Medicaid Estate Recovery and Trusts

Overview

When a Medicaid beneficiary dies, a state might seek recovery of the Medicaid benefits paid during the beneficiary’s life from the deceased beneficiary’s estate.  Part of estate planning to protect assets from being depleted during life and limit or eliminate a state’s right to recover benefits post-death involves transferring property to a trust with the appropriate terms.  Known as a Medicaid Asset Protection Trust (MAPT), it’s a part of estate planning that is very important to many farm and ranch families that desire to keep the farm in the family for multiple generations.  It’s also a topic that I started lecturing on nationally over 30 years ago after I wrote one of the very first law review articles ever published on the topic.  Roger A. McEowen, et al., “Estate Planning for the Elderly and Disabled: Organizing the Estate to Qualify for Federal Medical Extended Care Assistance,” 24 Ind. L. Rev. 1379 (1991).  I then followed that up with another article three years later.  Roger A. McEowen, “Estate Planning for Farm and Ranch Families Facing Long-Term Health Care,” 73 Neb. L. Rev. 104 (1994).

An MAPT was involved in a recent Iowa case.  Unfortunately for the estate, the court’s suspect reasoning resulted in the trust not operating to protect the decedent’s assets from the state seeking reimbursement.  A dissenting opinion, however, pointed out the majority’s flawed rationale.

Medicaid asset protection trusts – it’s the topic of today’s post.

Medicaid Basics

For many persons, estate planning also includes planning for the possibility of long-term health care.  Nursing home care is expensive and can require the liquidation of assets to generate the funds necessary to pay the nursing home bill unless appropriate planning has been taken.  Medicaid is a joint federal/state program that pays for long-term health care in a nursing home.  To be able to receive Medicaid benefits, an individual must meet numerous eligibility requirements but, in short, must have a very minimal level of income and assets.  States set their own asset limits and determine what assets count toward the limit.  Assets exceeding the limit must be spent on the applicant’s nursing home care before Medicaid eligibility can be established. 

There are also rules that can apply to help protect certain assets from being depleted to pay for a long-term care bill, and different rules apply when the Medicaid applicant/beneficiary is married, and the spouse is not applying for or receiving Medicaid.   However, the overriding public policy concern is that private assets are primarily used to pay for care before taxpayer dollars are utilized. 

While some states set different timeframe for the “look-back” period, the general rule is that the value of any non-exempt asset owned by a Medicaid applicant or applicant’s spouse that is disposed of for less than fair market value within five years of an application for Medicaid is treated as an available asset for purposes of Medicaid eligibility. That is the rule for outright transfers as well as transfers to or from a trust.  If such a transfer occurs, a penalty period is triggered that could further delay Medicaid eligibility.  The penalty period is determined by dividing the uncompensated value of the transfer by the average monthly cost of nursing home care in the individual’s state.  The resulting figure is the number of months the individual’s penalty period will last.  The penalty period begins on the date on which the individual has applied and is otherwise eligible for Medicaid. 

Asset Sheltering Trusts

An asset sheltering trust (also known as an MAPT) is a trust designed to enable the grantor to be eligible for public assistance benefits (Medicaid) for long-term health care costs that would be incurred if the grantor entered a nursing facility.  The rules surrounding these types of trusts are quite complex and are constantly changing given the public policy concerns that surround the creation of these types of trusts.

In general, these trusts contain language explicitly evidencing the grantor’s intent to give the trustee complete discretion (a “fully discretionary” trust) to distribute trust income and principal.  Similar language might also be used to assure that the grantor’s intent was to supplement rather than supplant public benefits that might be otherwise available.  The purpose of these types of provisions is that if the beneficiary ever is in need of long-term medical assistance in a nursing facility, then the trustee has the discretion to withhold the payment of funds from the grantor’s property contained in the trust to permit the beneficiary to receive public assistance (Medicaid) benefits at taxpayer expense and preserve the grantor’s assets for the heirs. They also operate to not create any interest in the trust corpus that the state can attach to seek reimbursement from after the beneficiary dies. 

Recent Iowa case.  In In re Trust Under the Will of Riessen, No. 22-0048, 2022 Iowa App. LEXIS 925 (Iowa Ct. App. Dec. 7, 2022), the court faced the issue of whether a trust effectively barred the state from seeking post-death reimbursement for Medicaid benefits paid to a trust beneficiary during life.  The trust grantor died in 1972 with a will that established a trust to hold an equal share of his farm for a daughter, with his son serving as trustee.  The trust authorized the son to pay the net income and principal of the trust to the daughter at his complete discretion – he was not obligated in any way to provide trust funds to his sister as the beneficiary.  The trust also stated that the grantor’s reason for giving the complete discretionary power to the trustee was because it was the grantor’s “hope and desire to keep the entire property in the family.”  The trust specified that the son had the right to rent the land in the trust and farm it as the tenant. The trust also stated that it was the grantor’s intent that the son, as trustee, buy certain adjacent tracts of land to help maintain the family farming operation.

The daughter died in 2020 and during her lifetime the trust didn’t provide any funds for her medical care, but the state did provide Medicaid benefits for her.  After she died, the state sought reimbursement from the trust for the Medicaid benefits provided to the daughter during her life.  The probate court ordered the trust to reimburse the state and the trustee appealed.  The state based its reimbursement claim on Iowa Code §249A.53(2), which provides that when Medicaid funds care for an individual 55 or older that is a resident of a care facility, the debt can be collected from any trust in which the individual had an interest.  However, the trustee asserted that the trust was a fully discretionary trust and that he had the complete discretion to ignore the beneficiary’s medical needs if he so desired – there was no standard set in the trust that he had to follow in providing trust funds for his sister’s care.  As such, the trustee asserted that the beneficiary had no interest in the trust to which the state’s claim could attach. 

The state claimed that the trust language meant that the trust gave the trustee the discretion to use trust funds for his sister’s care for that he deemed “advisable and beneficial” and that discretion meant that the trustee couldn’t completely ignore the beneficiary’s medical needs.  But the trustee pointed out that Iowa Code § 633A.4702 stated that, “in the absence of clear and convincing evidence to the contrary, language in a governing instrument granting a trustee discretion to make or withhold a distribution shall prevail over any language governing instrument indicating that the beneficiary may have a legally enforceable right to distributions or indicating a standard of payments or distributions.”  The appellate court, however, noted that the statute was inapplicable to trusts effective before 2004.  The appellate court also determined (with not much analysis (the entire majority opinion, including a recitation of the facts) is only eight pages (double-spaced)) that the grantor’s intent to maintain the farm in the family did not negate or outweigh the grantor’s desire that his daughter medical needs be met from the trust. 

The appellate court also reasoned that the trust language meant that the trustee could invade the corpus of the trust for the benefit of the sister when necessary and that the grantor preferred for the trust to be used to provide for the sister instead of protect family land.  Consequently, the appellate court determined that the beneficiary had an interest - portions of the trust were to be used for her care and the trustee was instructed to invade the corpus of the trust to make distributions in the sister’s support. This meant that the state had a right to the sister’s interest in the trust for reimbursement of past Medicaid benefits that were paid on her behalf and affirmed the probate court’s determination.

The dissenting judge, a senior judge sitting by designation and who had written a prominent court opinion on the issue in the past, disagreed that the trust language could be interpreted to identify any type of ascertainable or measurable standard that could give the daughter any interest in the trust that would allow the state to have a legitimate reimbursement claim.  Indeed, the trust granted the trustee the “sole and absolute discretion” to invade the trust corpus when the trustee deemed it “necessary for the benefit” of the grantor’s daughter.  That language did not reference any particular standard that could measure the daughter’s interest in the trust.  He noted that the term “benefit,” as used in the trust, is simply not a distributional, ascertainable standard. To read it as one as the majority did, meant that the majority was judicially rewriting the terms of the trust.

Conclusion

Medicaid asset and trust planning can be a complex part of estate planning.  But it can be a very important aspect of protecting farm assets from being depleted paying a long-term health-care bill.  The facts of the Riessen case as stated in the opinion were insufficient to be able to determine whether the trust was drafted with the intent of protecting assets from being depleted to pay for the beneficiary’s long-term health care.  However, as the dissent points out, and as I have written and lectured on this topic for years concerning MAPT language, the trust language at issue comported with that of a properly drafted as a fully discretionary MAPT to accomplish that goal.  The dissent properly pointed out that the majority’s opinion essentially rewrote the trust to give the state a reimbursement claim.   

If the case is appealed, it is likely that the Iowa Supreme Court, based on past precedent, will overturn the appellate court’s judgment.  It’s simply inappropriate for a court to essentially rewrite the terms of a trust to accomplish an outcome it desires.  If the decision is not appealed or is not overturned on appeal, the Iowa legislature will need to determine what it desires from a public policy standpoint concerning the breadth of the state’s ability to be reimbursed from a decedent’s estate for past Medicaid benefits paid.