Paying Back the State: Medicaid Estate Recovery Rules

Medicaid will often pay for nursing home care even for those who have assets that could be used to pay for care. After the person's death, the state Medicaid program can try to collect those costs from the deceased person's estate. In this way, you can think of Medicaid benefits as a kind of loan that has to be paid back after your death. This is called "estate recovery."

Below, we discuss the following:

• How exactly does Medicaid recover what it paid for your nursing home costs?
• What are the exceptions? When can Medicaid take your house?
• Can you ever avoid Medicaid estate recovery?

What Is Medicaid Estate Recovery?

The federal government has an established policy requiring that all states must try to recover the costs paid on behalf of those who received certain types of Medicaid coverage during their lifetime. All states attempt to recover long-term care costs, including home health services and hospitalizations while in long-term care, and some try to recover regular Medicaid costs as well (though they can generally only recover costs paid for those who were 55 or older or institutionalized when they received Medicaid benefits).

When an individual becomes eligible for Medicaid, federal law requires that the state send the individual a written notice describing the rights of the state to recover Medicaid-paid medical costs following the individual's death.

Ways States Recover Costs

While individual state laws on estate recovery vary, they all boil down to two different ways to recover costs paid: recovering from the deceased person's estate and putting liens on the person's property. These are the two ways that Medicaid can take your assets.

Recovering From the Estate

The first method states use is to seek repayment from the estate of a deceased Medicaid beneficiary. Each state defines the term "estate"—meaning what type of property Medicaid will go after—differently. Some states are fairly conservative about what they will try to take, and will recover costs only from a deceased person's "probate estate." A probate estate includes only assets that will pass through probate, and will not include bank accounts or retirement accounts with named beneficiaries, property in a living trust, real estate owned in joint tenancy, and any other property that avoids probate.

Other states use a broader definition of the term estate that includes any assets an individual had legal title to or interest in at the time of death, including property that bypasses probate.

To recover expenses paid under the probate definition of estate, the state files a claim in the probate estate of the decedent just as would any creditor. Under the more expansive definition of estate, the state must enforce its rights by notifying heirs of its rights under state law.

Lien on Real Estate

The second method for recovering Medicaid costs paid is to place a lien on any real property owned by the person who received Medicaid coverage. During the person's lifetime, the state places a lien on your house. When the house is sold, either before or after your death, the state can collect repayment from its share of the sale proceeds, as would any other lienholder.

When States Can't Recover Costs

Even though the states must recover for costs paid when appropriate, there are certain prohibitions that states must follow. Your assets are exempt from Medicaid estate recovery in the following situations:

• Surviving spouse. The deceased person's spouse is still living, regardless of where that spouse lives.
• Minor, blind, or disabled child. There is a surviving child under the age of 21, blind, or disabled, regardless of where that child lives.

• Sibling caregiver. There is a sibling who resided in the home for at least one year prior to the institutionalization of the deceased and who continues to reside in the home and has an equity interest in that home.
• Child caregiver. There is a child who resided in the home for at least two years prior to the institutionalization of the deceased, who continues to reside in the home, and can demonstrate that the care they provided delayed the institutionalization of the deceased.

Limit on Amount That Can Be Recovered

There is a limit on how much can be recovered by the state. States cannot recover more than the total amount spent by Medicaid on the individual's behalf at or after age 55. Also, states may not recover more than the amount remaining in the estate. What this means is that if there's nothing in the estate (such as if you die owning nothing), or if there's nothing left after paying any creditors that have priority, then the state won't be able to recoup its costs.

Avoiding Medicaid Estate Recovery

Is it possible at all to avoid Medicaid estate recovery? Here are two considerations.

Giving Away Your Assets

As mentioned above, if you have nothing left when you die, Medicaid won't be able to recover anything. So you might think you can simply give away everything to your family before you qualify for Medicaid. However, there are asset transfer rules that penalize anything you give away within a certain lookback period before you apply for Medicaid. So you would want to proceed very carefully, and almost certainly with the help of a professional estate planning attorney or financial advisor who specializes in Medicaid.

Undue Hardship Exception

One situation where a state may "waive recovery" (decide not to try to collect repayment) is when the deceased person's heirs can prove that recovery of Medicaid costs will impose an "undue hardship." Most states consider undue hardship to be when when the deceased person's heirs have limited income and the estate is their sole income-producing asset (for example, a family farm or other family business that produces a limited amount of income).

When the state notifies the deceased person's heirs of the state's recovery rights, it must allow them an opportunity to claim an exemption from estate recovery.

A state can also waive estate recovery when it is determined that it would be too expensive to try to collect repayment from the estate. Each state is allowed to establish its own rules on what is not cost-effective.