Estate Recovery

by Jerrold Bartholomew

You have perhaps heard that Michigan passed a form of estate recovery in September of 2007, becoming the last state in the union to do so. Estate recovery is a program through which states attempt to recoup the costs of Medicaid long-term care benefits paid out from the estate of the Medicaid recipient. Although Michigan has passed the necessary legislation to begin estate recovery, it will not be until the program is reviewed and approved by CMS that estate recovery against real property is officially implemented.

What is subject to estate recovery? Many commentators say that only probate assets are subject to estate recovery, and conclude that one must only avoid probate in order to avoid estate recovery. But I believe this is misleading for a few reasons. First, annuities purchased or modified after February 6th, 2006 must name the state of Michigan as a remainder beneficiary to the extent of Medicaid benefits received. For all practical purposes, this is estate recovery on a non-probate asset. Second, many common techniques for avoiding probate of real estate can interfere with qualification for Medicaid. So to say that one must only avoid probate in order to avoid estate recovery is not accurate.

A home under $500,000.00 in equity is excluded for purposes of Medicaid qualification in Michigan. But the state can place a lien on the home for Medicaid benefits received if the house goes through the probate process. Some would therefore advise that the home be placed in a revocable living trust. This creates the problem that the home cannot be excluded if it is titled in the name of a trust. Put another way, the whole value of a home will be counted as an asset for purposes of determining asset eligibility if the home is titled in the name of a trust. This will obviously prevent one from qualifying for Medicaid, so a revocable living trust cannot help you avoid estate recovery on a home.

There are a variety of solutions to this apparent catch-22 because a home can be titled in a several different ways to avoid estate recovery. The trick is using the right form of ownership at the right time to protect the house, but at the same time avoid a penalty for transferring property without proper compensation.

Right now it is possible to title a home so that it will transfer without probate, avoid estate recovery, and not be considered a divested and subject to penalty. But there are several concerns here. First of all, it is important to understand that this only works under existing law. But Michigan’s estate recovery law is not yet finalized and subject to change. It remains to be seen whether the state will try to take other assets and it is possible that such changes could be retroactive.

The best way to protect the home is to start early and divest a portion of the property to your heirs. But this must be done carefully or the house can be out of the fire of Medicaid Estate Recovery and into the frying pan of higher property taxes and claims of your heirs’ creditors. It is really only appropriate to transfer the homestead as part of a comprehensive asset protection plan. But to be effective, it must be done in advance. Once a loved one is in a nursing home, there are still things that can be done under existing law, but it is not all clear how long that will continue to be the case.

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