The Center for Medicare and Medicaid Services (CMS) has apparently rejected Michigan’s proposed estate recovery program. Michigan’s proposed legislation was unique not only for being last in the union to be enacted, but also for being exceptionally lenient. It is therefore reasonable to assume that Michigan will be required to enact a more aggressive approach to estate recovery.

This issue has been appealed by the state of Michigan with a hearing set for January. There will be much more to say on this issue as it develops.

Estate recovery is a state program created to recoup the costs of providing care to Medicaid long-term care recipients. Once a Medicaid recipient passes away, the state uses a variety of legal processes to take the remaining assets of that Medicaid recipient to the extent of Medicaid benefits provided. The state’s ability to take assets is not unlimited and may be subject to a variety of allowances provided in other parts of the state law. For most people, the biggest worry regarding estate recovery is that the state will take the family home.

QUESTION: I am concerned about my parents. My dad just entered the nursing home. His care costs more $6,000.00 per month and my mother is almost out of savings. Does she have to sell the house (which is worth about $250,000.00) to pay for my dad’s care? And what about estate recovery? What is that?

ANSWER: Your mother does not have to sell the house and for now, it is safe as long as you follow the proper procedures to qualify for Medicaid. But there are still several concerns here.

First, most people needing nursing home care will end up receiving Medicaid assistance at some point. Many people make the mistake of thinking that they should just pay the nursing home each month without realizing that there are often estate planning options that can prevent the need for a full spend down. Seeing an elder law attorney during a nursing home spend down is a lot like seeing an accountant at tax time: there are a lot of deductions and exclusions that you would not otherwise know about that can cut your tax bill. An elder law attorney can help you minimize your nursing home bill in the same way.

With respect to your home, it is an exempt asset for purposes of Medicaid qualification. A nursing home patient in Michigan can own a home and still qualify for Medicaid. But there are exceptions to this rule and any non-homestead real estate would not be exempt.

Second, a house occupied by a nursing home patient’s spouse is not currently subject to estate recovery. Estate recovery is the process by which the state seeks reimbursement from a Medicaid recipient’s estate. Under current law, the state will not seek to recover costs against the home of a Medicaid recipient that is occupied by the recipient’s spouse. So that is not an immediate concern. But that law could change or it could be that the spouse living at home will have a dramatic change in health and perhaps need Medicaid assistance as well. At that point, the house would become subject to estate recovery and so it would make sense to begin planning for some of these potential problems now.

When one spouse requires long-term care in Michigan, the Department of Human Services will do an assessment of the couple’s total resources. Without any planning or asset positioning, the spouse at home will be permitted to keep 1/2 of the couple’s assets as of the date the spouse needing long-term care entered either the hospital or long-term care, with a maximum of $104,400.00 and a minimum of $20,880.00 (in 2008). For example, a marital estate valued at $100,000.00 in non-exempt assets will be limited to $50,000.00 that the at-home spouse can keep. The remainder will have to spent on long-term care or converted to exempt assets before Medicaid will provide assistance with the cost of long-term care.

One simple estate planning technique to overcome this problem is to place the marital home in a revocable living trust before any health problems arise. Instead of being excluded from the total value of the estate, under Michigan law, the equity value of the home held in a living trust will be counted as an asset. So a couple with $100,000.00 in the bank and a home in a trust worth $150,000.00 will be treated as though they have $250,000.00 in assets when the asset declaration is completed. This couple will therefore be entitled to keep the full $104,400.00.

There are several cautions to using this technique. First of all, the home must be returned to the name of a natural person (not the trust) before applying for Medicaid. Failure to do so promptly can have horrific consequences. Second, relying on this technique can leave the home exposed to estate recovery. A more comprehensive asset protection plan is necessary well in advance of disability to be certain to avoid estate recovery. Third, this technique will not help with a home valued at more than $500,000.00. A variety of different asset protection techniques can be utilized in those circumstances. But for a married couple hoping to secure assets through retirement, placing a home in a revocable living trust can be quite helpful.

Estate Planning often involves transfer of real property. Care must be taken to avoid incurring unnecessary property taxes as an asset protection plan is carried out.

One of the biggest obstacles to overcome is the so-called uncapping of property taxes. In Michigan, property taxes can only increase by a fixed percentage each year, regardless of the increase in fair market value of the real estate so long as the real estate is owned by the same person or joint owners. For those who have held real property for a long time, this rule has helped to keep their property taxes down.

When real property is transferred to another person, such as through a sale or a gift, the property tax values will generally be reset at the fair market value of the real estate at the time of the transfer. Knowing the exceptions to these rules and how to retain sufficient interest in the property by the grantor can be critical to obtaining the best possible asset protection result without incurring additional property taxes.

One example of how an uncapping of property taxes can be avoided is through the creation of joint tenancy. Under MCL 211.27a (h), the creation of a joint tenancy does not create an uncapping under most circumstances:

A transfer creating or terminating a joint tenancy between 2 or more persons if at least 1 of the persons was an original owner of the property before the joint tenancy was initially created and, if the property is held as a joint tenancy at the time of conveyance, at least 1 of the persons was a joint tenant when the joint tenancy was initially created and that person has remained a joint tenant since the joint tenancy was initially created. A joint owner at the time of the last transfer of ownership of the property is an original owner of the property. For purposes of this subdivision, a person is an original owner of property owned by that person’s spouse.

One way of reading this paragraph would allow for avoiding the uncapping of property taxes indefinitely. If Annie and Barrie own property that they transfer to Charlie by creating a joint tenancy, no uncapping results. Furthermore, if Annie, Barrie and Charlie convey to Annie, Barrie, Charlie and Danny as joint tenants, one could argue that Charlie is an “original owner” for purposes of MCL 211.27a(h) and that at the passing of Annie and Barrie, Charlie and Danny will continue to pay property taxes at the “capped” rate, i.e., without regard to the fully appreciated value of the property. So what prevents Charlie and Danny from conveying the property to Eve as joint tenants and continuing to avoid the uncapping of property taxes?

This technique is one example of how a careful understanding of Michigan’s property tax law can result in significant savings and maximize the value of an asset protection plan.

Before the Deficit Reduction Act was signed in February of 2006, it was relatively easy for an elder law attorney or a well-informed layperson to set aside money to pay for the upkeep of a nursing home patient’s homestead. A simple contract could be created and assets transferred to a responsible relative who would pay for the utilities, taxes, insurance and maintenance of the nursing home patient’s home. It also used to be possible to gift a significant amount of money each month. Therefore one could simply give assets to another to keep up the home. These techniques were necessary because a person in a nursing home can generally have only $2,000.00 in cash or equivalent non-exempt assets and all but a small portion of income will go to the cost of care. Since such a small amount of money is dwarfed by property taxes alone, the policy allowing money to be set aside for homestead maintenance made sense for several reasons.

First of all, some people do return home, even after long stays in a nursing home. Second, there are significant tax benefits to waiting until one’s passing to transfer a homestead to a relative. But with the possibility of tax foreclosure or dissipation through neglect, a sale or significant financial hardship is difficult to avoid with the owner in a nursing home. Moreover, Medicaid policy considers the transfer of a homestead a divestment subject to penalty in most cases. Third, the sale of home in financial distress is a loss to an effected family, particularly in today’s troubled real estate market.

Today the rules are more complex and the preservation of a home requires careful planning and proper asset allocation. For reasons known only to Washington and Lansing, a nursing home patient’s homestead is gravely threatened even while the nursing home patient is alive.

There are basically two ways to handle this situation: one is an asset protection pre-plan. That obviously is not an option for everyone, but for anyone at or near retirement age, this should be a consideration. The second is an advanced crisis plan. By these means, a portion of assets can be preserved to pay property taxes and utilities on the nursing home patient’s home.