Does Having a Living Trust Automatically Protect My Assets from Health Care Costs?

Living Trusts are a popular estate planning vehicle to avoid Court involvement and statutory probate costs in the administration of a decedent’s estate, large attorney’s fees and lengthy delays in the distribution of assets. However, it is a common misunderstanding that a Living Trust is a shield from creditors, including lawsuits and Medi-Cal estate claims. In most cases, Living Trusts do not protect assets from claims and in fact if not properly done may add roadblocks to proper long term care planning.

One of the most common misunderstandings stems from the belief that because one has assets in a Living Trust, that person does not own the assets and therefore Medi-Cal, for example, can’t count them or subject them to recovery claims. In most situations, in fact, the person does control the assets. Consequently Medi-Cal and creditors can claim against them.

There are several ways a Living Trust can be utilized to help protect assets from nursing home costs. There must be very specific clauses, containing very specific wording, in order to take advantage of these protections. If the language is not contained in the Trust document, the Trustee may be powerless to take the steps necessary to protect the family’s assets. Very simply put, most trusts simply DO NOT allow the family to manage the trust to protect a lifetime’s work.

Some of the provisions that should be included in the trust are:

* The authority to apply for Government health care benefits.
* The authority to maximize eligibility for all health care programs.
* The authority to take all steps to create eligibility.
* The authority to make unconditional and unlimited gifts in excess of the per year limit for non-taxable gifts.
* The authority to transfer community property from one spouse to another.
* The authority to irrevocably transfer assets to heirs while living to avoid estate claims.
* The authority for either Trustor to amend the Trust.
* The authority to amend the Trust using a Power of Attorney.
* The authority to create revocable or irrevocable trusts

Watch out for “Boiler Plate” provisions!

Many so-called “Estate Planning” attorneys and low cost trust mills, simply push a button on the computer and turn out a generic, one size fits all, Trust. These in many cases include provisions (or more importantly, lack provisions) that have no application to the client’s estate. One very common example is the creation of an A/B Trust, which freezes the deceased spouse’s one-half of the community property and makes a portion of the Trust, IRREVOCABLE! The surviving spouse essentially loses all control over those assets. Remember, most trusts are created to deal with DEATH. People needing care may be incompetent or incapacitated but they are NOT DEAD. Most competent attorneys no longer do boiler plate A/B Trusts.

Durable Powers of Attorney for Property and Personal Affairs must have specific language and provisions to be effective for incapacity and Medi-Cal planning.

Your Durable Power of Attorney must have very specific language in order to do Long Term Care planning for a person who is incompetent or incapacitated. These provisions generally include: broad gifting powers; powers to undue community property to separate property; powers to take over the handling of one’s Living Trust if they are unable to do so, including the power to amend; the power to apply for and take any steps necessary to obtain Public Benefits. They should also be immediate, not springing. Also extremely important is the ability to create a life-care contract. Remember that a Power of Attorney for Health Care does not allow someone to make financial decisions.

What Now??

If your Trust and Powers of Attorney were created by a “Trust Mill” or other inexperienced professionals, or do not contain these provisions and safeguards, it is not too late. You CAN make changes, but it must be done while alive and competent. Don’t wait for circumstance to force decisions upon you.


The dramatic, wide-ranging privacy rules of HIPAA took effect April 14, 2003. These regulations, considered to be the most significant development in health care legislation since 1965 apply to virtually every health care provider and organization in America. It is absolutely imperative that Advance Health Care Directives and Durable Powers of Attorney for Finance as well as your Living Trust now contain very specific HIPAA compliant provisions. Most current documents DO NOT contain these provisions. Without the appropriate release authority language your Attorney-in-Fact may not be able to act on your behalf.

The foregoing report is designed solely for the purpose of providing very general and limited information on the subject matters. Readers should have their estate planning documents reviewed to determine their legal sufficiency and whether they need to be amended or replaced. Nothing here is intended to be legal advice.

Prepared by Gary R. Lieberman of the Law Offices of McCarty & Lieberman, Elder Law Attorneys since 1962.

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