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Gonzalez v. City National Bank

California Court of Appeals, Second District, Seventh Division

June 24, 2019

JOSUE GONZALEZ et al., Plaintiffs and Appellants,
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, No. 17STPB02129 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.

          STONE, J. [*]

         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.


         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 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 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 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.

         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.


         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

         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 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 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 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, 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 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 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 ...

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