Medicaid Might Make You Pay Them Back Mom's Nursing Home Costs

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Here's a typical scenario I've seen play out: You've met with your elder law attorney, you've come up with a plan of action, time has gone by, and your parent has entered the nursing home, with Medicaid paying the full cost. Your family members have managed to preserve virtually all of their assets through careful planning, so you feel that the lawyer's fee was well worth it!

A number of years go by and your parent has now passed on to a better place, but before you've finished grieving you get a letter from the state Medicaid Recovery Unit requesting repayment of every dime they paid out on your parent's behalf! You're depressed, angry, confused. You stare at the paper and can't believe it. "I thought we were all set, that once Mom was on Medicaid we didn't have to worry about that any more….Can this be correct?" you ask your siblings.

Unfortunately, the answer is "Yes." What you have just been confronted with is something called Medicaid "estate recovery." Essentially, it requires repayment of the entire amount of Medicaid benefits that were made during your family member's stay in the nursing home.

Prior to 1993, such estate recovery was optional—a state could implement it or not. However, in that year a new federal law was passed (known as OBRA '93) that mandated that every state must seek estate recovery from its Medicaid-receiving residents, following their deaths.

In essence, while you thought you had qualified your family member for a government handout, all you've really received is an interest-free loan. And upon your family's member's death, the state wants its loan paid back.

Now if you're sharp, you may be thinking "Wait a minute…if someone qualifies for Medicaid, they have to be essentially broke. So where exactly is this money coming from to repay the state?" That's a good question, and the good news is that if your family member died owning nothing, then indeed the state is out of luck. It can't go after the kids' money. There must be some assets that the nursing home resident had a legal interest in, at the time of death, in order for the state to be repaid.

In many states, the only "legal interest" of a deceased Medicaid recipient that is taken into consideration is the individual's so-called "probate estate." That's an asset that was titled in the sole name of the individual, or as a "tenant in common" if jointly owned. It's the assets that will pass under a person's will. For example, something like a joint bank account, stock owned in "TOD" (transfer on death) form, a bank account with a "POD" (pay on death) beneficiary, an annuity interest, and real estate that's titled as "JTWROS" or "joint tenants with right of survivorship," are all non-probate assets and therefore protected against the state's claim for reimbursement.

A number of other states, however, have passed laws that permit recovery against an "expanded definition of estate." The federal Medicaid laws permit this. Under such an expanded definition "estate" could now include joint property, life estates, living trusts, and any other asset in which the deceased nursing home resident had any legal interest at the time of death. This even goes against hundreds of years of common law, but it is legal, and there have been a number of court cases that have backed this up.

Now if you live in one of the "probate estate only" states, you should feel lucky, but remember that at any time your state can revise its laws and go with the broader definition. And your family member will not be "grandfathered in" if he or she received Medicaid benefits before the change in law in your state; there have been court cases that have ruled on this, stating that it's the law in effect as of the date of death of the Medicaid recipient that counts.

Well, what should you do to plan for this, assuming you can do anything at all? And are there exceptions to this harsh rule?

Merely qualifying for Medicaid is not enough if upon your death your family will have to pay back the state every dime of benefits it paid out on your behalf during your lifetime. There must be some planning techniques you can implement, right? Some "secrets" to avoid that harsh rule? Let's take a look at a few…

First of all, in states where recovery of benefits paid is only made by a claim against your probate estate, all you need be sure of is that the Medicaid recipient has no probate estate at death. Thus, the recipient should only own assets in POD, TOD, joint ownership with right of survivorship, annuity, etc., form. This is similar to those avoid probate techniques, except that you cannot use a living trust: any asset titled in the name of a living trust will be a countable asset for Medicaid purposes, even if it's ordinarily non-countable were it not in the trust.

For example, you can title an automobile in joint names with a child. So the car would be titled as "Mary Smith and John Smith, JTWROS." John is Mary's son, and upon Mary's death, sole title to the car passes automatically to him outside of probate. "JTWROS" stands for "joint tenants with right of survivorship." (Be sure to check your state's motor vehicle titling rules to be sure this will work in your state!) Since one car of any value is exempt during Mary's lifetime, it's protected during her life and escapes estate recovery on her death.

The same approach can even be taken for her house. Since a Medicaid recipient's house is normally exempt during lifetime (for an unmarried person, up to between $500,000 and $750,000 of equity value, depending on the state), it's only at the recipient's death that there's a problem. So to avoid the house being included in the parent's probate estate, once again you can title the house as JTRWOS. CAUTION: Adding another person's name to the deed is a gift of an interest in the house, effective upon the date of the deed. Thus, when Mary has her attorney add her son John's name to the deed, she has just made a gift of 50 percent of the house to him. Although gift tax is rarely an issue, it should be considered. More importantly, though, is that this is a Medicaid-disqualifying transfer, with a large penalty attached. If Mary wants to go this route, she may be unable to apply for Medicaid for five years after she signs the deed.

Also, what if John is sued or divorced? Mary may still think of the entire house as "hers," but the creditor or divorcing spouse will view that 50 percent interest in the house as an asset of John's, and it could be subject to attack. Mary may find herself out on the street if the house has to be sold to satisfy the judgment or divorce settlement.

Some states permit adding another person to the deed by giving them less than 50%, which could reduce the amount of the gift, but that is something only your attorney can determine for you. Sometimes what the rule is for real estate law differs from the rule for Medicaid purposes. So, a word to the wise: be sure that the attorney who is doing the new deed for you is up-to-date on the effect that will have on your Medicaid eligibility!

It's not enough to qualify for Medicaid unless you also plan for the possibility of "estate recovery." That's when the state presents a bill to the estate of the person who had been receiving Medicaid, for all Medicaid payments it made on behalf of the Medicaid recipient, following that person's death. There are some exceptions, however, that prevent such recovery. Let's take a look at a few of these.

If you were under age 55 at the time you received Medicaid benefits other than nursing home care, then you will be exempt from estate recovery.

If you are survived by a spouse, a child under age 21, or a blind or totally and permanently disabled dependent, you will also be exempt from estate recovery. Technically, the federal law states that recovery can be made "only after the death of the individual's surviving spouse." So if, for example, the surviving spouse dies a month after the Medicaid recipient spouse, a state could file a claim for recovery at that time. Many states, however, have taken a more liberal reading of this, and so long as there is a surviving spouse, no recovery will be made, no matter how long or short the surviving spouse lives. Once again, you'll need to check your state's own laws to find out which rule applies to your situation.

Notwithstanding the above, even in a state where recovery may be made after the surviving spouse's death, there typically is an additional limitation that applies to all claims against an estate: all states have a statute of limitations that bars claims against an estate that are made more than a certain number of months after the death. In many states, that limit is one year. So, in a state with this rule, if the surviving spouse dies more than a year after the Medicaid recipient spouse, it will be too late for the state to file its claim for estate recovery.

If a state can only file a claim when there is no child under 21, can they wait until the child attains age 21 and then file their recovery claim? Once again, this must happen within the statute of limitations period, assuming there's not a blanket exemption if there's a surviving child under age 21, period.

There will be no recovery made against the exempt home of the Medicaid recipient (i.e., it will not have to be sold to pay back the state) in either of these two scenarios:

  1. A sibling of the Medicaid recipient was living in the house for at least one year immediately prior to the date the recipient was admitted to the nursing home and who has continuously lived in the house since then
  2. There is a son or daughter (of any age) of the Medicaid recipient who was living in the house for at least two years immediately prior to the date the recipient was admitted to the nursing home, who has continuously lived in the house since then, and who provided care to the Medicaid recipient prior to his or her entering the nursing home which permitted the recipient to delay entering the nursing home.

If all else fails, there's an exemption against estate recovery if such recovery would work an undue hardship on the surviving family members. One example would be where the exempt asset is a working farm, and a forced sale of that farm would throw surviving family members out of work.

K. Gabriel Heiser is an attorney with over 25 years of experience in elder law and estate planning. He is the author of "How to Protect Your Family's Assets from Devastating Nursing Home Costs: Medicaid Secrets," an annually updated practical guide for the layperson.

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87 Comments

Medicaid told us that a spouse cannot disinherit the wife, even thou they are living in a nursing home. (hmm wonder why you make a will) Legally the spouse gets half of the estate. I live in NJ, and we had a very good lawyer that we used for this. It took medicaid 2 years to get there act together to find out that we sold this house. All they saw was $ 200,000 dollars. They did not see that it had a home equity loan out on it for 3/4 of that amount. Luckily when dad was alive he took out this loan and gave a large portion of that money to his family. So this way the government could not touch it.
Gramshelper, Medicaid is not interested in "taking" houses. They want to see the proceeds of a house sale used for the care of the Medicaid recipient. So if you buy the house Gram will probably be expected to use the money to pay for her nursing home costs and other things she needs, until that money is gone, and then she'd be eligible for Medicaid again.

There is another possibility here. Did you living with Gram prevent her from going to the Nursing Home earlier? Are paying for the upkeep, taxes, etc. now? You MIGHT be eligible to inherit the house or to have it gifted to you.

Before you proceed with the purchase, I urge you to consult a lawyer who specializes in Elder Law. Spending a few hundred dollars for professional advice now can save you and Gram lots of headaches down the road!
Great article but wondering about estate recovery of a home and financial assets that are gifted to a disabled child while that child is disabled but who later loses disability status. Is the gifting still permanent and safe from estate recovery?