Is Medicaid Going to Want Us to Pay Them Back?

Q. I recently heard a horror story on NPR about a woman whose mother had Lewy body dementia, and Medicaid paid for her care. When she died, the state sent the family a letter that they owed over $200,000 in recovery payments. I didn’t realize that Medicaid was similar to a loan that you had to pay back. Does this happen in every state, and how common is it? I’m asking because my husband is in the early stages of dementia, and we are deciding how to plan for his future long-term care needs. Thanks so much for your help!

A. Yes, what you described, called Medicaid Estate Recovery, does happen regularly in all 50 states and DC, and when families have not planned in advance to avoid this, the consequences can be disastrous. The good news is that with the help of an experienced Elder Law attorney in Virginia, Maryland, and in Washington, DC, this nightmare scenario can be avoided.

There are ways to avoid this situation, as I will explore later in this article.

In the situation that you described, Fran Ruhl, who resided in Iowa, was diagnosed with Lewy body dementia. Instead of nursing home care, her husband, Henry, and daughter Jen Coghlan, chose to care for her at home.

In 2014, the family sought the assistance of a case manager from the Area Agency on Aging, who suggested that they look into the state’s “Elderly Waiver” program to help pay for long-term care expenses, which are not covered by Medicare and Tricare, the military insurance Henry earned during his Iowa National Guard career. They filled out the paperwork and received care for Fran in their home for seven years until she passed away in 2022.

When Fran passed away, Henry and Jen were shocked to receive a notice in the mail from the Iowa Medicaid estate recovery program informing them that Fran’s estate owed more than $200,000 to Iowa’s Medicaid program as recovery for the long-term care that Medicaid had provided.

They Had No Idea That Medicaid Would Seek Reimbursement!

According to Coghlan, the paperwork did not clearly explain that the government might seek reimbursement for properly paid benefits. She described how some of the Medicaid money went to her for helping care for her mother and that she had paid income taxes on those wages. She explained how she likely would have declined to accept the money if she’d known the government would want it back after her mother died.

To pay back Medicaid, Coughlan may lose the modest house her family wanted to leave her. Since her mother was a joint owner, the state Medicaid program could claim half the value after her father’s death as part of the recovery efforts. For many, similar to the situation described, the family home is the most valuable asset, and heirs wind up selling it to pay the Medicaid bill.

Coughlan and her dad ultimately found some comfort in learning that the bill for Fran Ruhl’s Medicaid expenses will be deferred as long as her father is alive. He won’t be kicked out of his house, and he knows his wife’s half of their assets won’t add up to anything near the $226,611.35 the government says it spent on her care.

Iowa Medicaid Responds to Recovery Situations Similar to the One Described

Iowa Medicaid Director Elizabeth Matney says that in recent years the state added clearer notices about the estate recovery program on forms people fill out when they apply for coverage. She also stated that her agency has considered changes to the estate recovery program, and she would not object if the federal government limited the practice.

Iowa’s Medicaid estate collections topped $30 million in fiscal year 2022, but that represented a small percentage of the total Medicaid spending in Iowa, which is over $6 billion a year. And more than half the money recouped goes back to the federal government, she said.

Matney notes that families can apply for “hardship exemptions” to reduce or delay recovery of money from estates.

Does This Happen in Other States?

When it comes to Medicaid Estate Recovery, the federal government requires that all states and the District of Columbia pursue Medicaid Estate Recovery after the death of all Medicaid recipients who received Medicaid long-term care services and supports after age 55.

States also have the option to recover costs of all other Medicaid services (including Medicaid health insurance coverage) for people who are 55 or older. However, states have some discretion to decide whom to bill and what type of assets to target. Some states collect very little. For example, Hawaii’s Medicaid estate recovery program collected just $31,000 in 2019, according to a federal report.

States can limit their collection practices. For example, Massachusetts implemented changes in 2021 to exempt estates of $25,000 or less. Massachusetts also allows heirs to keep at least $50,000 of their inheritance if their incomes are less than 400 percent of the 2022 federal poverty level or about $54,000 for a single person. Prior to the changes, Massachusetts reported more than $83 million in Medicaid estate recoveries in 2019, more than any other state!

Some other states have tried to avoid the practice altogether. West Virginia sued the federal government in an attempt to overturn the requirement that it collect against Medicaid recipients’ estates. Unfortunately though, that challenge failed.

Estate Recovery in Virginia

Virginia state law provides for estate recovery in the Code of Virginia § 32.1-325 and the Virginia Administrative Code at 12VAC30-20-141. Special consideration may be shown when the estate is the sole income-producing asset of survivors such as a family farm, family business, or a homestead of modest value, and in some other circumstances. Also, there is no estate recovery if any of the following apply:

• There is a surviving spouse, and the surviving spouse has not been on Medicaid.
• The Medicaid recipient is survived by a child who is blind or disabled.
• The Medicaid recipient is survived by a child under age 21.

More information is available in this Virginia Medicaid Fact Sheet, but please know that these types of “fact sheets” are not always complete or accurate statements of the law.

Estate Recovery in Maryland

Maryland state law grants Medicaid the right to file a claim against the estate of a deceased Medicaid recipient for medical services it provided to the recipient, as long as the recipient was over 55 when receiving the care. Worse yet, Maryland is unique among our three local jurisdictions in that Maryland Medicaid can impose a lien on real estate owned by a Medicaid recipient while they are still alive. Also, similar to Virginia, there is no estate recovery if there is a surviving spouse, an unmarried child younger than 21, or a blind or totally disabled child. Estate recovery may also be waived in certain circumstances due to hardship. A hardship means Medicaid’s claim will result in the removal of a dependent who:

• lived in the property at the time of the Medicaid recipient’s death
• lived there continuously for a period of two years before the Medicaid recipient’s death and/or
• cannot find another place to live.

Read more in this Maryland Medicaid Fact Sheet, but please remember that these types of “fact sheets” are not always complete or accurate statements of the law.

Estate Recovery in Washington, DC

According to their Fact Sheet, “D.C. Medicaid must recover Medicaid payments from the estate of an individual who, at age 55 or older, received medical assistance for nursing facility, home and community based waiver (1915(c)) services, and related hospital care and prescription drugs.” The Fact Sheet also states that “(i)f the decedent’s family or representative submits information and documentation that establishes an undue hardship, DHCF may waive any enforcement of its claim. Sections 6703- 6704 of Title 29 of the D.C. Municipal Regulations state the standards for establishing an undue hardship and the application process” and describes the appeals process.

The National Effort to End Medicaid Estate Recovery Practices

Some potential good news is that there has recently been a national effort to end Medicaid Estate recovery practices. The 2021 federal advisory report urged Congress to bar states from collecting from families with meager assets and to let states opt out of the effort altogether.

U.S. Rep. Jan Schakowsky introduced a bill in 2022, H.R.6698 – Stop Unfair Medicaid Recoveries Act of 2022, which would end the programs. The Illinois Democrat says that many families are taken by surprise when it comes to Medicaid estate recovery notices. Similar to the Ruhl family in our example, loved ones may have qualified for Medicaid participation not realizing it would wind up costing their families later. “It’s really a devastating outcome in many cases,” she said. Schakowsky hopes the proposal can move ahead, since every member of Congress has constituents who could be affected: “I think this is the beginning of a very worthy and doable fight.”

Protecting Your Biggest Asset from Medicaid Estate Recovery

As you can see, after a Medicaid recipient dies, the state must attempt to recoup from the person’s estate whatever benefits it paid for in terms of the recipient’s care. For most Medicaid recipients, their house is the only asset available. There are many ways that we can avoid Medicaid estate recovery for our Level 4 clients. For many people, one of the best ways to protect the family home from estate recovery is Level 3 planning, where we transfer your home and other assets you want to protect into a properly-drafted irrevocable asset protection trust. Here are reasons to do so:

• Once the house is in an irrevocable trust, it cannot be taken out again.
• Although it can be sold, the proceeds must remain in the trust. This can protect more of the value of the house if it is sold, as the sale of the home while in a properly- drafted irrevocable trust allows the settlor, if the settlor had met the residency requirements, to exclude up to $250,000 in taxable gain ($500,000 for a married couple), an exclusion that would not be available if the owner had transferred the home outside of trust to a child or other third party before sale.
• If the house remains in a properly-drafted trust until death, then the beneficiaries of the trust will receive the house with a fully stepped-up basis for capital gains purposes, potentially saving hundreds of thousands of dollars in capital gains taxes when they eventually sell the house.

The Living Trust Plus® Protects the House

Irrevocable trusts can take on many forms and can be used to accomplish a variety of estate planning goals, but the most common goals of our clients are all accomplished by the Living Trust Plus®, as follows:

• The Living Trust Plus irrevocable asset protection trust protects your assets from probate PLUS lawsuits PLUS Veteran’s Aid and Attendance benefits for wartime veterans (after three years), PLUS Medicaid eligibility (after five years), PLUS Medicaid estate recovery, all while being completely tax neutral, thereby preserving the lifetime capital gains exclusion upon the sale of the home inside the trust and preserving the step-up in basis upon death.
• Even though the trust is irrevocable, the term “irrevocable” does not mean that the trust is set in stone and cannot be changed. On the contrary, if you establish a Living Trust Plus Asset Protection Trust, you can remain in control of the assets even though you are giving up ownership to the trust.
• Remaining in control means that you can change the trustees and change the beneficiary of the trust. Remaining in control also means, in most states, that you can serve as the trustee if you are still competent, which means that you can decide how the assets in the trust are invested, you can decide if and when to sell your family home, and you can decide whether and when to make distributions of trust financial assets from the trust to a named trust beneficiary (which cannot be you or your spouse) or to a charity of your choice, and you can decide the amount of any such distributions.
• The only power over the home that you give up is the ability to refinance a mortgage or take out a home equity loan with a traditional lender, as traditional lenders will not lend money to an irrevocable trust.

For many Americans over age 65, a Living Trust Plus® is the preferable form of estate planning because it includes asset protection for the person planning, and not just for that person’s children or other descendants. For purposes of Medicaid eligibility, this type of trust is the only type of self-settled asset protection trust that allows a settlor to retain control over the assets in the trust while also protecting the assets from being counted by Medicaid and by the Veterans Administration.

Whether you’re rich, poor, or somewhere in between, you cannot afford to ignore the potentially devastating costs of nursing home care and other types of long-term care, and you can’t ignore the potential that your house could be a target of Medicaid estate recovery.

If you’re a client or potential client who would like more information about the Living Trust Plus, please call our office to make an appointment for a no-cost introductory consultation:

Northern Virginia Medicaid Estate Recovery Planning: 703-691-1888
Fredericksburg, Virginia Medicaid Estate Recovery Planning: 540-479-1435
Rockville, MD Medicaid Estate Recovery Planning: 301-519-8041
Annapolis, MD Medicaid Estate Recovery Planning: 410-216-0703
Washington, DC Medicaid Estate Recovery Planning: 202-587-2797