Medicaid Liens and Estate Recoveries
What are Medicaid liens and estate recoveries?
Federal law encourages states to seek reimbursement from Medicaid recipients for Medicaid payments made on their behalf. There are two types of cost-recovery actions against the assets of Medicaid recipients: (1) real or personal property liens, and (2) recovery from decedent’s estate.
A Medicaid lien is a form of attachment against your property that signifies that someone else has certain rights or interests in your property. A lien makes it impossible for you to sell or refinance your property without the state’s knowledge and opportunity to collect. While federal law allows a lien to be placed on your home at the time you become a permanent resident of a nursing home, not all states have adopted such provisions.
Along with the use of lifetime liens, your state may be able to seek reimbursement from your estate after you die. For Medicaid purposes, the word “estate” has traditionally been construed as your probate estate; that is, property which passes under your will, not by beneficiary designation or operation of law. Therefore, assets held jointly with other people, assets held in trust, and assets held subject to a life estate, for example, would escape a Medicaid lien (because they were not part of your probate estate). Since 1993, however, states have had the option to expand the definition of estate to include all nonprobate assets as well (to the extent of your legal interest in such assets at the moment before your death). Thus, nonprobate assets may not be completely sheltered in certain states.
When may a lifetime lien be imposed?
If you’re a Medicaid recipient, your state can (at its option) attach a lien to your real or personal property (while you’re alive) in certain limited situations:
- If a court judgment has proclaimed that Medicaid benefits were paid to you incorrectly; or
- If, after notice and a hearing, the state has determined that you cannot reasonably be expected to be discharged from your nursing home (or other institution). In this case, however, the state may impose a lien on your real property only.
Despite the foregoing rules, no lien may be imposed on your real property while you’re alive if any of the following people is lawfully residing in your home:
- Your spouse
- Your child under age 21 (or your blind or permanently and totally disabled child of any age)
- Your sibling who has resided in the home for a period of one year immediately preceding your date of institutionalization
Caution: If you’re a Medicaid recipient living in a nursing home and there is a sale of your house during your lifetime, the state can immediately recover its benefits out of the sale proceeds (assuming there’s a lien on the house). However, recovery is limited to that portion of the proceeds attributable to your ownership share. Therefore, if you hold title to the home jointly with your daughter, the state would be entitled to recover only one-half of the proceeds at the time of the sale.
In some states, the purchase of an older “qualified” long-term care insurance policy (i.e., purchased prior to OBRA ’93) will protect the house from the imposition of a Medicaid lien when you become eligible for Medicaid benefits. Thus, some people were able to purchase the minimum coverage necessary to qualify for this protection against the Medicaid lien.
When may an estate recovery occur?
After you die, the state is able to seek reimbursement from your estate, bearing in mind that estate could mean simply your probate estate or could have an expanded definition. Call your state Medicaid office if you are unclear about the treatment and standard practice in your state.
The state cannot enforce a lien or attempt estate recovery procedures until after the death of your surviving spouse (if any) and only if you have no surviving children under age 21 (or blind or permanently and totally disabled children). In addition, if a lien on your house already exists, no estate recovery may be made while any one of the following individuals is lawfully residing in your home:
- Your sibling who was residing in the home for a period of one year immediately preceding the date of your institutionalization; or
- Your son or daughter who was residing in the home for a period of at least two years before the date of institutionalization and who provided care to you during that period such that your institutionalization was prevented.
Example(s): George was a Medicaid recipient who died at age 80 in a nursing home. The state had paid a total of $200,000 in Medicaid benefits on his behalf. George owned a house jointly with his wife, Martha, and Martha continues to reside there. However, George’s state has adopted an expanded definition of estate, which includes jointly owned property.
Example(s): When George died, the state placed a lien on the family house. The state cannot force a sale of the house while Martha is alive, but when she dies, the state can force a sale of the home and apply one-half of the proceeds toward its recovery of the $200,000 Medicaid benefits it paid to George. Also, the state can collect immediately if Martha decides to sell or refinance the house at any time.
Caution: Your assets and funds that are exempt for purposes of determining Medicaid eligibility are not exempt from recovery proceedings. Exempt assets are those that do not affect your eligibility for Medicaid. Each state composes a list of exempt assets, which may include such items as one automobile and household furnishings. Therefore, the state can require the sale of any personal property of the estate to satisfy the Medicaid claim.
Example(s): Assume George is a Medicaid recipient who dies while living in a nursing home. George owns one automobile (which his family used to visit him), a gold necklace and an expensive watch. After his death, the state is entitled to force a sale of the car and personal effects in order to recover part of the Medicaid benefits paid on George’s behalf over the years.
Tip: In states that have long-term care partnership programs, full estate recovery will not apply to individuals who purchase long-term care policies under the program, then qualify for Medicaid once their long-term care benefits run out.
Tip: A significant limit on the state’s power to go after assets is that it can only go after assets in your name at death, not assets in your spouse’s name. Also, as mentioned before, the state can only go after nonprobate assets to the extent of your legal interest in such assets at the time of your death. Therefore, if you transfer assets into an irrevocable income-only trust, retaining only the right to receive income from the trust, then the state would be entitled to collect only the present value of your income interest at the moment of your death. If you own a piece of property jointly with someone else, the state (if it adopts the expanded definition of estate) will be able to reach one-half the value of the property.
How can I avoid liens and estate recoveries?
First of all, it’s useful to summarize the rules:
- The state cannot place a lifetime lien on your property while certain people reside there, such as your spouse
- Any property in your probate estate can be reachable by the state to recover Medicaid benefits
- If you have probate assets and you leave a surviving spouse (or the applicable categories of children), the state may file a lien against the property in your probate estate but cannot recover any money immediately
- Property that passes outside of probate, on the other hand, will not be reachable by the state unless the state has adopted the expanded definition of estate
- If the state has adopted the expanded definition of estate, then the state may recover against your nonprobate assets, but only to the extent of your legal share of that property
Since there is clearly an advantage to avoiding probate, you should plan accordingly before you need to enter a nursing home. You can avoid probate by using such tools as joint tenancy (i.e., joint ownership with rights of survivorship), irrevocable trusts, and gifts of property with a reserved life estate. A life estate is a planning tool that enables you to transfer ownership of your house while still giving you the right to live there during your lifetime.
Example(s): Ronald transfers his home to his two children, Nancy and Pattie, reserving a life estate for himself. At the time of the transfer, Ronald’s life estate is worth 48 percent of the value of the home. Ten years later, after Ronald dies in a nursing home as a Medicaid recipient, the state seeks to recover from his estate. At his death, however, Ronald’s life estate is worth only 30 percent of the value of the home. Consequently, that’s all the state can collect.
Of course, if you anticipate entering a nursing home soon and don’t have time to engage in sophisticated planning, you should consider transferring your home to your healthy spouse’s name alone. The healthy spouse can then create a will, naming the children (or anyone other than the institutionalized spouse) as beneficiaries.
Caution: The Deficit Reduction Act of 2005 placed a restriction the use of life estates as a Medicaid planning tool. Life estates are still allowed, but the individual transferring a home using a life estate must live in the home for at least one year after the transfer to avoid a transfer penalty.
Tip: There are hardship exceptions to the estate recovery rules. Undue hardship might exist, for example, when the estate subject to recovery is the sole income-producing asset of the survivors and the income is limited (e.g., a family farm or other business). States must develop hardship exception criteria but may conclude that undue hardship does not exist if a Medicaid applicant created the hardship by resorting to estate planning methods to divest assets in order to avoid estate recovery. It is important, therefore, to know your state’s policy regarding hardship exceptions.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
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