Medicaid Liens and Estate Recovery in New Jersey
By Donald D. Vanarelli, Esq.
There are both federal and state provisions for the recovery of correctly paid Medicaid benefits from the estate of a recipient.
States such as New Jersey that participate in the Medicaid program are required to enact provisions in order to recover from the estate of a deceased Medicaid recipient all monies expended on behalf of that recipient during the recipient's lifetime. According to 42 U.S.C.A. §1396p(b)(1)(B), "In the case of an individual who was 55 years of age or older when the individual received such medical assistance, the State shall seek adjustment or recovery from the individual's estate."
Although the regulations that govern Medicaid recovery are complex, the basic estate recovery rule is that, if an individual has been a recipient of correctly paid Medicaid benefits on or after age 55, or age 65 depending on the dates when benefits were paid, upon that recipient's death, those benefits may be recoverable from the recipient's estate, if he leaves no surviving spouse, child under age 21, or blind or disabled child.
New Jersey's Medicaid estate recovery regulations (for recovery of Medicaid benefits correctly paid) are set forth in N.J.A.C. 10:49-14.1. The New Jersey regulations include the mandatory federal requirements as well as optional requirements permitted by federal law.
New Jersey's Guidelines for application of estate recovery:
Recovery can be made under the following circumstances, which are dependent upon the date of death and the age at which benefits were paid.
Recovery can be made against the Medicaid recipient's estate if the recipient was age 65 or older when he/she received benefits and:
- If the recipient died between 2/1/84 and 10/20/92, and left no surviving spouse or surviving child; and
- If the recipient died after 10/21/92, and left no surviving spouse or surviving child who is under age 21, blind or permanently and totally disabled; and,
- If the recipient died between 7/20/81 and 12/22/95, the amount to be recovered exceeds $500 and the gross estate exceeds $3,000.
In addition, if the recipient died on or after 4/1/95, and received benefits on or after 10/1/93, benefits are also recoverable if the recipient received services on or after age 55 but before age 65, and the individual left no surviving spouse or surviving child who is under age 21, blind or permanently and totally disabled; with the additional qualification that, if the recipient died between 7/20/81 and 12/22/95, the amount to be recovered must exceed $500 and the gross estate must exceed $3,000. N.J.A.C. 10:49-14.1(a)-(d).
For recipients dying on or after 12/22/95, Medicaid claims are deemed preferred claims (equivalent to debts and taxes with preference under federal or state law). N.J.A.C. 10:49-14.1(e).
New Jersey Procedures for estate recovery:
For estates created on or after 10/4/99, liens or claims against a recipient's estate are to be filed by the Division within 90 days from receipt of actual written notice (from the estate's personal representative or any interested party) of the recipient's death. N.J.A.C. 10:49-14.1(d). Any lien filed on or after 10/4/99 shall describe the extent of the beneficiary's interest covered by the lien if that information is known by the Division at the time the lien is filed. If that information is not known by the Division, then the full amount of the claim shall be listed on the lien. N.J.A.C. 10:49-14.1(m).
Upon request, the deceased recipient's personal representative or other interested party may obtain a "payoff statement" on the amount due under the claim, if that information is available to the Division when requested. N.J.A.C. 10:49-14.1(f).
For estates created or pending after 10/4/99, if a deceased recipient's family member had continuously resided in a home owned by the recipient prior to the recipient's death, that home was the recipient's primary residence, and the home was and remains the family member's primary residence, a Medicaid lien may be recorded against the property, but it will not be enforced until the property is voluntarily sold or the family member dies or vacates the property. N.J.A.C. 10:49-14.1(g).
New Jersey Limitations on estate recovery:
For recipients who die on or after 10/1/93, and whose estates are subject to a Medicaid lien that was pending or initiated after 3/1/95, the estate representative may apply to the Division for a waiver or compromise of the claim based upon undue hardship. N.J.A.C. 10:49-14.1(h).
In addition, the Division may elect not to pursue a claim against the estate of a recipient who died on or after 12/22/95 if it determines that pursuing the claim would not be cost-effective. N.J.A.C. 10:49-14.1(h).
For estate recoveries pending on or initiated after 10/4/99, no lien (inchoate or otherwise) or right of recovery can exist or be pursued until all conditions of the statute are met, including the absence of a surviving spouse or minor, blind or disabled children. Even when such conditions are met, recovery shall not be pursued against property held by a bona fide purchaser who paid fair market value for the property, but shall be sought from the estate. N.J.A.C. 10:49-14.1(j), (k).
What comprises an "estate":
For purposes of Medicaid estate recovery, federal law permits states to define "estate" more expansively than the definition set forth in a state's probate law. Pursuant to federal law, a Medicaid beneficiary's "estate," for purposes of the Medicaid recovery provisions, may include not only the real and personal property and assets within the individual's probate estate, but also "any other real and personal property and other assets in which the Medicaid beneficiary had any legal title or interest at the time of death (to the extent of that interest), including such assets conveyed to a survivor, heir, or assign of the deceased individual through joint tenancy, tenancy in common, survivorship, life estate, living trust or other arrangement, as well as any proceeds from the sale of any such property which remain in the estate of the survivor, heir or assign of the beneficiary, to the extent of the beneficiary's interest." 42 U.S.C. §1396p(b)(4)(B). New Jersey has adopted this more expansive definition of an "estate." N.J.A.C. 10:49-14.1(l)(2).
Pursuant to New Jersey statute, for individuals who died on or after 4/1/95, a Medicaid beneficiary's "estate," for purposes of the recovery provisions, includes not only the real and personal property and assets within the individual's probate estate, but also any other real and personal property and other assets in which the Medicaid beneficiary had any legal title or interest at the time of death, to the extent of that interest, including assets conveyed to a survivor, heir or assign of the beneficiary through joint tenancy, tenancy in common, survivorship, life estate, living trust or other arrangement, as well as any proceeds from the sale of any such property, to the extent of the beneficiary's interest. N.J.A.C. 10:49-14.1(l).
"Life estate," for estates or estate recoveries pending on or after 10/4/99, means a life estate created upon the death of a beneficiary (but not a life estate in which the beneficiary held an interest during his lifetime, but which expired on the beneficiary's death). N.J.A.C.
"Other arrangement," for estate recoveries pending on or after 10/4/99, includes any trust or annuity in which the beneficiary had an interest at the time of death, including a trust or annuity established by a third party (subject to the exceptions below):
For estates pending on or after 10/4/99, the term "estate" shall not include:
An inter vivos trust established by a third party for the deceased beneficiary's benefit, if the trust (a) is a discretionary trust constructed so that the Medicaid beneficiary could not compel distributions; and (b) contains no assets in which the Medicaid beneficiary held any interest within 5 years prior to (i) applying for Medicaid benefits or (ii) the Medicaid beneficiary's death;
- A testamentary trust established by a third party (including the Medicaid beneficiary's spouse) for the deceased beneficiary's benefit, if the trust (a) is a discretionary trust constructed so that the Medicaid beneficiary could not compel distributions; and (b) contains no assets in which the Medicaid beneficiary held any interest within 5 years prior to (i) applying for Medicaid benefits or (ii) the Medicaid beneficiary's death. N.J.A.C. 10:49-14.1(n)(2), (3).
DeMartino and the Use of Testamentary Trusts in Medicaid Planning:
Prior to the case of Estate of DeMartino v. DMAHS, 373 N.J. Super. 210 (App. Div. 2004), testamentary trusts were favored in certain Medicaid planning situations. For example, because a Medicaid recipient is entitled to a statutory elective share upon the death of the community spouse, and those assets could ultimately be claimed by the Medicaid authorities to reimburse the state for the cost of the care provided to the institutionalized spouse, a Medicaid plan may have included the creation of a testamentary trust through the Last Will and Testament of a community spouse, whereby the amount required to satisfy the Medicaid recipient spouse's elective share is held by the trustee for the Medicaid recipient's special needs during his lifetime, and the amount remaining at his death is distributed to the couple's children. Until the DeMartino case, the thinking had been that, because the assets would be in a testamentary trust, it would not be considered part of the institutionalized spouse's "estate," for purposes of Medicaid estate recovery.
That practice was challenged by the DMAHS in the DeMartino case, and the DMAHS ultimately succeeded in its position that assets of a testamentary trust established by a community spouse could be used by the DMAHS to recover Medicaid benefits paid to the institutionalized spouse.
The DeMartino Case:
In DeMartino, in September 1999, the husband, Michael DeMartino, gifted his interest in the couple's home to his wife Anne (the community spouse). He entered a nursing home on April 1, 2000 and began receiving Medicaid benefits. His wife died on October 29, 2000. In her will, she created a testamentary trust for the husband. Under the testamentary trust, that portion of her residuary estate equaling the husband's elective share was placed in the trust. The husband received the income from the trust in installments, and the trustee was given sole and absolute discretion to distribute principal for the husband's "special nonsupport needs." The will provided that, upon the husband's death, the remainder of the trust would be distributed to the couple's children.
When the husband died on May 6, 2001, the aforementioned testamentary trust had not yet been funded. Thereafter, the DMAHS sought to assert a claim against the husband's estate, including against the assets in the testamentary trust. The husband's estate, in turn, claimed that the DMAHS could not assert a lien on the property because the husband had no legal interest in the trust assets at the time of his death. The estate also claimed that provisions of N.J.A.C. 10:49-14.1(n), which defines the term "estate" to include assets in certain testamentary trusts (in particular, those trust assets in which the Medicaid recipient had an interest within a five-year "look-back" period), to be invalid.
The Appellate Division rejected the husband's estate's challenge to N.J.A.C. 10:49-14.1(n), finding that federal law permits states to adopt broadened definitions of "estate," which may include "assets conveyed to a survivor ... of the deceased individual through joint tenancy, tenancy in common, survivorship, life estate, living trust, or other arrangement." 42 U.S.C. §1396p(b)(4)(B) (emphasis supplied).
The DeMartino court concluded that the assets of the testamentary trust were part of the husband's "estate" upon his death:
Rather than make an outright bequest to Michael of the [elective share] monies, Anne placed Michael's elective share in a trust.... But for the trust arrangement, Michael's elective share would have been part of his own estate.... By establishing a trust, ... Michael's assets were transferred to his heirs upon his death. In our view, a testamentary trust of the sort employed here qualifies as an "arrangement" for the conveyance of the assets of a Medicaid beneficiary within the meaning and intent of 42 U.S.C. §1396p(b)(4)(B).
The court found that, although the trust was created by a third party, as opposed to the Medicaid recipient, "a testamentary trust that effects the transfer of the recipient's assets to his survivors, heirs or assigns, is similar in purpose and effect to the forms of conveyance mentioned in 42 U.S.C. §1396(b)(4)(B)." It concluded that, "When assets of a Medicaid recipient are conveyed to a survivor, heir or assign by such an "arrangement," the assets remain part of the recipient's "estate" pursuant to 42 U.S.C. §1396p(b)(4)(A) and N.J.S.A. 30:4D-7.2(a)(3)."
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