Medicaid, “a cooperative federal-state program that ‘seeks to provide medical assistance to low-income individuals who are unable to meet the costs of their medical care,’” “has become one of the largest programs in the Federal budget as well as a major expenditure for State governments.” Since the program’s beginning, how Medicaid is funded, and thus the amount of people it is able to reach, is a crucial issue. In 2016, “Almost two-thirds of all Medicaid spending for services is attributable to the elderly and persons with disabilities, who make up just one-quarter of all Medicaid enrollees.”
One means of continuing to provide funds for Medicaid is through estate recovery. Pursuant to the Omnibus Budget Reconciliation Act of 1993, in order for a state to receive federal assistance for its Medicaid program, the following applies:
the State shall seek adjustment or recovery of any medical assistance correctly paid on behalf of an individual under the State plan … from the individual’s estate or upon sale of the property subject to a lien imposed on account of medical assistance paid on behalf of the individual.
At minimum, such recovery must be made against the Medicaid recipient’s probate estate; however, states may choose to adopt an expanded definition of estate, which may include recovery from nonprobate assets. More specifically, Title 42 U.S.C. § 1396p(b) provides:
(4) For purposes of this subsection, the term “estate,” with respect to a deceased individual —
(A) shall include all real and personal property and other assets included within the individual’s estate, as defined for purposes of State probate law; and
(B) may include, at the option of the State (and shall include, in the case of an individual to whom paragraph (1)(C)(i) applies), any other real and personal property and other assets in which the individual had any legal title or interest at the time of death (to the extent of such interest), including such assets conveyed to a survivor, heir, or assign of the deceased individual through joint tenancy, tenancy in common, survivorship, life estate, living trust, or other arrangement.
If a state chooses to adopt the expanded definition of estate that appears in subparagraph (b) of 42 U.S.C. § 1396p for estate recovery purposes, the estate from which Medicaid expenses can be recovered has been explained as including the following:
assets which, under ordinary probate law, would not be part of the Medicaid recipient’s estate, because they would pass immediately to someone else on the recipient’s death. For example, when two persons hold property in joint tenancy with a right of survivorship and one dies, the deceased joint tenant’s interest ordinarily passes directly to the surviving joint tenant and is not part of the probate estate. Under the optional expanded definition allowed by federal law, for Medicaid recovery purposes the interest of a deceased joint tenant who had received Medicaid would be included in his estate, rather than passing directly to the surviving joint tenant.
Each state takes a different approach in meeting the federal mandate. Overall, much has changed in how states address estate recovery since the last NAELA Journal article on this topic was published, in 2005. Most recently, in 2017, California, which had previously adopted expanded estate recovery, passed a law limiting Medicaid reimbursement to the probate estate. In California, estate is now defined as “all real and personal property and other assets in the individual’s probate estate that are required to be subject to a claim for recovery pursuant to Section 1396p(b)(4)(A) of Title 42 of the United States Code.” However, even though California has restricted what is recoverable from an estate, other states have been expanding their definition of what is included in a Medicaid recipient’s estate for estate recovery purposes.
As discussed in the remainder of this article, states are inconsistent in their approaches to and implementations of estate recovery. The states vary so drastically that as of this writing, 17 states have adopted an expanded definition of estate, one state has a modified expanded definition of the term, 26 states recover from probate estates only, and six states provide for recovery from probate estates with further modifications regarding what is included in the definition of estate. Overall, what this appears to be showing is that no state has come up with a perfect solution to paying the expenses associated with its Medicaid program. Therefore, rather than analyze how many states have expanded versus limited estate recovery, the more prevalent question may be, “What do the specific definitions of estate say?” More precisely, “Is there a trend that may help us be better prepared to plan for our clients moving forward?”
II. What Are the Competing Arguments for Expanded Versus Limited Estate Recovery?
The purpose of estate recovery is to “supplement Medicaid funds that are used to provide medical services to eligible persons.” Put another way, “[T]he legislative purpose behind the Medicaid recovery statutes is to prevent individuals from transferring their assets to survivors, heirs, or assigns, while at the same time benefiting from taxpayer funds intended to assist the poor.” However, competing interests exist when attempting to achieve this purpose. For example, opponents of expanded estate recovery have argued the following:
the estate recovery program is bad public policy that yields little in terms of dollars actually recovered but creates substantial non-financial problems, such as “widespread clinical depression in aged and disabled nursing home residents.” The program generally affects the poorest segment of the elderly population, those who cannot afford to buy long-term care insurance and those who cannot afford or do not appreciate the need for the legal advice necessary to engage in the various forms of estate-planning that can protect certain assets while retaining Medicaid eligibility.
The Louisiana legislature stated, “[T]he legislature declares that a comprehensive plan should be developed to address the federal requirements for an estate recovery program while at the same time recognizing the state’s long tradition of protecting the citizens’ rights to home ownership and the state’s interest in assuring the transfer of real property within family units.”
On the other hand, proponents of expanded estate recovery have argued that expanded estate recovery “capture[s] and make[s] available for payment of Medicaid-reimbursement claims certain interests in property that are not ordinarily subject to the payment of a decedent’s debts,” which in turn “frees more funds for provision of future services.” The challenge of these competing interests is illustrated by how each state has chosen to address the estate recovery mandate.
III. What Changes Have States Made to Their Estate Recovery Programs Through the Legislature?
In attempting to find the right balance between these competing interests, states are continuing to make changes to their estate recovery programs. For example, New York, similar to California, limits recovery to the probate estate, with estate defined as “all real and personal property and other assets included within the individual’s estate and passing under the terms of a valid will or by intestacy.” Such change in New York resulted from the removal of the following language in 2013 previously implementing expanded estate recovery in the state:
Pursuant to regulations adopted by the [Department of Health] commissioner, which may be promulgated on an emergency basis, an individual’s estate also includes any other property in which the individual has any legal title or interest at the time of death, including jointly held property, retained life estates, and interests in trusts, to the extent of such interests; provided, however, that a claim against a recipient of such property by distribution or survival shall be limited to the value of the property received or the amount of medical assistance benefits otherwise recoverable pursuant to this section, whichever is less. Nothing in this subdivision shall be construed as authorizing the department [Department of Health] or a social services district to impose liens or make recoveries that are prohibited by federal laws governing the medical assistance program.
On the other hand, when California was limiting recovery to the probate estate, Nebraska was clarifying what is included for estate recovery purposes under its expanded estate recovery statute by adding the following language to Nebraska Revised Statute § 68-919(4)(b)(i):
(B) Notwithstanding anything to the contrary in subdivision (3) or (4) of section 68-923, assets conveyed or otherwise transferred to a survivor, an heir, an assignee, a beneficiary, or a devisee of the recipient of medical assistance through joint tenancy, tenancy in common, transfer on death deed, survivorship, conveyance of a remainder interest, retention of a life estate or of an estate for a period of time, living trust, or other arrangement by which value or possession is transferred to or realized by the beneficiary of the conveyance or transfer at or as a result of the recipient’s death to the full extent authorized in 42 U.S.C. 1396p(b)(4)(B). Such other arrangements include insurance policies or annuities in which the recipient of medical assistance had at the time of death any incidents of ownership of the policy or annuity or the power to designate beneficiaries and any pension rights or completed retirement plans or accounts of the recipient. A completed retirement plan or account is one which because of the death of the recipient of medical assistance ceases to have elements of retirement relating to such recipient and under which one or more beneficiaries exist after such recipient’s death; and
(ii) Estate of a recipient of medical assistance does not include:
(A) Insurance policies in proportion to the premiums and other payments to the insurance carrier that were paid by someone other than the recipient of medical assistance or the recipient’s spouse;
(B) Insurance proceeds and accounts in institutions under federal supervision or supervision of the Department of Banking and Finance or Department of Insurance to the extent subject to a security interest where the secured party is not a related transferee as defined in section [68-990];
(C) Insurance proceeds, any trust account subject to the Burial Pre-Need Sale Act, or any limited lines funeral insurance policy to the extent used to pay for funeral, burial, or cremation expenses of the recipient of medical assistance;
(D) Conveyances of real estate made prior to [August 24, 2017,] that are subject to the grantor’s retention of a life estate or an estate for a period of time; and
(E) Any pension rights or completed retirement plans to the extent that such rights or plans are exempt from claims for reimbursement of medical assistance under federal law.
Other states are also continuing to expand estate recovery. For example, Minnesota, with a long history of amendments, has been expanding its definition of estate for estate recovery purposes since 2003, when the state expanded estate recovery to include life tenants and joint tenants with a right of survivorship. In 2008, another recoverable item was added to the statute: “(5) the person’s legal title or interest at the time of the person’s death in real property transferred under a transfer on death deed under section 507.071, or in the proceeds from the subsequent sale of the person’s interest in the real property.” The statute was further amended in 2009 to its current form to read, “(5) assets conveyed to a survivor, heir, or assign of the person through survivorship, living trust, transfer-on-death of title or deed, or other arrangements.”
Wisconsin expanded estate recovery in 2013, when the legislature approved the following definition of property of decedent for estate recovery purposes:
all real and personal property to which the recipient held any legal title or in which the recipient had any legal interest immediately before death, to the extent of that title or interest, including assets transferred to a survivor, heir, or assignee through joint tenancy, tenancy in common, survivorship, life estate, living revocable trust, or any other arrangement, excluding an irrevocable trust.
North Carolina, which has general recovery from the probate estate, partly expanded estate recovery in 2010, when an exception was added for those who “received benefits under a qualified long-term care partnership policy,” in which case the expanded definition provided in the federal statute applies. This is the same approach taken in Illinois, which has not made any changes to its estate recovery statute in recent years.
Lastly, in Arkansas, where recovery is limited to the probate estate, the legislature in 2007 extended recovery to include transfer-on-death deeds such that recovery is now permitted as follows: “The department [Department of Human Services] may make a claim against the estate of a deceased recipient or the interest acquired from the deceased recipient by a grantee of a beneficiary deed under § 18-12-608 for the amount of any benefits distributed or paid or charges levied by the department.”
While some states expanded estate recovery, Maine, with long-standing expanded estate recovery, limited such recovery in 2009 by excluding recovery from “joint tenancy in real property.”
IV. What Changes Have States Made to Their Estate Recovery Programs Through the Courts?
Changes also have been made to estate recovery programs outside the legislature. For example, although a Tennessee statute continues to provide for recovery from the probate estate, in 2012 the Tennessee Court of Appeals expanded the definition of estate to include revocable trusts. In Stidham, the question before the court was “[w]hether the Bureau [of TennCare] may use assets held in a revocable trust to satisfy a claim against an estate for medical benefits.” The court concluded, “[A]ny property that can be reached by the personal representative pursuant to Tennessee Code Annotated section 35-15-505 for the payment of the debts of an insolvent estate may be reached by the probate court for the purpose of reimbursing the Bureau.”
Likewise, in Missouri, estate recovery is limited to the probate estate via statute; however, the Missouri Court of Appeals interpreted estate to include “the value of nonprobate transfers” pursuant to Missouri Revised Statutes § 461.300. In Jones, when a Medicaid recipient’s home passed to his intended beneficiaries via a beneficiary deed, the court looked at “whether Missouri’s estate recovery statutes allow the State to proceed under section 461.300,” which the legislature considers to be part of the probate code. The court concluded, “[A] proceeding under section 461.300 allows the decedent’s estate to recover the value of nonprobate assets when the assets already in the estate are insufficient to cover the claims of the decedent’s creditors.”
The expanded definition of the federal statute also has been taken one step further by the Idaho Supreme Court, when it held that the remainder interest of a Medicaid recipient’s life estate is subject to recovery.
Lastly, in Mississippi, where recovery is limited to the probate estate, the Mississippi Court of Appeals further limited recovery by excluding recovery from property that falls within the state’s homestead exemption. In Stinson, the court reasoned, “Mississippi Code Annotated section 91-1-21 provides that exempt property is not liable for the debt of the decedent if there is a surviving spouse, children or grandchildren.” Therefore, the court held that “children and grandchild are entitled to inherit the exempt property free of [Medicaid recipients’] debts.”
V. What Changes Have States Made to Their Estate Recovery Programs Through Administrative Agencies?
A number of states have expanded estate recovery via regulation. For example, Georgia has statutorily limited estate recovery to the probate estate; however, regulations define estate as follows:
all real and personal property under the probate code. Estate also includes real property passing by reason of joint tenancy, right of survivorship, life estate, survivorship, trust, annuity, homestead or any other arrangement. The estate also includes excess funds from a burial trust or contract, promissory notes, cash, and personal property. Estates valued at $25,000 or less are exempt from estate recovery because it is not cost effective for the state to pursue recovery.
The same is true in South Dakota, whose statute provides for recovery from the probate estate and regulations define estate as follows:
all real and personal property and other assets included within the individual’s estate as defined in SDCL 29A-1-201, and any other real and personal property or other assets in which the individual had any legal title or interest at the time of death, including such assets conveyed to a survivor, heir, or assign of the deceased individual through joint tenancy, tenancy in common, survivorship, life estate, living trust, or other arrangement, including any funds remaining in an individual’s prepaid burial trust or prepaid burial account after the individual’s reasonable burial expenses are paid.
VI. What Unsuccessful Changes Have States Attempted?
Even though some states have been successful in expanding or limiting estate recovery, other states have attempted to make such changes to their estate recovery programs but have failed. For example, Massachusetts continues to recover from the probate estate after the following language was removed from the 2017 final budget:
If an individual became eligible for medical assistance on or after July 1, 2016, the term “estate” shall mean any interest in real and personal property and other assets in which the individual immediately prior to death had any legal title or interest, to the extent of such interest. This shall include interests in real and personal property and other assets that would pass to a survivor, heir or assignee of the decedent through joint tenancy, tenancy by the entirety, life estate, living trust, right of survivorship, beneficiary designation or other arrangement. This shall not include annuities and life insurance held on the life of a decedent, with the exception of payments otherwise includable in the decedent’s probate estate.
Likewise, in Pennsylvania, estate recovery continues to be limited to the probate estate after a number of attempted changes to expand estate recovery failed to pass. These attempted changes include a 2009 bill that expanded estate recovery and a 2010 bill, reintroduced in 2011, that tried to expand, with approval of the governor, the state’s Department of Human Services’ ability to expand estate recovery to include “other real and personal property in which an individual had any legal title or interest at the time of death.”
In 2011, a bill limiting recovery to the probate estate was introduced in Michigan, which, in 2007, became the last state to address estate recovery for the first time. The bill attempted to expand estate recovery; however, it did not move forward.
Lastly, in Oregon, estate is defined as follows:
all real and personal property and other assets in which the deceased individual had any legal title or interest at the time of death including assets conveyed to a survivor, heir or assign of the deceased individual through joint tenancy, tenancy in common, survivorship, life estate, living trust or other similar arrangement.
An Oregon administrative agency further expanded estate recovery in 2010 to include a provision extending a person’s estate to the following:
(viii) Other similar arrangement, such as an interspousal transfer of assets, including one facilitated by a court order, which occurred no earlier than 60 months prior to the first date of request established from the recipient’s and the recipient’s spouse’s applications, or at any time thereafter, whether approved, withdrawn, or denied, for the public assistance programs referenced in OAR 461-135-0835(2).
This regulation, however, was invalidated by the Oregon Supreme Court. Therefore, an administrative rule, adopted June 5, 2017, now includes recovery that simply extends the legislative definition of estate recovery to include recovery from “[t]enancy by the entirety,” “[t]ransfer on death deed,” and “[a]nnuity purchased on or after April 1, 2001.”
VII. What Are the Specific State Statutes Actually Saying?
States that have not changed their estate recovery programs in the past decade are split between expanded and limited estate recovery. For example, 11 states have long-standing expanded estate recovery programs — Iowa, Kentucky, Montana, Nevada, New Hampshire, New Jersey, North Dakota,Ohio, Utah, Washington, and Wyoming — and in 19 states, recovery is limited to the probate estate — Alabama, Alaska, Arizona, Colorado, Connecticut, Delaware, Florida, Hawaii, Louisiana, Maryland, Mississippi, New Mexico, Oklahoma, Rhode Island, South Carolina, Texas, Vermont, Virginia, and West Virginia.
Since there does not appear to be a clear preference regarding expanded versus limited estate recovery, reviewing the specific approaches states take can tell us more about what may be expected moving forward. First, in states that have adopted expanded estate recovery, some states, including New Jersey, Ohio, Oregon, Utah, and Wyoming, have simply adopted the language used in 42 U.S.C. § 1396p(b), which includes recovery from assets conveyed “through joint tenancy, tenancy in common, survivorship, life estate, living trust, or other arrangement.”
On the other hand, some states with expanded estate recovery have made slight modifications to the language in the federal statute. For example, in Montana, the state has extended the federal definition to include “(ii) property from a deceased recipient’s estate otherwise distributed to or in the possession of a person through any other procedure or when a legal procedure for distribution has not been followed.” Kansas has also extended the federal definition to include interests in “transfer-on-death deed[s], payable-on-death contract[s], … [and] annuities.”
Washington’s statute, which states, “[T]he department [Department of Social and Health Services] shall seek adjustment or recovery from the individual’s estate and from nonprobate assets of the individual as defined by RCW 11.02.005,” defines nonprobate assets as follows:
a right or interest passing under a joint tenancy with right of survivorship, joint bank account with right of survivorship, transfer on death deed, payable on death or trust bank account, transfer on death security or security account, deed or conveyance if possession has been postponed until the death of the person, trust of which the person is grantor and that becomes effective or irrevocable only upon the person’s death, community property agreement, individual retirement account or bond, or note or other contract the payment or performance of which is affected by the death of the person. “Nonprobate asset” does not include: A payable-on-death provision of a life insurance policy, annuity, or other similar contract, or of an employee benefit plan; a right or interest passing by descent and distribution under chapter 11.04 RCW. … For the definition of “nonprobate asset” relating to testamentary disposition of nonprobate assets, see RCW 11.11.010(7).
In Indiana, a person’s estate also includes “(3) any real or personal property conveyed through a nonprobate transfer; and (4) any sum due after June 30, 2005, to a person after the death of a Medicaid recipient that is under the terms of an annuity contract purchased after May 1, 2005, with the assets of the Medicaid recipient.” However, a nonprobate transfer does not include the following transfers: “(1) a survivorship interest in a tenancy by the entireties real estate; (2) a life insurance policy or annuity; (3) the death proceeds of a life insurance policy or annuity; (4) an individual retirement account or a similar account or plan; or (5) benefits under an employee benefit plan.”
Lastly, even though Maine has expanded estate recovery, the state limited such expansion by excluding recovery from joint tenancy in real property.
VIII. What Can We Take Away?
The trend appears to continue toward expanded estate recovery, with a fair amount of estate recovery changes occurring outside legislation. Three states have further expanded their existing expanded estate recovery programs, and three other states, where recovery had been limited to the probate estate, have implemented expanded estate recovery.
Of the three states that previously recovered from the probate estate only, two states made estate recovery changes via administrative agencies and only one made changes statutorily. Additionally, four states, where recovery was limited to the probate estate, have expanded estate recovery beyond the probate estate to some degree: two legislatively and two via the courts. The most successful estate recovery changes appear to occur as a result of a partial expansion or limitation.
On the other hand, not all attempted changes to state estate recovery programs have been successful; four states failed to expand their programs, three of which attempted expansion by statute and one of which attempted expansion by regulation. The two states that switched from expanded estate recovery to limited estate recovery now appear to be outliers.
Even though estate recovery changes have been attempted, sometimes successfully, the future of estate recovery feels unknown. The switch in California, an early adopter of expanded estate recovery, to limited estate recovery may indicate a trend toward the latter. However, at this point, there does not appear to be any clear indication that this will be the case.
With health care costs continuing to rise, each state will be hard-pressed to find the right balance between providing those in need with medical assistance and giving individuals with limited assets the ability to pass on what little they have to their family members after they die. States’ budgets, populations, and political climates differ considerably; therefore, it is not surprising that states are all over the board in attempting to balance these needs.
The future of estate recovery is unclear. Therefore, we must be prepared for continuing changes to state estate recovery programs as we strive to meet the planning needs of our clients.