Medicaid estate recovery causes "paralysis" in many attorneys, but there is no cause for panic, New York attorney David Zumpano told attendees at a session of the National Academy of Elder Law Attorneys' (NAELA) 2012 Annual Conference in Seattle, Washington.
Zumpano began by talking about the authorization for estate recovery. Federal law requires that states have a recovery plan in place. The constitutionality of the law was attacked as an infringement on state's rights, but in a case brought by West Virginia the U.S. Court of Appeals for the Fourth Circuit ruled that the requirement is not coercive nor a violation of the Tenth Amendment.
The biggest issue surrounding Medicaid estate recovery is federal preemption. Recovery at the state level can't be more expansive than federal law allows. "Everything in estate recovery comes down to the state's definition of ‘estate’," explained Zumpano.
How does estate recovery work? The general rule is that no lien may be imposed during the Medicaid recipient's lifetime. There is an exception if the Medicaid payment was incorrectly made and there is a judgment from the court or if there is real property and no intent to return home. In Arkansas Dept. of Health & Human Services v. Ahlborn (547 U.S. 268 (2008)), an individual received a settlement in a personal injury case, and Medicaid asserted a lien against the settlement. The Supreme Court held that federal law prohibits recovery during the recipient's life, so the state cannot touch the settlement unless it is reimbursement for medical costs associated with the injury.
What can and can't be recovered depends on what your state permits. Federal law allows states to expand the definition of estate beyond the probate estate to real or personal property or other assets the recipient had title to or an interest in at the time of death. Fewer than half the states have adopted the expanded definition of estate. Even if your state doesn't currently have an expanded definition, Zumpano warned, "expanded recovery is coming to your state."
Recoverable Assets Still Limited
But even if your state has expanded the definition of estate, there are still only a limited number of assets that it can recover from, said Zumpano. If the community spouse dies first, Medicaid can recover only what the institutionalized spouse is entitled to under state law. If the community spouse survives the Medicaid spouse, then the state can generally only recover from assets in the spouse's estate that can be traced back to the Medicaid recipient's ownership at death. For example, say a husband and wife own a house jointly. The wife does not take the husband's name off the deed when he enters a nursing home. He dies in the nursing home and the wife dies several years later. Medicaid can recover against the house because it can trace the ownership to the husband at the time of his death. If the wife had removed his name when he entered the nursing home, then the state would not have been able to recover the house.
There are exceptions to this general rule, however. Wisconsin does not allow recovery from a community spouse, period. Iowa, Illinois, and Mississippi can recover from a community spouse, but only if the state follows the expanded definition of estate. Minnesota attempted to allow recovery from all joint assets owned during marriage, but the state’s high court struck down this provision. (See In re the Estate of Francis E. Barg (Minn., No. A05-2346, May 30, 2008.) North Dakota has a very expansive definition of what it can recover. It includes all assets transferred by the institutionalized spouse to the community spouse at any time during the marriage. Zumpano believes this definition conflicts with federal law, but it hasn't yet been challenged in court. According to Zumpano, attorneys "get scared and don't want to fight," but he argued that elder law attorneys shouldn't be afraid of litigation because taking the state to court can be a good form of marketing.
States can recover assets from third parties only to the extent of the Medicaid recipient's interest in the assets. Zumpano stressed the importance of knowing how your state treats jointly held property. For example, if your state is a "tenancy by the entireties" state, each owner owns 100 percent of the whole, so the state would not be able to recover from a surviving spouse. However in most states a joint tenant owns an undivided 50 percent interest in the whole. This means if the recipient jointly owned a $100,000 house with someone else, Medicaid could recover only $50,000, because that was the amount the recipient was entitled to. Similarly any life estate interest owned by the Medicaid recipient at death is recoverable after death.
What About Trusts and IRAs?
Whether the state can recover from a trust depends, in part, on whether the trust is revocable or irrevocable. If your state has adopted an expanded definition of estate, then a revocable trust can be recovered against. In some states, a revocable trust can even be pulled into the probate estate. In general, the state can't recover against an irrevocable trust, but there have been exceptions. In one case, a discretionary trust was invaded because it did not contain a spendthrift provision, so it was available to all general creditors. Zumpano explained that "Medicaid planning is asset protection planning," so the state's underlying asset protection laws will apply. As long as you follow state law regarding asset protection, you shouldn't have any problems.
Although the state can't recover from gifts to an irrevocable income-only trust, it can recover income from an income-only trust, including undistributed income. If the trust includes a general power of appointment, then the corpus would probably be recoverable. A limited power of appointment would not make the trust recoverable, asserted Zumpano, because the grantor would not be able to give the trust back to him- or herself.
Whether the state can recover from an individual retirement account (IRA) is an open question. While the face of the statute would imply that Medicaid can, Zumpano did not find any cases where a state has tried. He believes there is a strong argument that recovery from an IRA would conflict with federal tax law.
The most important thing to remember, according to Zumpano, is that "estate recovery does apply, but only in narrow situations." Attorneys should not be paralyzed by fear or by a possible bad outcome. "Medicaid planning is alive and well even with estate recovery," he reassured his listeners.
The sessions of the 2012 NAELA Annual Conference are available on a DVD that contains audio of the program sessions synched with presenters' PowerPoint presentations, along with links to handouts and materials and an MP3 of the audio portion. Contact naela@naela.org for more information.
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