The specter of Medicaid estate recovery causes fear for many who are considering the consequences of gifting to qualify for Medical Assistance. However, the speakers at the recent National Academy of Elder Law Attorneys’ (NAELA) 2012 Annual Conference in Seattle, Washington reminded the attendees that through proper Elder Law planning, assets can be protected from nursing home spending and estate recovery.

One of the speakers 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. As a result, all states, including Pennsylvania, have an estate recovery program.

The biggest issue surrounding Medicaid estate recovery is federal preemption. Recovery at the state level can’t be more expansive than federal law allows. Each state defines the term “estate” differently when considering what is eligible for recovery.

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 each individual 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.

The Pennsylvania Department of Public Welfare (PA DPW) only seeks re-payment from a decedent’s probate estate. Therefore, assets with joint ownership or beneficiary designations will be able to avoid estate recovery if the existence of those assets, if known, were properly disclosed to DPW upon application for Medicaid.

What About Trusts?

Whether the Pennsylvania DPW can recover from a trust depends, in part, on whether the trust is revocable or irrevocable. In Pennsylvania, a revocable trust cannot be recovered against, but it is likely the assets in the trust would have been spent on the decedent’s care during lifetime.
In general, the state can’t recover against a properly drafted 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. As discussed in other articles, Medicaid planning is asset protection planning and we depend on the state’s underlying asset protection laws for direction. As long as the irrevocable trust is properly drafted under Pennsylvania state law regarding asset protection, the assets should be safe.
Check out another recent article I have written on a great option when using the Medicaid Asset Protection Trust.

Although the Pennsylvania DPW can’t recover the principal amount of gifts to an irrevocable income-only trust, it can recover income from an income-only trust, including undistributed income. BE CAREFUL!! If the trust includes a general power of appointment, then the remainder of an irrevocable trust would probably be recoverable. However, a limited power of appointment would not make the trust recoverable because the grantor would not be able to give the trust back to him- or herself or to his or her estate.

How About IRA’s?
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 make recovery from an IRA, the speaker said he had not located any cases in which a state has tried. He believes there is a strong argument that recovery from an IRA would conflict with federal tax law. That being said, IRA’s with beneficiaries designated are non-probate assets and therefore are not subject to estate recovery on Pennsylvania.

The most important thing for you to remember is that “estate recovery” does apply, but only in a very small number of cases. You, your family and loved ones should not be paralyzed by fear or by a possible bad outcome. Medicaid planning is alive and well even with estate recovery. Proper planning done well in advance will pass the test.

To review your case in detail, please call Douglas L. Kaune, Esquire at 610-933-8069. Please also sign up to receive our most recent free reports by clicking here.
Read my other article on estate recovery in PA by clicking here.