The Medicaid Set-Aside Trust: What California Families Need to Know in 2025
In 2025, a new administration has begun to train its sights on the ballooning costs of Medicaid. While Medicare has long been the poster child of federal healthcare, Medicaid quietly supports millions of low-income and disabled Americans, particularly those needing long-term care. The Medicaid Set-Aside Trust (MSAT)—not to be confused with a Medicare Set-Aside arrangement used in personal injury settlements—has emerged as a powerful tool in protecting assets while preserving eligibility for this vital public benefit.
What Is a Medicaid Set-Aside Trust?
A Medicaid Set-Aside Trust (MSAT) is a legal instrument designed to hold and manage assets in a way that allows a disabled or elderly person to qualify for Medicaid while still benefiting from those assets. The trust segregates funds so they don’t count as “available resources” under Medicaid’s strict financial eligibility rules. While this might sound similar to a Medicare Set-Aside (MSA)—which is used to preserve Medicare’s future interest in a personal injury settlement—MSATs are different in purpose and scope. MSAs primarily relate to future medical expenses paid by Medicare, while MSATs focus on long-term Medicaid eligibility and asset protection.
First-Party vs. Third-Party Funded Trusts
An important distinction exists between first-party and third-party MSATs:
- First-Party MSATs are funded with the beneficiary’s own assets—often from a legal settlement, inheritance, or personal savings. These trusts must include a payback provision to the state Medicaid agency for services rendered.
- Third-Party MSATs are funded with someone else’s assets—such as a parent or sibling creating a trust for a disabled child or adult. These trusts do not require a Medicaid payback clause and are often part of broader estate planning strategies.
Understanding which type of trust suits your situation is critical, especially for California families navigating the state’s unique Medi-Cal rules.
Medi-Cal in California: Special Considerations
California administers Medicaid through the Medi-Cal program. The state has recently enacted sweeping reforms that impact how families plan for long-term care.
Elimination of the Asset Test
In a groundbreaking move, California has eliminated the asset test for Non-MAGI (Modified Adjusted Gross Income) Medi-Cal programs, effective January 1, 2024.
“Starting January 1, 2024, the Medi-Cal program no longer counts your assets when determining if you are eligible for benefits. This means that you do not need to report your bank accounts, vehicles, or property.”
— DHCS Medi-Cal Eligibility and Estate Recovery Standards
This means a broader swath of Californians may now qualify for Medi-Cal regardless of their savings or property holdings—dramatically reducing the urgency for some to shelter assets in trust. However, the elimination of the asset test does not mean that Medi-Cal planning is no longer necessary.
Medi-Cal Estate Recovery Still Exists
Even though California has relaxed financial eligibility criteria, Medi-Cal still retains the right to recover costs from a beneficiary’s estate after death. This is particularly relevant for individuals over age 55 who received long-term services and supports.
“When a person on Medi-Cal passes away, Medi-Cal might ask for some money back for the services they got when they were 55 or older. These services include nursing care, help at home, and certain hospital and medicine costs.”
— DHCS Medi-Cal Eligibility and Estate Recovery Standards
However, this recovery is limited to assets that go through probate:
“Medi-Cal Estate Recovery’s claim is only against the estate assets of the deceased member.”
— DHCS Estate Recovery Brochure
That means if your assets pass outside of probate—say, through a properly funded revocable trust, joint tenancy, or a Medicaid Set-Aside Trust—they may be shielded from estate recovery. This is a critical point for families wanting to leave a legacy while still taking advantage of Medi-Cal benefits.
The Policy Landscape in 2025
The 2025 Trump administration has signaled a more aggressive stance on Medicaid costs. While no sweeping legislation has yet been passed, proposals are circulating that would increase federal oversight of trusts used to establish Medicaid eligibility. These may include:
- Reinstating asset tests at the federal level.
- Imposing stricter look-back periods and penalties for transferring assets into trusts.
- Expanding the scope of estate recovery.
If implemented, these measures could upend many current planning strategies. For now, California families still benefit from some of the most generous Medicaid rules in the country—but the window for strategic planning may be narrowing.
A Veteran’s Story from Paso Robles
Consider John, a Navy veteran from Paso Robles. After a stroke left him unable to work, John worried about affording long-term care. He had $150,000 in savings and a modest home. Without planning, these assets would have disqualified him from Medi-Cal—or been subject to estate recovery. With the help of an attorney, John created a first-party MSAT and transferred his savings into the trust. He qualified for Medi-Cal and received quality nursing care. Upon his death, the remaining assets reimbursed Medi-Cal, but the home—held in a revocable trust—passed to his daughter outside of probate.
Contrast this with a family who established a third-party MSAT for their adult son with Down syndrome. Because the trust was funded entirely with the parents’ money, it avoided both disqualification and payback. The trust continues to provide for their son’s needs without impacting his Medi-Cal.
Takeaways for California Families
- Don’t confuse MSATs with Medicare Set-Asides. The former focuses on Medicaid eligibility and asset protection; the latter on preserving Medicare’s interests in injury settlements.
- Know the difference between first-party and third-party MSATs. It affects everything from eligibility to payback rules.
- Act now. California’s current rules are favorable, but federal changes may be on the horizon.
- Consult an experienced estate planner. These trusts are powerful but must be set up correctly to avoid costly mistakes.
The bottom line? A Medicaid Set-Aside Trust can offer California families both protection and peace of mind—if done right, and done soon.
