In its decision announced on March 15, 1995, the Court of Appeal for the Fifth District upheld the use of a revocable living trust to pass property to beneficiaries following death in _Belshe vs. Hope_, 33 CA 4th 161 (1995). Although the court found that the California Department of Health Services could claim $294,062.26 as reimbursement for Medi-Cal benefits provided to the decedent, the court rejected the Department's arguments attacking the trust as a valid instrument.
When Myrtle Hope died on July 20, 1992, she left certain real property to her husband, if he survived her, or to her four children, the defendants in this suit. The property had been held in a revocable inter vivos trust since September 13, 1976, and prior to her death, Mrs. Hope did not revoke, repudiate or modify the trust. When the Department asserted its claim for reimbursement, the four children contended that the property, as a non-probate asset, was not included within the "estate" of Myrtle Hope, as that term is used in the federal statute allowing states to seek reimbursement. 42 U.S.C. Sec. 1396p(b)(1)(B).
Significantly, the Department advanced three arguments in support of its claim, two of which attacked the fundamental validity of a revocable living trust as a means to pass property following death. The success of either argument would have severely undermined the use of living trusts for estate pl anning and avoidance of probate.
First, the Department argued that the trust property remained in Myrtle's estate because the trust document was an invalid testamentary transfer. Second, the Department contended that under common law the trust property passes by way of descent through Myrtle Hope's estate. Fortunately, the Court of Appeal rejected both arguments.
The Court of Appeal reversed the trial court's finding that Myrtle's revocable trust was testamentary in nature and therefore invalid because it was not executed in compliance with the statute of wills. Such a holding would have invalidated every trust executed in California without the formalities of a will - virtually every trust would have become instantly useless to pass an estate following death.
The Court of Appeal found that the trial court had erroneously relied on _Demartini v. Allegretti_ (1905) 146 Cal. 214 in finding that the revocable trust was testamentary. Instead, the court should have followed _Tennant v. John Tennant Memorial Home_ (1914) 167 Cal. 570, in which a deed reserving a life estate and the right to revoke the deed in full was upheld as a valid transfer. The deed was not testamentary because the grantor had made a present conveyance of a future interest, in spite of the reservation of the life estate and the right to revoke. Thus, under this holding, Myrtle Hope's revocable trust transferred a present interest at its creation in 1976, even though the trust was revocable, and was not an invalid testamentary transfer.
The Department's second argument was based on the same reasoning: because Myrtle's 1976 revocable trust did not pass a present interest in her property, her heirs took the property through her estate, which would be subject to the reimbursement claim. Again, the Court of Appeal pointed out that the Department had misinterpreted the _Tennant_ case. The Court also rejected the Department's application of _Noble v. Learned_ (1908) 153 Cal. 245, in which the California Supreme court had invalidated the transfer of stock certificates endorsed to certain beneficiaries prior to death. Unlike Myrtle Hope, the owner of the stock certificates in _Noble_ had never intended to create a trust at all.
Finally, the Court of Appeal also noted that that Probate Code 5000 provides specifically for the nonprobate transfer of property in a trust, without the formalities of a testamentary instrument.
Thus, the attacks by the Department on the fundamental nature of a revocable trust as a means to pass property upon death were soundly rejected. Unfortunately for Myrtle Hope's children, however, this was not the end of the Department's case. The Court of Appeal rejected the reasoning and holding of the Ninth Circuit in _Citizens Action League v. Kizer_ (9th Cir. 1989) 887 F.2d 1003, which found that "estate" as used in the federal statute was limited to the common law definition of "probate estate," effectively excluding all nonprobate assets of a decedent from any reimbursement claim. The Court of Appeal found that it was the intent of the Legislature to adopt a much broader definition, including all assets of the decedent's estate, whether probate or nonprobate. "We find ... the purposes of the act will be better achieved and the broad definition will ensure that assets of a recipient are used for the cost of care rather than given away." 33 CA 4th at 175 (1995).
Consequently, the Department's claim was upheld and the Hope children must reimburse the State for their mother's $294,062.26 of Medi-Cal benefits.