Estate and Elder Law

Expanded Medicaid Estate Recovery in New York State

As part of the 2011-2012 New York State Governor's budget bill adopted by the legislature, Medicaid estate recovery has been expanded beyond assets passing under the terms of a valid will or by intestacy.  Under the prior law Medicaid estate recovery was limited to an individual's property included within the individual's estate passing under the terms of a valid will or by intestacy, and would not include property passing to a beneficiary outside of estate administration such as through a beneficiary designation or by operation of law.  (These rules do not apply to the estate of a legally responsible relative, such as a spouse.)  However, a Medicaid recipient may only have assets valued at $13,800 plus limited exempt resources.  Therefore the only property likely to be in a Medicaid recipient's estate was a personal needs account with a maximum of $13,800, a homestead valued under $758,000, an exempt family business, such as a farm, or a retirement plan which was in payout status.  Aside from estate recovery, if the person was in a nursing home, the Medicaid agency is likely to have asserted a lien against the homestead if it was determined that the individual was permanently absent and unlikely to return to the home.

The 2011 Article VII Budget Bill provides:

Subdivision  6  of  section 369 of the social services law, as added by chapter 170 of the laws of 1994, is amended to read as follows:

6. For purposes of this section, [the term] an  individual's  "estate [meansincludes all of the individual's 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.  Pursuant to regulations adopted by the 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 or a social services district to impose liens or make recoveries that  are  prohibited  by federal laws governing the medical assistance program.

At the time of this writing there are no regulations or emergency regulations implementing this law.  However, the law does raise some important issues which may be resolved by the regulations.

Will there be expanded estate recovery against existing life estates and trusts?  Expanded estate recovery should only affect transfers and conveyances after the effective date of the regulations.  Any other retroactive effect of the statute would be unfair and raise Constitutional questions regarding the taking of property.

The statute clearly only affects "retained life estates."  It was probably the intent to affect only other retained interests.  This interpretation would eliminate the problems caused by including lifetime interests in trusts created by third parties such as third party supplemental needs trusts, pooled third party supplemental needs trusts, QTIP trusts, credit shelter trusts and trusts created for descendants. 

Third party trusts are frequently created for minor children or grandchildren pursuant to an individual's Last Will and Testament.  This would cause a chilling effect on all trusts established for purposes having nothing to do with Medicaid protection.

Also, an interest in a trust at the time of death should be limited to a "beneficial" interest.  Powers such as a limited power of appointment or a power to substitute property do not create any beneficial interest in the holder of the power and often created for tax purposes. 

There is obviously a problem in valuing the individual's interest at the time of death. If there is to be any estate recovery from life estates or income only trusts, an artificial value will have to be assigned to the life estate or income interest.  Will it be the value at the moment before death?  Will that value be based on life expectancy tables? Life estates are considered to have a zero value for eligibility (see the New York State Dept. of Health's Administrative Memo, 96 ADM-8), since there is no market for them, so any attempt to count them as having a value for estate recovery would be inconsistent with both current policy and the economic reality it reflects.

Aside from these questions, such recoveries potentially conflict with existing New York laws. Life estates terminate upon the death of the life tenant and upon the life tenant's death, the remainder interest passes to the remainderman.  If the remainder beneficiary is ascertainable at the time the life estate is created, the remainderman has a future estate which is indefeasibly vested.  EPTL 6-4.7 defines a future estate indefeasibly vested as " estate created in favor of one or more ascertained persons in being which is certain when created to become an estate in possession whenever and however the preceding estates end and which can in no way be defeated or abridged."  This is the case with most transfers of real property with a retained life estate.  The assignment of an artificial value to the life estate after the death of the life tenant for the purposes of estate recovery reduces the vested property right interest of the remainderman. The same reasoning applies to an income interest in a trust and the remainder interest.  Furthermore, Pursuant to EPTL 6-5.1, the remainderman's property right interest is alienable.  A remainder interest may have been sold or transferred by the remainderman prior to the life tenant's death.  Estate recovery against a life estate would therefore generate a conflict between Medicaid's rights and the rights which may have been conferred by a remainderman, leading to a significant amount of litigation against third party transferees.  EPTL 6-5.1 states: "Future estates are descendible, devisable and alienable, in the same manner as estates in possession."

The preceding paragraph highlights the problems that this recovery statute will create for title to real property.  Not only is there a potential conflict with the EPTL provisions, but every transfer of property where the title search reveals a transfer by survivorship of a joint tenant or vesting of a remainder interest where there was a life tenant will raise the issue of a potential recovery claim by Medicaid.  However, unlike a Medicaid lien, there is no recording of the claim, and unlike an estate claim there is no set period for raising such a claim.

The state already imposes a transfer penalty for the full value of property transferred to an irrevocable trust, thus recognizing that the transfer was of the full value of the assets in the trust, regardless of a retained interest or benefit.  Imposing an estate recovery would be inconsistent with the transfer penalty policy.  Additionally, certain transfers are exempt from Medicaid penalties. For example a homestead may be transferred to a spouse; a child who is blind, disabled or under age 21; a sibling who has an equity interest in the home and who resided in the home for at least one year before the person was institutionalized; or a child who resided in the home for at least two years before the person was institutionalized and provided care to maintain the person at home ("caretaker child").  It would conflict with federal and state Medicaid law to recover against these transfers of a homestead even if they were subject to a retained life estate.

Likewise certain transfers in trust other than the homestead are exempt from Medicaid transfer penalties. For example assets other than a homestead may be transferred to a trust for the sole benefit of the spouse; to a trust established for the sole benefit of a disabled child; a trust established for the sole benefit of a disabled person under the age of 65. To recover against these trusts (even if there is a retained life interest) would conflict with state and federal Medicaid law.

Claims against retirement plans would conflict with Employee Retirement Income Security Act of 1974 (ERISA) and CPLR 5205. These accounts are traditionally protected from creditors. EPTL. 13-3.2(a) provides that the rights of beneficiaries of a pension, retirement, death benefit, stock, bonus or profit-sharing plan, system or trust or (insurance proceeds) "shall not be impaired or defeated by any statute or rule of law governing the transfer of property by will, gift or intestacy."  For the protection of these accounts after the owner's death see Matter of Gallet, 196 Misc. 2d 303, 308, 765 N.Y.S.2d 157, 161 (Sur. Ct. New York County 2003) [enhanced version available to subscribers].  Estate recovery against retirement plans would therefore generate a conflict between Medicaid's rights and the rights of the beneficiaries leading to a significant amount of litigation.  Likewise, life insurance should not be considered to be a recoverable asset. Life insurance is not subject to claims of creditors; and it should not be considered in Medicaid estate recovery.

In summary, the ambiguities, conflicts with other state laws, constitutional issues, and conflicts with federal and state Medicaid laws will cause challenges and litigation which will ultimately cost the state more than the potential savings from expanded estate recovery.  Hopefully the regulations will limit some of these problems.

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  • Anonymous
    Thank you, Mr. Goldfarb, for laying out the issues in a clear and concise fashion and for all the work you do for the Elder Law bar in our state. I agree that the cure could end up being a lot worse than the disease. Sorta like no-fault insurance.
  • Anonymous
    The medicaid estate recovery was limited to an individual property.