th at pp. 609, 611.) The trustee invoked the
Medicaid and Medi-Cal estate reimbursement provisions of
section 1396p(b)(1)(B) and former Welfare and Institutions Code
section 14009.5, subdivision (b)(1), to argue “the trust assets were
exempt from the Department’s reimbursement rights because the
beneficiary was under 55 years of age when the services were
provided.” (Herting, at pp. 609, 611.) After the superior court
agreed with the Department’s position and ordered the trust to
reimburse the Department, the trustee appealed. (Id. at p. 612.)
The Sixth District affirmed the superior court’s order.
Unlike the Shewry court, the court concluded that the applicable
Medicaid and Medi-Cal provisions were “not those pertaining to
estate recovery but those governing establishment of special
needs trusts and recovery from those trusts upon the
beneficiary’s death.” (Herting, supra, 235 Cal.App.4th at p. 614.)
Under the latter provisions, the court held, the Department was
23
entitled to reimbursement of the medical expenses it paid,
notwithstanding that Alexandria was under age 55 when she
received the services. (Id. at p. 609.)
The court set forth the following reasoning: “Alexandria’s
trust was not estate property but an instrument created for the
specific and exclusive purpose of ensuring that she qualify for
Medi-Cal benefits and have enough resources to supplement
those benefits and enhance her compromised quality of life. . . .
[S]ection 1396p(d)(4)(A), recognizes special needs trusts for
Medicaid eligibility purposes if the individual is under 65 and
disabled and if the state will be reimbursed for the amount it
paid for the individual’s medical care. . . . Alexandria’s trust
would not have been approved by the court had it not contained
the condition required in section 1396p(d)(4)(A). It is through
this condition that the device of the special needs trust ‘strikes a
balance between the private interest of the Medicaid recipient in
having a supplemental source of support and the public interest
in recovering the costs of Medicaid expenditures.’ (Rosenberg,
supra, at p. 136.)
“Likewise, in California, the applicable Medi-Cal provisions
are not those pertaining to estate recovery but those governing
establishment of special needs trusts and recovery from those
trusts upon the beneficiary’s death. . . . Probate Code
section 3605 . . . describes the procedure to be followed upon the
death of the special needs trust beneficiary. Subdivision (b) of
that statute provides, in pertinent part, ‘Notwithstanding any
provision in the trust instrument, at the death of the special
needs trust beneficiary or on termination of the trust, the trust
property is subject to claims of the State Department of Health
Care Services, the State Department of State Hospitals, the State
24
Department of Developmental Services, and any county or city
and county in this state to the extent authorized by law as if the
trust property is owned by the beneficiary or is part of the
beneficiary’s estate.’ The remaining subdivisions prescribe the
notice that the trustee must give to the Department, the four-
month period in which the Department may claim
reimbursement from the trustee, the circumstances under which
the statute of limitations is tolled with respect to the
Department’s claim, and the consequences of the trustee’s
distribution before the Department’s four-month period has
expired. No exception is stated for claims against a trust created
for a beneficiary under age 55. . . . The Department’s claim was
authorized by Probate Code section 3605.
“California Code of Regulations, title 22, section 50489.9
reflects this legislation: It states that a special needs trust
properly constituted (i.e., established by a parent, grandparent,
legal guardian, or, as here, a court, for the benefit of a disabled
individual under 65) shields the trust assets if ‘[t]he State
receives all remaining funds in the trust, or respective portion of
the trust, upon the death of the individual or spouse or upon
termination of the trust up to an amount equal to the total
medical assistance paid on behalf of that individual by the Medi-
Cal program.’ (Id., subd. (a)(3)(C).) Thus, to be approved by the
court Alexandria’s trust had to contain a payback provision in
compliance with the federal and state statutes under which her
eligibility for assistance was established. Had the trust not
contained that provision, all of the settlement funds would have
been deemed available for her care, thereby disqualifying her
from public assistance.” (Herting, supra, 235 Cal.App.4th at
pp. 614-615, fns. omitted.)
25
The court also concluded that “[t]he terms of Alexandria’s
trust fully conformed to the federal and state law discussed
above. Clearly its central purpose was to ensure the availability
of resources for Alexandria’s care, not to serve as an estate
planning device.” (Herting, supra, 235 Cal.App.4th at pp. 615-
616, fn. omitted.) The court noted the trust’s expression of its
intention to comply with the federal and state law provisions
governing special needs trusts, and the directions to the trustee
to first distribute to the Department and then to any other
agency entitled to Medi-Cal reimbursement, “up to the amount
remaining in this trust, an amount equal to the total medical
assistance paid on behalf of the Beneficiary by the Medi-Cal
program.” (Id. at p. 616.)
The court recognized that “[t]he California Law Revision
Commission comment to Probate Code section 3605 may appear
to support [the trustee’s] position by stating, ‘On the death of the
special needs trust beneficiary or on termination of the trust,
trust property may become subject to reimbursement claims
under federal or state law [(including Medicaid and Medi-
Cal)]. . . . For this purpose and only this purpose, the trust
property is treated as the beneficiary’s property or as property of
the beneficiary’s estate.’ [Citation.] We do not read this
comment, made before the enactment of OBRA ’93 . . . , as a
declaration that specific statutes and regulations governing
government claims against special needs trusts may be
disregarded simply by calling the trust assets estate property.”
(Herting, supra, 235 Cal.App.4th at p. 615, fn. 4.) “That the
provision [Probate Code section 3605, subdivision (b)] contains
the words ‘as if the trust property is owned by the beneficiary or
is part of the beneficiary’s estate’ does not warrant engrafting
26
estate-recovery text onto a statute specifically targeted to special
needs trusts.” (Id. at p. 615.)
The court addressed the holding of Shewry, stating, “We
depart from Shewry only insofar as it generally interprets the
Medicaid and Medi-Cal statutes to deem the assets of any special
needs trust to be part of a beneficiary’s estate after death. . . .
The statutes and regulations governing recovery from a special
needs trust do not exempt beneficiaries under age 55, either
directly or by making them ‘subject to’ the estate recovery
provisions. Nor do we see a public policy reason in this case to
shield the trust assets from recovery so that the $417,812.43
spent by the public can pass to Alexandria’s parents along with
the rest of the trust assets. Such a result would contravene both
the text of the provisions discussed above and the clear intent of
Congress and our Legislature.” (Herting, supra, 235 Cal.App.4th
at pp. 617-618.)
IV. The Mandatory Recovery Rules for Special Needs Trusts
Apply to the Trust Remainder
A. Application of federal and state provisions
As discussed above, section 1396a requires that Medi-Cal
provisions “comply with the provisions of section 1396p of this
title with respect to . . . recoveries of medical assistance correctly
paid . . . and treatment of certain trusts.” (§ 1396a(a)(18).)
Under section 1396p, “trust assets do not affect the beneficiary’s
[M]edicaid eligibility as long [as] the trust contains a ‘payback’
provision allowing trust assets remaining upon the recipient’s
death to be used to reimburse the state for the total medical
assistance it provided to the trust beneficiary. See 42 U.S.C.
§ 1396p(d)(1), (4).” (Sullivan v. County of Suffolk (2d Cir. 1999)
174 F.3d 282, 285.) While the OBRA provides that qualifying
27
special needs trusts will not be considered for purposes of
determining Medicaid eligibility “if 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 on
behalf of the individual under a State plan under this title”
(§ 1396p(d)(4)(A)), such special needs trusts necessarily may be
considered in determining eligibility for Medicaid if the state will
not receive all amounts up to an amount equal to the total
medical assistance paid. Like the court in Herting, supra,
235 Cal. App. 4th 607, we conclude that section 1396p(d)(4)(A)
mandates that the Department seek recovery of the total medical
assistance paid for by Medi-Cal on behalf of the beneficiary of a
special needs trust. (See also Lewis, supra, 685 F.3d at p. 349
[Ҥ 1396p(d)(4)(A) and (B) require repayment [to the Department]
up to the total amount expended for medical assistance”].)9
California law explicitly acknowledges that, for the purpose
of determining eligibility for Medi-Cal, federal Medicaid
standards apply. (Welf. & Inst. Code, § 14006, subd. (c) [whether
resources are exempt under the Medicaid Act is determined in
accordance with the federal law governing resources under that
act].) It is well-understood that “[r]ecovery from Medicaid
beneficiaries must be made in accordance with federal Medicaid
9 In concluding that the estate recovery provisions of former
Welfare and Institutions Code section 14009.5 apply to the
residual assets in special needs trusts, the court in Shewry held
that section 1396p(d)(4)(A) sets forth only eligibility
requirements, not reimbursement rules. (Shewry, supra,
125 Cal.App.4th at p. 197.) We disagree with Shewry’s
interpretation of section 1396p(d), which Plaintiffs do not
espouse.
28
law, because federal Medicaid law controls.” (Lopez v.
DaimlerChrysler Corp. (2009) 179 Cal. App. 4th 1373, 1380.)
California regulations reflect that in order for assets in a
special needs trust not to be counted in determining if the
beneficiary is eligible for Medi-Cal, the trust must include a
mandatory payback provision (like the one in the Trust) stating
that at the death of the beneficiary the state will be reimbursed
from the trust remainder for the Medi-Cal expenses incurred.
(Cal. Code Regs., tit. 22, § 50489.9, subds. (a)(3)(C), (b)(2) [for
special needs trust to be considered “not available” when
determining Medi-Cal eligibility, trust must be set up so that “the
State receives all remaining funds in the trust, or respective
portion of the trust, upon the death of the individual or spouse or
upon termination of the trust up to an amount equal to the total
medical assistance paid on behalf of that individual by the Medi-
Cal program”].) And Probate Code section 3605 provides that, at
the death of the beneficiary, the property of a special needs trust
is subject to claims of the Department and other state agencies.
(Prob. Code, § 3605, subd. (b).)
B. Plaintiffs’ interpretation of Probate Code section 3605
conflicts with federal law
Plaintiffs contend that the rights of state agencies to
reimbursement from special needs trust remainders is qualified
by additional language in Probate Code section 3605,
subdivision (b), providing that the trust property is subject to
agencies’ claims “to the extent authorized by law as if the trust
property is owned by the beneficiary or is part of the beneficiary’s
estate.” (Prob. Code, § 3605, subd. (b).) Supporting their
argument are the Comments of the Law Revision Commission,
which state, “On the death of the special needs trust beneficiary
29
. . . trust property may become subject to reimbursement claims
under federal or state law. See, e.g., 42 U.S.C. § 1396p(b)(1)(B)
(Medicaid); Welf. & Inst. Code § [] 14009.5 (Medi-Cal) . . . . For
this purpose and only this purpose, the trust property is treated
as the beneficiary’s property or as property of the beneficiary’s
estate.” 10 (Cal. Law Revision Com. com., 52B West’s Ann. Prob.
Code, supra, foll. § 3605, p. 154.) Plaintiffs read Probate Code
section 3605 as incorporating former Welfare and Institutions
Code section 14009.5, which governs reimbursement of Medi-Cal
expenses from beneficiaries’ estates and generally bars the
Department from claiming against an estate where the
beneficiary was under age 55 when she received her Medi-Cal
services. (Former Welf. & Inst. Code, § 14009.5, subd. (b)(1).)
Plaintiffs argue that although Probate Code section 3605
(as they interpret it) represents a “departure” from the
mandatory federal reimbursement provision of
section 1396p(d)(4)(A), the State of California has “latitude” to
implement its Medi-Cal plan in a manner that does not afford the
Department a right of reimbursement from all qualifying special
needs trusts created under Probate Code sections 3604 and 3605.
They rely on the principle that “‘[t]he [Medicaid] program was
designed to provide the states with a degree of flexibility in
designing plans that meet their individual needs,’” requiring that
states be “‘given considerable latitude in formulating the terms of
their own medical assistance plans.’” (Olszewski, supra,
30 Cal.4th at p. 810.)
10 Although the Law Revision Commission’s comments are
not binding, they are entitled to substantial weight in construing
the statute. (People v. Garfield (1985) 40 Cal. 3d 192, 199;
Van Arsdale v. Hollinger (1968) 68 Cal. 2d 245, 249.)
30
We disagree that the flexibility afforded to states to design
their Medicaid plans extends to the standards for reimbursement
from a special needs trust, which standard Congress specifically
designed as part of the OBRA. Were we to construe Probate Code
section 3605, subdivision (b) to conflict with sections 1396a and
1396p(d)(4)(A) of the federal Medicaid statute, we would have to
find the Probate Code provision preempted and unenforceable.
(Olszewski, supra, 30 Cal.4th at pp. 814-815 [state statute is
preempted to the extent it actually conflicts with federal
Medicaid law]; Citizens Action League v. Kizer, supra, 887 F.2d at
pp. 1006, 1008 [finding older version of Welfare and Institutions
Code section 14009.5 “impermissibly broad” and “inconsistent
with federal Medicaid law” in class action challenging the
Department’s practice of recovering costs of Medi-Cal benefits
from former joint tenants of deceased recipients]; Disabled &
Blind Action Committee of Cal. v. Jenkins (1974) 44 Cal. App. 3d
74, 78 [“It goes without saying that in the public assistance area,
California’s legislation must not be inconsistent with federal
legislation”].)
“A state law actually conflicts with federal law ‘where it is
impossible for a private party to comply with both state and
federal requirements [citation], or where state law “stands as an
obstacle to the accomplishment and execution of the full purposes
and objectives of Congress.”’ [Citation.] ‘What is a sufficient
obstacle is a matter of judgment, to be informed by examining the
federal statute as a whole and identifying its purpose and
intended effects.’” (Olszewski, supra, 30 Cal.4th at pp. 814-815,
826 [concluding California’s lien statutes permitting healthcare
providers to recover from Medi-Cal beneficiaries were invalid
because they conflicted with federal Medicaid law that prohibits
31
providers from attempting to obtain payment directly from
beneficiaries]; see Pac. Gas & Elec. Co. v. State Energy Res.
Conservation & Dev. Commission (1983) 461 U.S. 190, 203-204
[103 S. Ct. 1713, 75 L. Ed. 2d 752].)
“When determining the preemptive effect of federal law, we
are guided by the United States Supreme Court’s ‘oft-repeated
comment . . . that “[t]he purpose of Congress is the ultimate
touchstone” in every pre-emption case.’ [Citation.] ‘Congress’
intent, of course, primarily is discerned from the language of the
pre-emption statute and the “statutory framework” surrounding
it.’ [Citation.] ‘Also relevant, however, is the “structure and
purpose of the statute as a whole,” [citation] as revealed not only
in the text, but through the reviewing court’s reasoned
understanding of the way in which Congress intended the statute
and its surrounding regulatory scheme to affect business,
consumers, and the law.’” (Olszewski, supra, 30 Cal.4th at
pp. 816-817.)
In Lewis, supra, 685 F.3d 325 the Third Circuit Court of
Appeals analyzed whether a Pennsylvania statute dealing with
another particular type of trust, a “pooled” special needs trust,
was preempted by an OBRA provision regulating the
reimbursement rules for such trusts. The Pennsylvania statute
guaranteed the state at least 50 percent reimbursement for
Medicaid expenses from “pooled” special needs trust remainders,
while section 1396p(d)(4)(C)(iv) provided that pooled special
needs trusts could retain up to 100 percent of the trust remainder
upon the death of the disabled beneficiary, in which case the
32
state would receive no portion of the residual. 11 (Lewis, at
pp. 333-335, 348.)
The court concluded Congress had an “overarching intent”
in enacting the trust-counting provisions and the special needs
trust exemptions in the OBRA. (Lewis, supra, 685 F.3d at
p. 347.) “Congress provided a comprehensive system for dealing
with the relationship between trusts and Medicaid eligibility. . . .
Congress made a deliberate choice to expand the federal role in
defining trusts and their effect on Medicaid eligibility. . . . [¶]
[It] made a specific choice to expand the types of assets being
treated as trusts and to unambiguously require States to count
trusts against Medicaid eligibility. Its primary objective was
unquestionably to prevent Medicaid recipients from receiving
taxpayer-funded health care while they sheltered their own
assets for their benefit and the benefit of their heirs. But its
secondary objective was to shield special needs trusts from
impacting Medicaid eligibility. And the Supreme Court has
emphasized the importance of giving full effect to all of Congress’
statutory objectives, as well as the specific balance struck among
them.” (Id. at p. 343.)
The court determined that whereas Congress provided for
full reimbursement to state agencies for Medicaid expenses under
the special needs trust exemption of section 1396p(d)(4)(A) (the
type of trust at issue in our case), Congress made plain its intent
to treat pooled special needs trusts differently by giving
charitable organizations the discretion to retain the remainder of
a beneficiary’s account for the benefit of other disabled
11 A pooled special needs trust contains separate accounts
established for the benefit of multiple disabled individuals and is
managed by a nonprofit association. (§ 1396p(d)(4)(C).)
33
beneficiaries in the same pooled trust. Pennsylvania’s law
permitting nonprofit organizations to retain a maximum of
50 percent of the trust remainder ran counter to this clear intent,
and, accordingly, it was preempted. (Lewis, supra, 685 F.3d at
p. 349.)
We agree with the Third Circuit’s analysis of Congress’s
intent in enacting the specific exemptions for special needs
trusts, and its intention to precisely regulate reimbursements
from such trusts for Medicaid expenditures. The quid pro quo for
not considering assets in a special needs trust for Medi-Cal
eligibility purposes is that any assets remaining in such a trust
at the death of the beneficiary must be used to reimburse the
state for its Medi-Cal expenses on behalf of the beneficiary. (See
Corp. of Guardianship, Inc. v. Brajer (M.D.N.C. Mar. 21, 2016,
No. 1:15CV245) 2016 U.S. Dist. Lexis 35960, *16, fn. 3
[“§ 1396p(d) allows a benefit—the right of the beneficiary to
accept and use trust proceeds while continuing to receive medical
assistance benefits—that is virtually unique in the statutory
scheme. . . . In light of the fact that the prior statutory scheme
would have required a disabled individual to either accept trust
benefits while relinquishing medical assistance benefits or
decline the trust benefits, the rational basis for the statutory
compromise is self-evident”].) Section 1396p(d)(4)(A) does not
explicitly or implicitly permit a qualification that the Department
be reimbursed only for services provided to a beneficiary over the
age of 55. Accordingly, construing Probate Code section 3605 to
require such a qualification would lead it to be in conflict with,
34
and therefore preempted by, section 1396p(d)(4)(A). We decline
to interpret Probate Code section 3605 in such a manner. 12
Although Probate Code section 3605 provides that trust
remainders should be treated as part of a beneficiary’s estate, it
does not explicitly cross-reference the estate recovery provisions
of former Welfare and Institutions Code section 14009.5, except
in the Law Revision Commission comment. Nothing in the
legislative history explains the meaning behind the reference to
treating remaining trust assets as part of a beneficiary’s estate,
or otherwise reflects any intention to afford the states less than
full reimbursement for their Medi-Cal expenditures on behalf of
deceased beneficiaries of special needs trusts.
It is notable that section 1396p (approved on August 10,
1993) did not exist at the time Probate Code section 3605 was
12 Plaintiffs also contend that special needs trusts established
under Probate Code sections 3604 and 3605 are a distinct subset
of special needs trusts that do not fall within the standards set
forth in section 1396p(d). They provide no authority for this
assertion. Instead, they focus on supposed differences between
federal law governing special needs trusts and Probate Code
sections 3604 and 3605, such as the stricter definition of a
“disability” under Probate Code section 3604, subdivision (b)(1),
than under section 1396p(d)(4)(A), to argue that trusts
established under Probate Code sections 3604 and 3605 are in a
class of their own. However, Plaintiffs fail to articulate how or
why the purported distinctions between federal and state
standards compel the conclusion that the estate recovery rules of
section 1396p(b) and former Welfare and Institutions Code
section 14009.5 should apply to trusts established under Probate
Code sections 3604 and 3605, as opposed to the special needs
trust recovery rules under section 1396p(d) and California Code
of Regulations, title 22, section 50489.9.
35
enacted. At the time our state legislature considered and passed
Probate Code section 3605, it could not have anticipated that the
following year Congress would choose to crack down on what it
perceived as the abusive use of trusts, such that their assets
generally would be counted for purposes of Medicaid eligibility, or
that Congress would choose to strike a particular bargain as to
special needs trusts, making them exempt from eligibility only on
the condition that at the beneficiary’s death the state would
recover the full amount of Medicare expenses incurred while the
trust was in existence.
In interpreting Probate Code section 3605 along with the
other laws applicable to the treatment of special needs trust
assets, we “must consider the consequences that might flow from
a particular construction and should construe the statute so as to
promote rather than defeat the statute’s purpose and policy.”
(Escobedo v. Estate of Snider (1997) 14 Cal. 4th 1214, 1223.)
“Congress intended that special needs trusts be defined by a
specific set of criteria that it set forth and no others.” (Lewis,
supra, 685 F.3d at p. 347.) Congress has made plain that special
needs trust assets will only be exempt for purposes of Medicaid
eligibility if they will be subject to full reimbursement to the state
upon the beneficiary’s death, and our state has acknowledged the
supremacy of federal law on such eligibility and reimbursement
issues. (See Lopez v. DaimlerChrysler Corp., supra,
179 Cal.App.4th at p. 1380.) Adopting Plaintiffs’ interpretation
of Probate Code section 3605 would not be in keeping with that
understanding. We thus conclude that Probate Code section 3605
permits the Department to recover for Brenda’s Medi-Cal
expenses.
36
C. Centers for Medicare & Medicaid Services’ opinion letter
supports the Department’s position
As additional support for its position, the Department
relies on a January 6, 2015 letter from the Centers for Medicare
& Medicaid Services (CMS). 13 Due to the extraordinary
complexity of the Medicaid Act, Congress delegated the
administration of the Medicaid program to the Secretary of
Health and Human Services, who in turn exercises his or her
broad authority through CMS, previously known as the Health
Care Financing Administration (HCFA). (Ahlborn, supra,
547 U.S. at p. 275 & fn. 3; Olszewski, supra, 30 Cal.4th at p. 810;
Sierra Vista Regional Medical Center v. Bontá (2003)
107 Cal. App. 4th 237, 243.)
That letter from CMS to the Department states that it is
being provided “in response to questions from [Department] staff
regarding the interplay between the estate recovery provision in
[section 1396p(b)] and the trust provisions of
[section 1396p(d)(4)]. Specifically, the Department . . . asks for
confirmation that a state’s right to reimbursement under the
mandatory ‘payback’ provisions in the trusts described in
[section 1396p(d)(4)] is not limited by the restrictions described in
13 We deny Plaintiffs’ request, submitted after briefing was
complete, for us to take judicial notice of a number of “All County
Letters” issued by the Department, as well as pages on the
Department’s website. The materials have, at best, marginal
relevance to the issues before us, and in any event, Plaintiffs did
not submit them to the trial court. (See California Advocates for
Nursing Home Reform v. Bontá, supra, 106 Cal.App.4th at
pp. 515-516, fn. 8.)
37
[section 1396p(b)(2)] that apply to a state’s right to estate
recovery.”
The CMS letter confirms that the trust provisions of
section 1396p(d)(4), including the payback provisions, are
“[s]eparate and distinct from the estate recovery provisions” of
[section 1396p(b)]. “To qualify as . . . a special needs trust . . . ,
the Act requires, among other things, 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 on behalf of the individual . . . .’ [¶] Accordingly, the State
Medicaid Manual at Section 3259.7 (‘Exceptions to Treatment of
Trusts Under Trust Provisions’) provides that in order for a
Medicaid beneficiary to have a trust classified as . . . a special
needs trust . . . , the trust must contain a provision that directs
payback to the state in accordance with the above-described
provisions. A trust that does not contain the relevant payback
provision language, or applies limitations on the payback beyond
the ones specifically identified in the statute (those being, upon
the death of the individual, up to an amount equal to the total
medical assistance paid . . .) may not qualify as a
[section 1396p(d)(4)] trust.”
Thus, according to CMS, “[a] state’s entitlement to
reimbursement from trusts described in [section 1396p(d)(4)]
exists independent of the estate recovery authority in
[section 1396p(b)],” and “[t]he mandatory reimbursement terms
in a [section 1396p(d)(4)] trust, and not the provisions of
[section 1396p(b)], provide the basis for a state’s reimbursement
rights from such trusts.” “The statutory language does not limit
the states’ right to reimbursement from [section 1396p(d)(4)]
trusts to the services a Medicaid beneficiary receives, nor does it
38
condition the right upon the age of a trust beneficiary or absence
of surviving family members, or otherwise make the states’
reimbursement rights subject to [section 1396p(b)]. No limitation
on a state’s entitlement to reimbursement from
[section 1396p(d)(4)] trusts may be imposed other than what is
expressly contained in the statute.”
Although Plaintiffs contend the CMS letter is not
persuasive because it makes no reference to the special needs
trust provisions in the Probate Code, CMS sets forth its position
that states cannot impose any limitations on the right of
reimbursement mandated by Congress in section 1396p(d)(4).
We find the letter persuasive and afford it some deference. (See
Olszewski, supra, 30 Cal.4th at p. 821 [policy clarification letter
from HCFA regarding conflict between state law and federal
Medicaid provisions was entitled to deference]; Christensen v.
Harris County (2000) 529 U.S. 576, 587 [120 S. Ct. 1655,
146 L. Ed. 2d 621] [HCFA’s interpretations contained in opinion
letters, as opposed to determinations after a formal adjudication
or notice-and-comment rulemaking, are “entitled to respect” to
the extent that they have the “power to persuade”]; Caremark,
Inc. v. Goetz (6th Cir. 2007) 480 F.3d 779, 787 [finding CMS’s
interpretation of the Medicaid statutory scheme entitled to
respect and some deference where it was persuasive and
consistent with federal and state law].)
D. Public policy considerations weigh in favor of permitting
reimbursement to the Department
It is well-established that “[a]llowing states to recover from
the estates of persons who previously received assistance furthers
the broad purpose of providing for the medical care of the needy;
the greater amount recovered by the state allows the state to
39
have more funds to provide future services. Furthermore, if a
person has assets available to pay for the benefits, then the state
should be allowed to recover from those assets because that
person was not fully entitled to all benefits.” (Belshe v. Hope,
supra, 33 Cal.App.4th at p. 173; see Burke, supra, 98 Cal.App.4th
at p. 793 [“allowing the State to recover as much as possible of
the costs of medical services provided to low-income persons
furthers the purpose of the Medicaid and Medi-Cal programs”].)
The policy rationales are even more compelling in the case
of special needs trusts that consist of the proceeds from
settlements or judgments from lawsuits against third-party
tortfeasors, such as medical professionals or other persons found
to have negligently or intentionally caused injuries to the
beneficiary. Those proceeds are set aside for the specific purpose
of meeting the medical needs of the beneficiary—and, pursuant to
Probate Code section 3604, the court must find that only an
amount reasonably believed to be necessary to cover medical
needs is being sheltered in this trust. Where a third party has
been found liable for the beneficiary’s injuries resulting in long-
term medical costs, proceeds provided by the third party fairly
should go towards these medical costs; only if the medical
expenses prove lower than reasonably expected should those
funds be distributed to the beneficiary’s heirs upon the death of
the beneficiary.
The policy is well-illustrated in the case before us. Brenda
had medical expenses of almost $4 million. Had the assets in her
special needs trust made her ineligible for Medi-Cal, her family
may well have struggled to pay for all her special medical needs
over her 21-year life. Because she was able to qualify for
Medi-Cal, the state paid almost $4 million in medical expenses on
40
her behalf, and Trust assets that originally totaled approximately
$2.4 million paid for additional services and supplies that Brenda
needed but were not covered by Medi-Cal. Upon Brenda’s death,
there is no policy justification for the remaining $1.6 million
earmarked for medical expenses to go to her heirs, as opposed to
reimbursing the state to the extent possible—here, approximately
40 percent of the total medical expenses incurred. It comports
with principles of fairness to allow the Department to partially
recover the healthcare payments for Brenda, so that those funds
can be expended on behalf of other Medi-Cal recipients.
E. The Trust itself requires reimbursement to the
Department
Our conclusion that the Department is entitled to be
reimbursed from the Trust residual is further supported by the
directives of the Trust itself. We review de novo the proper
interpretation of the trust instrument. (Estate of Stoddart (2004)
115 Cal. App. 4th 1118, 1130.) At the termination of a trust, the
trust property shall be disposed of “as provided in the trust
instrument or in a manner directed by the court that conforms as
nearly as possible to the intention of the settlor as expressed in
the trust instrument.” (Prob. Code, § 15410, subd. (d); see Crook
v. Contreras (2002) 95 Cal. App. 4th 1194, 1206; Salvation Army v.
Price (1995) 36 Cal. App. 4th 1619, 1624.)
Plaintiffs seek to distinguish the Trust from the special
needs trust in Herting, suggesting that the specific language of
the trust in Herting justified a different outcome in that case
than is warranted here. Plaintiffs’ argument is not persuasive.
The Trust provides that “[t]he Beneficiary has no interest
in the income or principal of the trust, other than as set forth
herein,” and “because this trust is to be conserved and
41
maintained for the Special Needs of the Beneficiary, no part of
the principal or income of the trust shall be construed to be part
of the Beneficiary’s ‘estate.’” So that it would qualify as a special
needs trust exempted from consideration for determining Medi-
Cal eligibility, it includes the following “payback” provision: “In
accordance with 42 U.S.C. § 1396p (d) (4) (A), upon termination,
whether by death or otherwise, and after payment of provision
has been made for expenses of administration, the remaining
trust estate shall be payable to any state, or agency of a state,
which has provided medical assistance to the Beneficiary under a
state plan under Title XIX of the Social Security Act, up to an
amount equal to the total medical assistance paid on behalf of the
Beneficiary under such state plan.”
The Trust could not be clearer in setting forth that none of
the assets in the Trust were to be treated as part of Brenda’s
estate; rather, at Brenda’s death, the state was entitled to full
reimbursement for Medi-Cal assistance provided during Brenda’s
life. We reject Plaintiffs’ contention that the Trust’s explicit
payback provision is “eviscerated” by the subsequent provision in
the Trust that “[n]otwithstanding any provisions of this
instrument to the contrary, this trust is subject to the provisions
and requirements of California Probate Code Sections 3604 and
3605, which require that notice of the Beneficiary’s death or the
trust termination be given . . . to . . . [the Department].” As
discussed above, we do not agree with Plaintiffs that Probate
Code section 3605 prohibits reimbursement from the Trust
because Brenda was under 55. We conclude that the Trust
directives are in accord with the applicable laws giving the
Department the right to reimbursement for its Medi-Cal
expenses incurred on behalf of Brenda.
42
V. Plaintiffs Failed To Show the Department’s Claim
Impermissibly Included Services Under IDEA/Lanterman
Act
Plaintiffs contend the creditor’s claim submitted by the
Department erroneously included expenses for special education
services pursuant to the IDEA and regional center services
pursuant to the Lanterman Act.
At the hearing on Plaintiffs’ petition, the probate court took
a practical approach to this issue, noting that the Department’s
creditor’s claim was for almost $4 million, but the Trust
remainder was only $1.6 million, which left approximately
$2.4 million in services for which the Department would not be
reimbursed. The court reasoned because there certainly were at
least $1.6 million in legitimately claimed medical expenses
included in the $4 million claim, it did not really matter if some
additional expenses (for which the Department would not be
reimbursed) were for special education and regional center
services. Counsel for Plaintiffs essentially conceded the issue,
and declined the court’s offer to continue the hearing so that
Plaintiffs could conduct discovery on how much, if any, of the
payback request was for IDEA or Lanterman Act services.
Accordingly, even if we assume that expenses for such services
are not appropriately claimed by the Department from a special
needs trust (a question we need not reach), Plaintiffs have failed
to carry their burden to demonstrate that the $1.6 million
available for reimbursement would necessarily go to reimburse
the Department for any such services. 14
14 The same logic applies to Plaintiffs’ contention that the
Department’s claim sought recovery for services rendered before
43
DISPOSITION
The judgment is affirmed. The Department shall recover
its costs on appeal.
STONE, J. *
We concur:
PERLUSS, P. J.
FEUER, J.
the Trust was approved. Even if that were true, and even if that
were not permissible, the Department points out it is undisputed
that over $3.9 million of the claimed services were provided after
the Trust was created. Given that only $1.6 million remains in
the Trust, the Department will not recover its payments for the
sliver of services that pre-dated the Trust.
* Judge of the Los Angeles Superior Court, assigned by the
Chief Justice pursuant to article VI, section 6 of the California
Constitution.
44