Written by H. Frederick Seigenfeld, Esq., C.P.A. (c), LL.M. (c) Tax & Estates.
LL.M conferral Dec. ’25. C.P.A. licensure Feb. ’26.
(Note: For Medi-Cal Planning scroll to the next section or click here.)
Intentional INterest Only Trusts (IIOT(s))
As society becomes increasingly litigious, the topic of asset protection becomes increasingly important. There are a number of tools available for California residents who are looking to protect their assets from creditors. Trusts are one of the most popular tools for asset protection worldwide.
Irrevocable trusts are designed for the long-term management of assets. They are commonly used in estate planning. There are several different types of irrevocable trusts designed to suit specific purposes. However, all irrevocable trusts have one common characteristic. This characteristic is that the grantor of the trust gives up control and ownership of the property held within the trust.
Irrevocable trusts are commonly used for asset protection. In this regard, the law uses the “step into their shoes” theory. That is, whatever debtors could do, personally, the creditors can step into their shoes and do the same. The grantor of an irrevocable does not have direct access to the assets held in the trust. As a result, creditors of the grantor generally cannot reach the assets held within the trust. California law does, however, include exemptions to this rule. These exemptions include child support claims, alimony claims, federal tax claims, and state tax claims.
Entity Formation and Interest Only
More traditionally, asset protection can also be procured through the use of an LLC or corporation. That said, the best liability and asset protection is made availability through Interest Only Distributions.
Despite the irrevocable name, it is also possible under California law to draft the trust in such a way that changes are permitted. This is possible through the use of different legal devices, such as a trust protector. Trusts protectors are disinterested parties who take on fiduciary responsibilities for the trust. Trust protectors, who are often accountants or attorneys, have limited oversight powers regarding the trust. It
Asset Protection strategie, briefly discussed above, are equally applicable to Medi-Cal Planning. See the next section for more information..
Medi-Cal Planning
How can a trust help you to qualify for Medi-Cal?
To qualify for Medi-Cal, both your income and the value of your other assets must fall below certain limits. In determining your eligibility for Medi-Cal, California may count only the income and resources that are legally available to you for paying medical costs.
A trust helps you to qualify for Medi-Cal because it can shelter your income and/or assets, making them unavailable to you. The state Medi-Cal authorities cannot consider assets that are truly inaccessible to the Medi-Cal applicant; therefore, anything that stays in an irrevocable trust and cannot under any circumstances be payable to you will generally lie outside of your financial picture (for Medi-Cal eligibility purposes). Such transfers to trust are subject to the applicable "look-back" period, which pulls back into the Medi-Cal eligibility equation transfers into trusts made before applying for Medi-Cal.
Which trusts are most useful for Medi-Cal planning?
Medi-Cal planning usually focuses on the possibility of long-term nursing home care. The average American spends 835 days in a nursing home. The average private nursing home room in California costs in excess of $120,000 per year. An aging population and the increased cost of long-term care have made Medi-Cal planning a crucial topic for many people and may well be an important part of your overall financial plan. If you anticipate the need for long-term care and are looking for a strategy to shelter your resources, consider using one of the following four trusts:
- Irrevocable Income-Only Trust
- Irrevocable Trust
- Supplemental Needs Trust
An irrevocable income-only trust is a vehicle that may allow an applicant to qualify for MediCal benefits while preserving substantial assets for family members or other heirs. The MediCal applicant is both the grantor and the beneficiary of the trust, but someone else is named as the trustee. As the name of the trust suggests, you are entitled to receive only the income from the trust--you cannot access the trust principal. Only the trust principal, therefore, will be sheltered from the state Medi-Cal authorities while you are alive and can generally go to your heirs when you die. Income from the trust that is actually paid to you is considered to be income to you for Medi-Cal purposes. Income that could be paid to you is considered an available resource of yours for Medi-Cal purposes. With respect to the trust income that you receive, most of it must be spent down to pay for part of your nursing home care each month--Medi-Cal will pay the rest.
Irrevocable Trusts
An irrevocable trust (in which the creator of the trust is not a beneficiary) is a vehicle that allows an applicant to qualify for Medi-Cal benefits while preserving substantial assets for family members or other heirs. As a Medi-Cal applicant, you are the grantor of the trust but not the beneficiary. You select someone else as beneficiary and make sure that the trustee has no discretion (ability) to direct trust income and assets to you. Since you are not entitled to receive any income or principal from the trust, whatever you deposit into trust will be sheltered from the state Medi-Cal authorities and preserved for your heirs. Both trusts are especially useful tools when you want to shelter a second home.
Supplemental Needs Trust
A supplemental or special needs trust is a federally recognized Medi-Cal planning tool created for permanently disabled persons. It is an irrevocable trust in which you (the Medi-Cal applicant) serve as beneficiary only. The goal of the special needs trust is to supplement (rather than replace) Medi-Cal benefits in order to create a more comfortable lifestyle for benefit dependent individuals. Therefore, the trust might pay for such things as a new television set or a private room. Since the trust income and principal are not considered to be available for paying medical bills, it's possible for one to qualify for Medi-Cal and still enjoy the benefits of the money.