Medicaid Estate Recovery in California

Curtis received a letter from the California Department of Health Care Services (DHCS) six months after his mother’s death demanding $85,000 for the long-term care benefits she received. He’d always understood Medicaid was a safety net, not a loan repaid from her estate. He was devastated to learn that California, like most states, has a robust Medicaid Estate Recovery Program (MERP), seeking reimbursement from the estates of deceased beneficiaries. What he didn’t realize is that proactive estate planning could have significantly minimized, or even avoided, this outcome.

What is Medicaid Estate Recovery?

Medicaid Estate Recovery, governed by both federal and California law, allows the state to recoup Medicaid benefits paid on behalf of beneficiaries who received long-term care services. It’s important to understand this isn’t limited to nursing home care; it can include in-home services, assisted living, and other medical expenses. The federal government mandates that states recover these costs, and California aggressively pursues these claims. As an Estate Planning Attorney and CPA with over 35 years of experience, I’ve seen firsthand the emotional and financial toll MERP can take on families.

How Does California’s MERP Work?

The process generally begins after a beneficiary’s death. DHCS will attempt to identify assets within the estate. This is done by searching public records, but also through notices sent to the executor or administrator of the estate. Once assets are identified, DHCS will file a claim against the estate. Critically, probate creditor claims follow the formal claims system outlined in Probate Code §§ 9000–9399. This means there are strict deadlines and procedures that must be followed. Failing to respond properly or missing deadlines can lead to a judgment against the estate, potentially forcing the sale of assets.

What Assets Are Subject to Recovery?

Generally, any asset owned by the deceased beneficiary at the time of death is potentially subject to recovery. This can include real estate, bank accounts, stocks, bonds, and personal property. However, there are important exceptions. One key exception involves a surviving spouse. While the state can make a claim against the deceased beneficiary’s share of community property, they are significantly limited in their ability to pursue assets solely owned by the surviving spouse. This distinction between community and separate property is governed by Family Code § 910 and Probate Code §§ 13550–13554. Another exception involves dependent children, which is a complex area that requires careful analysis.

How Can Estate Planning Help Avoid MERP?

The good news is that proactive estate planning can significantly reduce or eliminate MERP claims. This is where my dual background as an attorney and a CPA is invaluable. A well-structured estate plan can utilize trusts, gifting strategies, and other techniques to remove assets from the estate. The timing of these strategies is critical. For instance, transferring assets too close to the date of application for Medicaid benefits can trigger a period of ineligibility. However, transfers made years in advance may be perfectly permissible. Understanding the “look-back” period and the rules surrounding gifting is essential.

The Step-Up in Basis Advantage & Capital Gains Considerations

One frequently overlooked benefit of proper estate planning is the step-up in basis for inherited assets. This means that when an heir inherits an asset, their cost basis is reset to the fair market value of the asset on the date of the decedent’s death. This can significantly reduce capital gains taxes when the asset is eventually sold. For example, if your mother purchased a property for $100,000 and it’s worth $500,000 at the time of her death, your cost basis becomes $500,000. This is a major tax advantage that MERP claims don’t impact directly, but it’s something to consider when structuring an estate plan. Furthermore, accurate valuation of assets is critical for both estate tax purposes and MERP claims, which is another area where my CPA expertise is vital.

What About Small Estates?

California offers simplified procedures for small estates. As of April 1, 2025, the threshold for a small estate is Probate Code § 13100 = $208,850. If the total value of the deceased’s assets is below this amount, it may be possible to avoid formal probate and MERP claims through a simpler administrative process. However, even in small estate cases, it’s important to understand the potential for creditor claims and to take appropriate steps to protect assets.

What is the Deadline for Creditor Claims?

The state has a limited time to pursue MERP claims. California’s mandatory payment order is defined in Probate Code § 11420, establishing the priority of claims against an estate. Importantly, the hard one-year creditor action limit, as outlined in CCP § 366.2, applies to MERP claims. This means DHCS has one year from the date of death to file a lawsuit against the estate. It is crucial to note that this one-year period is NOT tolled by the probate process. Ignoring a MERP claim or failing to respond within the one-year timeframe can result in a default judgment.

What does a California probate court look for when interpreting testamentary intent?

In California, a last will and testament operates within a probate system that emphasizes intent, clarity, and procedural compliance. When properly drafted, a will does more than distribute property—it creates legally enforceable instructions that guide courts, fiduciaries, and beneficiaries through administration with fewer disputes and less uncertainty.

When a will is drafted with California probate review in mind, it becomes a stabilizing roadmap rather than a source of conflict. Clear intent, proper authority, and compliant execution protect both families and estates.

Controlling California Statutes on Estate Debts and Creditor Claims

• Debt Priority:
  
  California Probate Code § 11420
  
  Establishes the mandatory statutory order in which estate debts must be paid before any distributions to beneficiaries.
• Probate Creditor Claims:
  
  California Probate Code §§ 9000–9399
  
  Governs how creditor claims must be formally filed in probate and why informal demands, letters, or invoices are legally ineffective.
• Creditor Lawsuit Deadline:
  
  California Code of Civil Procedure § 366.2
  
  Imposes a strict one-year deadline from the date of death for most creditor lawsuits, which is not tolled by probate proceedings.
• Surviving Spouse Liability:
  
  California Probate Code §§ 13550–13554
  
  Limits a surviving spouse’s personal liability for a decedent’s debts to the value of property received under these statutes.
• Small Estate Threshold:
  
  California Probate Code § 13100
  
  Sets the $208,850 small estate affidavit threshold for deaths occurring on or after April 1, 2025.