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  • Inside Track
    May 01, 2013

    Proposed State Budget: Expansion of Medicaid Estate Recovery and the Death of Divestment Planning?

    In this article, West Allis lawyer Bruce Tammi explains how provisions in Gov. Scott Walker’s proposed biennial budget will expand estate recovery for long-term care expenses paid by Medicaid and impact divestment planning.

    May 1, 2013 – For those with spouses needing expensive long-term care, today at least, they can count on that financial hit ending when one spouse dies.

    But under the governor’s proposed budget bill (Assembly Bill 40), death will no longer free a spouse or a decedent’s estate from the cost of long-term spousal care if any of it has been paid by the state’s Medicaid-related programs.

    Bruce TammiBruce Tammi (Marquette 1976) is a solo practitioner at the Law Office of Bruce Tammi in West Allis. He practices primarily in the area of elder law. Tammi is an advisor on the State Bar’s Elder Law Section board.

    Medicaid is the largest source of public funds for long-term care, and states are permitted to recover from the estates of Medicaid recipients. In Wisconsin, Medicaid estate recovery is limited to the probate estate of the Medicaid recipient.

    However, Gov. Scott Walker’s budget bill incorporates statutory changes expanding estate recovery to the probate and non-probate estates of community spouses, meaning Medicaid estate recovery claims live on after the recipient dies.

    Whether the property is transferred upon the death of a community spouse by will, living trust, beneficiary designation, joint tenancy, marital property survivorship, or transfer by affidavit, the state will have a mechanism in place to recover its claim.

    The Details 

    AB 40 essentially changes marital property law by allowing the state to recover against all the property in which the community spouse has an interest at the time of death (including a life estate).

    A limited-scope fair hearing is often the only option for trustees, trust beneficiaries, survivorship owners, remaindermen, payable on death (POD) and transfer on death (TOD) account beneficiaries, and other claimants.

    The amount of the state’s estate recovery claim cannot be challenged by beneficiaries and the Wisconsin Department of Health Services (DHS) may obtain a judgment against a beneficiary for the amount allegedly received upon the death of the spouse of a Medicaid recipient without a circuit court action.

    The right to a reasonable notice of claim procedure, a trial, other due process, and judicial review are not afforded to such beneficiaries under AB 40.

    Medicaid estate recovery is extended to “property of a decedent,” which includes “all real and personal property to which the client held any legal title or in which the client had any legal interest immediately before death, to the extent of that title or interest, including assets transferred to a survivor, heir, or assignees, through joint tenancy, tenancy in common, survivorship, life estate living trust or any other arrangement.”

    “Property of a decedent” also includes all real and personal property in which the surviving spouse of a Medicaid recipient had an ownership interest at death, and property in which the surviving spouse had a marital property interest with his or her spouse within five years of the spouse applying for or while eligible for public assistance. 

    Trustees and Claimants: Rights and Duties 

    If a Medicaid recipient or the recipient’s spouse was a settlor of a trust, the trustee of the trust is required to notify DHS of the death within 30 days of the date of death.

    Federal government moneyThereafter, if DHS files an estate recovery claim within four months of the notice, the trustee has only 90 days to pay the claim. No provision is made for payment by the trustee of trust administration expenses, taxes, other claims, or for extending the time to pay the claim for cause or otherwise. Further, the trustee is personally liable to DHS for costs of recovery and possibly for the claim itself if the trustee does not comply with these notice and claim payment requirements.

    Special needs and pooled (WisPACT) trusts are also subject to the trust estate recovery notice and claim payment obligations, but a pooled trust may retain 30 percent of the trust account’s balance if it complies with the 30-day notice and 90-day payment deadlines. Other claimants having a higher priority under Wis. Stat. section 859.25(1) may file a demand with DHS for payment of their claims, but only if the demand is made within one year of the date the decedent’s property was transmitted to DHS.

    Real Estate Interests 

    Currently, DHS may usually file a lien against the home of a Medicaid recipient if the recipient no longer resides in the home pursuant to section 49.496(2). DHS must currently give the Medicaid recipient 45 days advance notice before filing the lien and the imposition of a lien may be contested in a fair hearing. There are also various restrictions on DHS filing liens such as when a spouse or disabled child occupies the home.

    The budget bill adds a clever statutory scheme to secure an estate recovery claim against all real estate interests of Medicaid recipients and their spouses.

    Under the scheme, upon an individual becoming eligible for public assistance, DHS may record with applicable Register of Deeds Office a document entitled “Request for Notice of Transfer or Encumbrance and Notice of Potential Claim” if the individual has any of the following ownership interests in real property:

    • A current ownership interest in real property, including a marital property interest;

    • A marital property interest in real property with his or her current spouse, if that spouse currently holds title to the real property acquired at any time within 5 years before the individual applies for public assistance or during the time that the individual is eligible for public assistance.

    Proposed section 49.849(2) also creates a rebuttable presumption that all property of the deceased nonrecipient surviving spouse was marital property held with the recipient and that 100 percent of the property of the deceased nonrecipient surviving spouse is subject to the department’s claim.

    While the Medicaid recipient is alive, his or her community spouse may transfer or encumber real estate against which DHS has recorded the above referenced “Request for Notice of Transfer,” but only after the community spouse first informs DHS of the proposed transfer or encumbrance.

    Upon the death of the Medicaid recipient, the community spouse is restricted from transferring and encumbering all real estate interests by newly created section 49.484(5), which allows DHS to recover against the property in any manner determined by the department to be appropriate, including by placing a lien against the property.”

    While the former Medicaid recipient’s spouse, child less than 21 years, or disabled child are alive, the DHS cannot enforce its claim or lien against real estate interests, but the real estate interests may not be encumbered or transferred without approval of DHS in the form of DHS recording a “Certificate of Clearance” for the property.

    The lien imposed against real estate owned by the deceased recipient’s spouse will be released by DHS only if the spouse or disabled child sells the real estate for “fair market value.” If the spouse or disabled child does not sell the real estate, the estate recovery lien persists until their death at which time the DHS can foreclose on or otherwise recover its claim.

    Prohibited by Federal Law? 

    While the proposed notice and lien scheme is a clever and effective way to recover Medicaid benefits paid from real estate owned by the spouse or disabled child of a Medicaid recipient, it also appears to be prohibited by federal law. (See 42 U.S.C. section 1396p(a)(2) and 42 U.S.C.1396(b)).

    The aforementioned expansion of Medicaid estate recovery to living trusts appears permitted by federal law under 42 U.S.C. section 1396p(b)(4)(B), but nothing in federal law appears to allow the imposition of personal liability on a trustee.

    Even if federal law allowed extension of liability to a trustee, it would be bad law and poor public policy to do so. A trustee has a duty to trust beneficiaries and other claimants which may well conflict with the duty the state wants to personally impose on the trustee to pay a claim for Medicaid benefits the trustee has nothing to do with.

    If the trust agreement provides that beneficiaries or other claimants have a higher priority over the estate recovery claim of DHS, what will a trustee do?

    If the trustee pays the DHS, the beneficiaries may claim a breach of fiduciary duty. If the trustee pays other claims or beneficiaries, the trustee may be personally liable to DHS for the claim and costs.

    The Death of Divestment Planning?

    The governor’s budget bill proposes various statutory amendments which effectively kill most commonly used divestment planning techniques and treat loans to family members (via promissory notes) as divestments.

    The proposed changes would also impose divestment penalty periods on a Medicaid recipient for divestments by a community spouse. The scope of divestment would also be expanded to include transfer of exempt assets and transfer of the community spousal asset share. The inclusion of exempt assets in the definition of divestment appears prohibited by federal law (See 42 U.S.C section 1396(c)(4) & (5)).

    Proposed Wis. Stat. section 49.453(4c)(c) would start the period of ineligibility for divestments by Medicaid recipients or their spouses “on the first day of the month following the month in which the individual receives advance notice of the period of ineligibility.” 

    The current 10-day advance notice requirement of DHS § 103.09(4) for termination of benefits would no longer apply to terminations for divestment.

    Loans by a Medicaid recipient/applicant or his/her spouse to family members and others using a promissory note may be considered a divestment under the ambiguous language of proposed sec. 49.453(4c)(c) which provides:

    “A promissory note in which the debtor is a presumptive heir of the lender or in which neither the lender nor debtor has any incentive to enforce repayment is considered cancelled upon the death of the lender for purposes of this sections.” 

    Just exactly who are “presumptive heirs” and how one proves a debtor wants to have repayment of the debt enforced is unclear (most would rather not). Regardless, this provision also appears to violate federal law (See 42 U.S.C. § 1396(c)(1)(I) and (c)(4)).

    The so-called “half a loaf” divestment technique would end by amendment to section 49.458(8)(a), requiring that to cure a divestment “the individual shall demonstrate that all of the assets transferred for less than fair market value, or cash equal to the value of the assets transferred for less than fair market value have been returned to him or her.” 

    Final Thoughts 

    It does not appear that the Centers for Medicare and Medicaid Services (CMS) can grant a waiver to the state for any of the proposed changes that violate federal law. Therefore, it will be interesting to see how everything plays out if all the budget bill proposals are enacted without an accompanying change in underlying federal law.

    The divestment, life insurance, and spousal income allocation changes are proposed to take effect for new Medicaid applications and for divestments by community spouses after enactment. The estate recovery and real estate lien changes are proposed to take effect upon the later of the date of enactment or October 1, 2013.

    The AB 40 estate recovery and divestment provisions may be found at LRB Index Nos. 0617 and 0749 at:

    An original version of this article is forthcoming in the Elder Law Journal of Wisconsin and is published here with permission from the Elder Law Section.

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