Many people believe that they’ve protected their house/retirement/savings by adding a child to the title or creating a life estate. Some people go so far as to create an irrevocable trust with their general practice lawyer believing this will save their estate from the nursing home.

But the old school of thought doesn’t deal with the true threat to your financial legacy. If you’re planning ahead for the cost of your long-term care, the nursing home’s not the one you need to worry about. It’s not Medicaid, either. Not really. The monster in the closet, the creature under the bed, is the state Estate Recovery Program. For many people – including most lawyers – Estate Recovery is something straight out of their financial nightmares.

What is Estate Recovery?

Under federal law, every state is required to have a program to recover as much of the money paid by the state’s Medicaid nursing home program as possible. In Iowa, the Estate Recovery program is created under Iowa Code Section 249A.53. If you follow that link, you’ll see the requirements, the exceptions, and the definitions associated with Estate Recovery in Iowa. You don’t want to read a page and a half of statutory language, so here’s some of the highlights:

  1. If you are on Iowa Medicaid and are either at least 55 years old or living in a care facility and not expected to return home, then your estate has an obligation to pay the state of Iowa back for every dollar spent on your behalf.
  2. Your “estate” is not limited to property that passes through probate.
  3. Your executor could be personally liable for the debt.

We’re not going to get into too much detail about the specifics of these items, but a little clarification is important. First, the debt is not dependent upon whether you’re disabled. If you are over age 55 and receiving Medicaid benefits, the debt begins to accrue immediately. Second, your estate includes assets that pass through probate and all other assets in which you hold some beneficial interest in the moment immediately before you die. Third, if your executor distributes money to your heirs before they pay money to Estate Recovery, then the state can sue your executor personally to get their money.

How Does Estate Recovery Work?

After your 55th birthday, your Estate Recovery bill starts to accrue the moment the state Medicaid program makes a payment on your behalf. The bill increases for every dollar they pay until you pass away, but it does not include interest during your life. The nursing home will inform Estate Recovery of your death, and your executor is required to do so as well. And that’s when things get interesting.

If you have a probate estate, Estate Recovery will submit a Claim in Probate for the amount of your outstanding debt. With the exception of a few specific bills, the estate assets must be used to pay back your Medicaid bill before any money can pass to your loved ones.

If there is no probate estate, Estate Recovery asks you to report all of your assets on a spreadsheet they provide. All of your assets must then be converted to cash and used to pay certain expenses of the estate and the Estate Recovery bill.

In both circumstances, you are required to disclose all of the assets you had an interest in at your death. Among elder law lawyers, this is known as a type of “expanded estate.” Iowa’s expanded estate includes annuities, life insurance, retirement accounts, real estate (including your home), bank accounts, funeral trusts or accounts, and any other property (including trusts) of which you were a beneficiary during your life.

What does that mean to you? One common strategy general practice lawyers have used to try to protect assets is called a “retained life estate.” This strategy involves a parent (often elderly) transferring their house to their adult children and reserving the right to continue living there until that parent dies. This approach avoids probate and preserves certain beneficial tax treatment. But the expanded estate includes life estates, so the full value of the residence can be accessed to pay the Estate Recovery bill.

The Iowa Code contains three exceptions: property passing to spouses or disabled children, property passing to children under the age of 21, and situations where undue hardship could result from the collection of the debt. Unfortunately, these are only temporary exceptions. The Estate Recovery debt still gets collected, either at the death of the spouse, disabled child, or person experiencing the hardship or when the child turns 21.

On top of all of that, Iowa courts are notoriously unsympathetic to Medicaid recipients, finding in favor of the State in many cases where the patient’s family thought the assets were completely protected. Many people assume their planning is complete once they’ve become eligible for Medicaid, but Estate Recovery is always lurking after their loved one passes away.

You can protect your property from the state

Maybe you’re not surprised by the idea that Estate Recovery can force your estate and your beneficiaries to pay your Medicaid debt. If that’s old news to you, you’ve probably given up on the whole idea of being eligible for Medicaid to pay your nursing home bill. Well, the surprises keep coming: even with the use of the expanded estate, you can preserve your estate for your spouse and children.

The primary hook for Estate Recovery to claim an asset should be used to pay back your bill is the idea that the asset is available to you in some way during your life. For example, according to a 2014 Iowa Supreme Court decision, if you are a beneficiary of a trust, all of the assets in that trust are countable for Estate Recovery even if your only benefit from the trust is the income until your death. That’s why life estates, life insurance, annuities, retirement accounts, bank accounts, and every other account that transfers automatically at death are often paid over, in full or in part, to the Estate Recovery program.

Fortunately, there are many planning options that can either act as exceptions to the “lifetime benefit” rule. One option involves purchasing prepaid funeral contracts for you and your family which are exempt from Estate Recovery under federal law. Other potential options include promissory notes or Medicaid qualified annuities, but all of these still have some risk of payment back to Estate Recovery (Medicaid annuities must contain a repayment provision!).

But perhaps the best way to deal with the estate recovery beast is to work and communicate with a collaborative team that includes your family. An elder lawyer can help you develop a comprehensive approach that involves your spouse and your children to help you leave a financial legacy that benefits your family and protect your assets from not just the nursing home, but also Estate Recovery.