Inside Track: Divestment, Estate Recovery Provisions Will Impact Family Transfers:

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  • Divestment, Estate Recovery Provisions Will Impact Family Transfers

    Changes to Wisconsin’s public assistance laws that were included in the 2013-15 biennial budget create severe consequences for the elderly and disabled, as well as family businesses and farms, according to Wauwatosa lawyer Carol Wessels.

    Carol J. Wessels

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    elderly farmer and wifeSept. 4, 2013 – The state budget bill, 2013 Wisconsin Act 20, dramatically expands the state’s power to recover the costs of long-term care from elderly and disabled individuals who receive public assistance benefits in the form of Medicaid.

    This expansion places significant financial burdens on elderly individuals who receive long-term care through Medicaid. And the burden does not end upon death.

    These provisions, which clearly violate federal law, also subject the families of Medicaid recipients to these “recovery” provisions. In essence, the state will follow property transferred by a Medicaid recipient or spouse and “claim” it to recover Medicaid costs.

    This article explains some of the major provisions and the practical implications, while noting that the implementation date of these provisions is currently unknown. Other changes not included in this article affect pooled trusts, and the role of trustees.

    State’s Power of Recovery

    Medicaid is the long-term program that provides coverage when an individual needs care in a nursing home facility. Family Care, also a Medicaid program, provides similar coverage for the disabled or elderly who remain at home or in assisted living facilities.

    Carol Wesselscom cwessels niwlaw Carol Wessels (U.W. Law School 1988) is a shareholder at Nelson Irvings & Wessels S.C., Wauwatosa. She practices elder law, concentrating on the legal needs of senior citizens and disabled persons. Wessels can be reached at (414) 777-0220 or by com cwessels niwlaw email.

    In order to qualify for long-term care under Medicaid, income and asset limits apply. In other words, individuals with too many assets or too much income are not eligible. However, some assets are exempt from that determination under federal law.

    After a Medicaid recipient dies, the state can make “claims” against the estates of Medicaid recipients to recover money paid out in the form of Medicaid benefits, including liens against the homes of Medicaid recipients that are eventually sold.

    Under Act 20, the state expands the types of property subject to Medicaid estate recovery “claims,” makes it possible for the state to pursue recovery claims against the estates of surviving spouses, and restricts and complicates property transfers.

    In addition, provisions within Act 20 may prevent families from transferring family businesses or farms, if the original owner needs long-term care through Medicaid.

    The Impact on Family Farms and Family Businesses

    Act 20 changes “divestment” laws in Wisconsin. Divestment involves the gifting of assets, or the selling of assets at less than fair market value, to qualify for Medicaid.

    If a person “divests” assets within five years of applying for Medicaid, the person will be ineligible for Medicaid benefits for a period of time, which is based on the amount divested. There are exceptions. For instance, spouses can gift anything to each other.

    In addition, some assets that are exempted from the Medicaid eligibility determinations are also not counted for purposes of divestment penalties, under federal law. Thus, the transfer of certain assets would not subject the individual to divestment penalties.

    The home is not part of this exception, even though it is excluded for purposes of eligibility. Some of the assets that would fall into this exception under federal law are vehicles, small life insurance policies, household furnishings, or business assets.

    Under federal law, possibly the most significant assets that are excluded in determining Medicaid eligibility, besides the home, are assets used in a trade or business, and assets that generate income. This exclusion has allowed individuals who own farms or businesses to receive Medicaid without having to lose the family farm or business.

    And after qualifying for Medicaid, these individuals were able to transfer the business or farming operation without incurring a penalty for divestment. This allowed families to pass along the family farm or business to the next generation without losing Medicaid.

    Act 20 changes that. If a farmer or business owner needs Medicaid, they can qualify while still owning the business. But if they want to transfer the business or farm to their children to keep the family business going, the children must pay full market value.

    Specifically, under Wis. Stat. section 49.453(2)(a), a Medicaid recipient who transfers assets for less than fair market value becomes ineligible for Medicaid, regardless of whether those assets are excluded from the eligibility determination under federal law. Also, any loan between parents and children is presumed to be a divestment.

    For business owners who need Medicaid, this may force a sale to individuals or entities outside the family, because most adult children working in a family business lack the resources to pay full fair market value, and to pay it essentially in cash.

    On the other hand, if the Medicaid recipient keeps the business in his or her name, the state can “claim” business assets upon death.

    Undoubtedly, this law will be challenged in court if it is ever enforced, because it clearly violates federal law, which specifically removes “excluded” resources such as family businesses from the divestment penalties that the new law seeks to impose.

    Until then, it is bound to create high levels of uncertainty in family business succession planning. Typically, family business succession plans involve annually transferring a small percentage of business ownership to the children involved in the business. This allows the parents to remain active in the business while transferring it over time.

    Now, a plan already in place may have to be halted if the parent-owner has a stroke and needs Medicaid, since continuing that plan would create a divestment penalty. Likewise, families who execute a plan like this in the future will face an unintended consequence of divestment for the transfers that have taken place before the parent needs Medicaid.

    And because the law prevents parents from loaning money to children, there is no way this problem could be fixed with a loan from parents to children that allowed them to pay over time, even for full market value.

    Estate Recovery Expansion

    Prior to Act 20, the Wisconsin Department of Health Services (DHS) had the power to file claims against the estates of Medicaid recipients for home-based or community-based medical assistance or for long-term institutional care.

    Under Act 20, DHS can also file claims against the estates of a “nonrecipient surviving spouse,”1 meaning the state’s recovery power lives on after the Medicaid recipient dies.

    In addition, Act 20 expands the types of property that can be “recovered,”2 attaching to property transfers by “community spouses” who still live independently.

    That is, DHS may recover all real and personal property to which the Medicaid recipient (or surviving spouse) held any legal title or interest immediately before death, including assets transferred to a survivor, heir, or assignee through joint tenancy, tenancy in common, survivorship, life estate, living trust, or any other arrangement.3

    In addition, recoverable property includes property in which a surviving spouse had an ownership interest at the Medicaid recipient’s death – if the recipient had a marital property interest in the property within five years of applying for benefits.4

    Act 20 also creates a notice process that allows the state to record documents related to any real estate that a person receiving Medicaid owns. Property cannot be transferred validly unless the state issues a certificate of clearance.

    In time, real estate professionals will become wary of the traps created by this notice law, and may steer prospective buyers away from a property with a recorded notice.

    What Estate Recovery Expansion Means for Wisconsinites

    Historically, when one spouse needed and qualified for Medicaid, the remaining assets were allocated to the spouse still in the community. The “community spouse” could then do whatever he or she felt was appropriate with those assets. The community spouse was also free to leave any remaining assets to family members or other beneficiaries.

    Act 20 changes this dynamic. It restricts the community spouse’s ability to do what he or she feels is appropriate with the resources allocated to him or her, during the first five years after the spouse in the nursing home qualifies for Medicaid.

    The new law says that for five years after the institutionalized spouse qualifies for Medicaid, anything that the community spouse gives away, or loans to family members, will cause the institutionalized spouse to be temporarily disqualified for Medicaid.

    The new law also allows the state to make a claim against the community spouse’s estate after the institutionalized spouse is dead, to recover the money paid on behalf of the institutionalized spouse. This severely reduces or eliminates the community spouse’s ability to leave anything for the family. And the new law presumes that anything the community spouse owns at death is considered marital property of the institutionalized spouse and subject to estate recovery.

    So, if the community spouse has continued to work after the institutionalized spouse qualifies for Medicaid, and has managed to save some funds to replenish what had to be spent down, the state presumes it can reach out and snatch that money in probate.

    The practical effect is that families will have to go through probate more often in cases where probate is unnecessary, simply to clarify what marital interests a Medicaid spouse had when he or she died, in order to rebut the presumption that the state gets it.

    In addition, the state’s attempt to wrap in all property that the Medicaid recipient owned five years prior to the time of application is clearly against the limitations of federal law, which confines recovery to those assets the recipient had “at the time of death.”

    Finally, there is much higher likelihood that older couples could get divorces to protect at least some assets because of these laws, and could opt not to marry when they are in relationships where either individual has children from prior relationships.

    Effective Date and Implementation Leaves Confusion

    While the effective date of the estate recovery and divestment provisions is Oct. 1, 2013, and the online statutes have been updated to reflect changes under Act 20, a last-minute amendment creates a delay in the enforcement of these provisions.

    DHS must submit one or more proposals to the Legislature’s Joint Committee on Finance requesting approval of implementation of the estate recovery and divestment provisions by June 30, 2015. Lawyers should stay tuned for further developments.

    Endnotes

    1 Wis. Stat. § 49.496(3)(a).

    2 Wis. Stat. § 49.496(3)(a).

    3 Wis. Stat. § 46.27(7g)(a)1m.

    4 Wis. Stat. § 46.27(7g)(a)5.b.




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