Estate Recovery: The Sleeping Giant is Waking Up
It sounds like a riddle: What do Texans and Georgians have in common?
Before you start guessing things like the recipe for barbecue sauce or a particular dance step, back up to something very serious: both states have recently implemented estate recovery: September 1st for Texas and August 1st for Georgia.
Even though estate recovery was required by the budget bill of 1993 (OBRA - The Omnibus Budget Reconciliation Act of 1993), the states have been slow to adhere to this federal requirement. All have finally done so, with the exception of Michigan.
First, what is estate recovery and how can the federal government force states to comply?
The federal government requires states to recover payments made by Medicaid for individuals who were age 55 or older for nursing facility, related hospital and prescription drug services. States have the option of recovering payments for all other Medicaid services provided. To do so, the state files a claim against the estate of the deceased Medicaid recipient.
Many people don’t understand the Medicaid recovery rules for nursing home care because in their mind, the family member “paid” for the service. They think that because the Medicaid recipient’s income less certain allowable deductions must go to the nursing home, then Medicaid picks up the balance up to the Medicaid rate for that facility.
The director of the Tennessee estate recovery program said she finds it easier to call the patient liability portion a copayment, as families understand that word means the patient is only paying a portion of the bill.
States have a right to expand the definition of estate beyond that which is subject to probate, and according to a survey conducted by the North Carolina Department of Health and Human Services in 1997-1998, 14 of them do so. According to the survey, this means “a state can recover from real or personal property in which the individual immediately before death had any legal title or interest, to the extent of such interest”. This can include as in Massachusetts Senate Bill 2173, assets “that would pass to a survivor, heir or assignee of the decedent through joint tenancy, tenancy by the entirety, life estate, living trust, right of survivorship, beneficiary designation, or other arrangement.” (The Massachusetts legislature reversed this measure in July which means the state will remain limited to the probate estate for estate recovery; i.e. primarily the home. However, the great news is that Massachusetts exempts the home from estate recovery if the policyholder enters a nursing home with a long-term care insurance policy with a minimum daily benefit of $125 and a minimum two-year benefit period.)
A 1/24/00 letter from the federal governing body for Medicaid (now called The Centers for Medicare and Medicaid Services) to the California Dept. of Health Services clarified that “other arrangement” in the above definition can include Medicaid annuities if a state has adopted the expanded definition of estate for estate recovery. The letter cautions not to disturb an annuity income stream left to a surviving spouse and/or dependent child; otherwise recovery from annuities is appropriate. (A few states have simply said that a so-called Medicaid annuity must list the state as beneficiary, so the issue is dealt with at the time of Medicaid application and doesn’t require the estate recovery process to kick in.)
Estate recovery may or may not include liens. The state has a right to place a lien on property retained during Medicaid eligibility, but cannot enforce the lien until the death of the surviving spouse. For single people, the state has the right to require the home to be sold if it is determined the person cannot return home after six months.
In a recent case, Nevada filed a lien on the residence at the death of the Medicaid recipient. The surviving spouse contested the lien and lost, because the Nevada Supreme Court held that recovery does not mean the same thing as imposing a lien. (State of Nevada Department of Human Resources v. Estate of Ullmer, April 1, 2004)
However, the State must release its lien upon the property upon demand by a surviving spouse in the event of a bona fide sale or other financial transaction involving the home. In that event, the real estate closing couldn’t be completed without evidence that the lien had been transferred to the new residence, in the same manner as a small business loan recipient. For example, if the financial organization that holds an SBA loan has a lien upon a personal residence of the SBA loan recipient, which is so often true, that personal residence generally can’t be sold without the lien transferring to the new residence during the closing of the initial residence.
Per federal law, there are four situations that preclude a state from enforcing a lien upon the residence:
- a surviving spouse, even if not living in the home
- a child under age 21 or blind or disabled child of any age, even if not living in the home
- an adult child who lives in the home and lived in the home at least two years prior to the Medicaid recipient’s admission to the nursing home and provided care that postponed the nursing home admission
- a sibling who lives in the home if he or she lived in the home at least two years prior to the Medicaid recipient’s admission to the nursing home.
It can be difficult for a state to administer estate recovery utilizing the lien process as the state must first be notified of the death of the Medicaid recipient. It’s highly unlikely that a state has adequate staff to scan the obituaries on a daily basis. It’s also difficult to expect the regional Medicaid offices or other possible source such as the long-term care providers, banks or other financial institutions, attorneys, etc. to report deaths consistently to the estate recovery unit.
Tennessee solved the notification problem by passing an amendment in 2002 that simply says probate cannot be completed without a release form from the Tennessee Medicaid program. At probate, Tennessee will investigate estate recovery for jointly held assets in the amount of the ownership percentage of the Medicaid recipient. In the event of a sibling who lives in the residence, for example, Tennessee will not pursue recovery until the sibling dies. On the other hand, if an adult child is living in the residence, Tennessee will investigate to see if the adult child actually helped meet the needs of the parent in order to delay admission to a nursing home per the federal exemption.
States are required to have a hardship waiver process, which simply means that interested parties can appeal a state’s decision to pursue estate recovery. A 2001 amendment to the Medicaid regulations, however, says a state may conclude that hardship doesn’t exist “if the individual created the hardship by resorting to estate planning methods under which the individual illegally divested assets in order to avoid estate recovery”. [HCFA Pub. 45-3, Section 3810(C)(1), Transmittal 75, 1/11/01]. The Georgia regulation takes it one step further to include the person who would inherit the Medicaid recipient’s property by saying “undue hardship does not exist when the heir divests assets to qualify under the hardship provision.”
Here is a snapshot of the two newest estate recovery programs:
Georgia
How: the Medicaid agency files a claim against the estate at the death of the Medicaid recipient
Who: Medicaid recipients who at time of death were 55 or older for nursing facility services, personal care services, home and community-based services, and hospital and prescription drug services provided to individuals in nursing facilities OR Medicaid recipients of any age at time of death who were in a facility for the mentally retarded or other mental institution
Scope: Probate estate “property passing by reason of joint tenancy, right of survivorship, trust, annuity, homestead or any other arrangement,” plus excess funds from a burial trust, promissory notes, cash and personal property.
Liens: allowed on available real estate of the “permanently institutionalized” (six months or more)
Estate Minimum: $25,000
Implementation date: August 1, 2004 for services back to August 2001
Miscellaneous: If the executor gives away property without satisfying the Medicaid claim, the executor may be held personally liable for the amount that is owed Medicaid up to the value of the property which was in his or her control. Also, an estate does not have to be open in order for the Department to execute its claim after all exception conditions are no longer present (i.e. dependent child turns age 22 or the surviving spouse dies).
Texas
How: the Medicaid agency files a claim against the estate at the death of the Medicaid recipient; the state may use experienced contractors
Who: Medicaid recipients who at time of death were 55 or older for nursing facility services, and related hospital and prescription drug services (does not apply to home and community-based services or to Medicaid recipients in a facility for the mentally retarded or other mental institution)
Scope: Confined to probate estate (does not include insurance policy proceeds, retirement accounts, pension plans, bank or credit union acounts, mutual funds or deferred compensation plans)
Liens: not allowed
Estate Minimum: $50,000
Implementation date: Services for those who apply for Medicaid on or after the effective date of the program (expected September 1, 2004)
MIscellaneous: A hardship waiver exemption can be granted if the property is a family farm or ranch that is the primary source of income for heirs or if property is a family business and produces more than 50% of the livelihood for heirs, or if estate recovery would put the heirs on public assistance.
How can the Federal government force a state to adopt federal requirements like estate recovery? Simple. Medicaid is a Federal-state jointly funded program with the match determined by the average income in the state. Federal funding can be as small as 50% of the Medicaid budget for each state, but is more like two-thirds in many states. President Bush has recommended that the federal government provide a flat amount plus some initial incentives to the states and let the states run their Medicaid program, but right now the program is jointly funded with a federal framework for the states to abide by. If a state refuses to follow a federal provision, the federal government has the right to withdraw funding.
With few exceptions, the heavy hand of the federal government has not been necessary. The states have for the most part followed the rule simply because they can’t afford not to. Some, like Ohio, have even been aggressive. For a time, Ohio paid a private attorney a percentage of dollars recovered. Most states have followed the rule much more quietly. West Virginia, on the other hand, argued that complying with estate recovery or having Medicaid funds withdrawn is unconstitutional and a violation of the Tenth Amendment but lost in a federal appeals court.
Although less than 10 percent of Medicaid beneficiaries use long-term care services, long-term care accounts for about one-third of total Medicaid spending, $83 billion vs. $259 billion in fiscal year 2003 (source: MedStat, 5/24/04). In 2002, spending on the elderly accounted for about 57 percent of that spending, with the remaining 43 percent spent on those under 65. (Kaiser Foundation: Medicaid and LTC: 5/04)
Twenty-five states experienced Medicaid shortfalls in fiscal 2002 and 28 states in fiscal 2003. Thirty-seven states reduced their fiscal 2003 budget after it was enacted, and total reductions represented the largest spending cut since 1979. (Source: “The Fiscal Survey of States”, National Governors Association, 6/03)
So is it any wonder that the whole issue of estate recovery is not just heating up but is exploding in some states?
Typically fought by consumer advocacy groups, the tide has really turned when you see Texas Legal Aid advocating for estate recovery. “It was about time for Texas to do this . . . it will direct all money derived from this to long-term care,” said Austin lawyer Bruce Bowers, director of the Texas Legal Services Center.
What does all this mean to the senior advisor? It means the noose is tightening fast for those who don’t plan ahead and count on Medicaid to take care of their long-term care. It means Medicaid is now a loan, not an entitlement. It means long-term care insurance may be the only way a family can avoid the onerous process of estate recovery which is just going to become more proactive over time as the states continue to dig their way out of the proverbial sand in the ocean of long-term care.
Each advisor should know exactly what is going on in his or her state regarding estate recovery. Just by educating consumers, long-term care insurance becomes the obvious choice for most Americans.
Phyllis Shelton is author of Long-Term Care: Your Financial Planning Guide, Kensington Books, NYC, 2003 and President of LTC Consultants, a Tennessee-based firm that specializes in training, sales and marketing programs for long-term care insurance, now available through Emerald Publications in San Diego. She can be reached through www.ltcconsultants.com or 800-844-4893.
9/1/04
