Medicaid's stated purpose is to provide "health coverage to millions of Americans, including eligible low-income adults, children, pregnant women, elderly adults, and people with disabilities." In 1993, a federal law was enacted which requires every state to implement a "Medicaid estate recovery" program for two groups of people receiving Medicaid benefits: those over the age of 55 who have received Medicaid assistance, and anyone permanently institutionalized who received Medicaid assistance (regardless of age).
If you or a loved one falls into one of these two groups, then your estate, or your loved one's estate, will potentially be subject to a Medicaid lien or "death tax" after you die. Here's what you need to know about this tax.
Medicaid Estate Recovery
If a deceased Medicaid recipient falls into one of the two groups covered by estate recovery, the state must recover enough assets from the estate to cover Medicaid's costs related to covering long-term care and related drug and hospital benefits. This includes Medicaid payments for Medicare cost sharing for these services.
However, these are the minimum amounts subject to recovery, and Medicaid estate recovery is governed by state law. Beyond this minimum, each state can set its own rules about what can and can't be recovered. Many states choose to recover more than this minimum, and it's possible for states to attempt to recover enough assets from the estate to cover all Medicaid costs incurred during the deceased recipient's lifetime.
The assets subject to estate recovery are those that go through probate. Since probate itself is governed by state law, these laws vary from state to state. It is essential to understand what assets are subject to probate in your state (referred to quite aptly as "probate assets"). It's also important to understand if your state has expanded the assets subject to recovery beyond probate assets, such as in Arkansas, Connecticut, and Georgia.
How Medicaid Estate Planning Impacts Recovery
In general, the first category of Medicaid recipients whose estates are subject to Medicaid estate recovery covers those with low levels of income and assets. This raises a fairly obvious question: "If you need to have low levels of assets and income to qualify for Medicaid, then how could you possibly have any assets left in your estate when you die for the state to collect?"
This is where "Medicaid planning" or "Medicaid estate planning" comes into play. As the American Council on Aging puts it, "Medicaid planning allows long term care Medicaid recipients to meet Medicaid's asset limit for eligibility purposes, while also legally protecting assets (also called resources) for family and loved ones for future inheritance."
The main goal of this type of planning is to qualify a sick person for Medicaid benefits (usually as soon as possible). However, another goal is to take assets that will be subject to Medicaid estate recovery under applicable state law (referred to as "nonexempt assets") and convert them into assets that will not be subject to Medicaid estate recovery (referred to as "exempt assets").
The more Medicaid planning it takes to qualify for benefits, the more likely it is that you'll have nonexempt assets.
Which Assets Are Subject to Medicaid Estate Recovery?
With that said, this all still comes down to state law. While in some states, it may be possible for a sick person to be broke enough on paper to qualify for Medicaid, it may not be possible to convert every asset owned by the recipient from a nonexempt asset into an exempt asset—it depends on how aggressive the state's Medicaid estate recovery laws are.
What may be an exempt asset in one state may not be an exempt asset in another state. This means that, unfortunately, it is impossible to even give a broad and general list of what may or may not be exempt.
Those who are concerned with protecting assets from Medicaid estate recovery are best served by consulting an elder law attorney in the state where the sick person lives to determine which assets of the sick person will be exempt, and which are likely to be recovered by state authorities.