Dealing with and avoiding losing property to the state.
by Jim Schuster, Certified Elder Law Attorney
Preliminary note: If you are dealing with letters from the State of Michigan about its claim against the estate of a deceased Medicaid recipient then you must hire an elder law attorney if you have property that needs probate. That is property that was in the recipient’s sole name while s/he was receiving “long term care” Medicaid assistance. It may be the family home. It may be the family cottage or vacant property that never sold. The reason is that the property will have to go through probate and the State of Michigan will have a claim. However, under Michigan’s Medicaid Estate Recovery law there are expenses and claims that come before the state of Michigan will be paid. You need a lawyer to be sure you “get it right.”
Michigan was the last state to have a Medicaid “estate recovery program.” Estate recovery means that after the death of the Medicaid recipient the state looks for repayment of the cost of long term care out of the assets of the recipient. Since the only property a Medicaid nursing home resident typically has is $2,000 plus a home and a car, that means the state would present its claim against the home. Thus, the government grabs elders’ homes. How may you avoid losing the family home to the government?
Under the law, the state’s estate recovery claim will only be presented in probate estate administration. There will be no liens prior to death on homes. There are two points that should be made up front:
First, estate recovery may be avoided if the recipient has taken steps to avoid probate.
Second, if a Medicaid recipient has died and there is no property to go through probate then any contact from the Michigan Department of Community Health about an estate recover claim can be ignored.
What if the Medicaid recipient did not take steps to avoid probate? There are limitations and exemptions built in Michigan’s estate recovery law.
The homestead is exempt if it is occupied by the spouse, disabled or minor child or a relative who for two years or more provided care sufficient to postpone entry into the nursing home. It will be exempt if a sibling co-owner lives in it.
Farms, businesses and other income producing property are exempt if they are the “primary” source of income to the survivors.
Dependents may make a hardship claim with the state where value of the home is below 50% of the average price of a home in the county. Note the state takes the position that this claim must be made in response to its letters and the claim may not be made in probate, nor does it apply if the home is sold. If sold the state will go after the money no matter how little.
There are unanswered questions regarding the exemptions. Suppose property is exempt because the spouse lives in the homestead and uses the business property for primary income? What if she sells the property and moves? It is clear the state cannot put a lien on the property and attempt to collect out of the sale. Will the state attempt to put in a claim on her death if some of her property goes through probate? The answer is not known.
These developments make smart probate avoidance mandatory – less the cure be worse than the disease. Probate can be avoided by many ways, some smart and some risky.
We should first observe that a Will does not avoid probate. Wills are only effective in probate and their role is to state the deceased’s “will” or intention regarding distribution of property in the probate proceeding. The Will does have an advantage in that it allows contingency planning should an heir predecease or develop personal problems such as addiction.
Jointly owned property is a common way and a risky way to avoid probate. Not all joint property avoids probate, only that which provides for ownership by the survivor will avoid probate. Joint property may be in the form of bank accounts, investments or property. A point that is often overlooked is that joint owners have joint control. A joint owner may remove as much money as he or she wants from a bank account. There have been reports of the joint owner’s creditors taking money from the account. In one case the bank itself removed $56,000 from an elder’s account. Why? Her daughter, who was a joint owner on the account, defaulted on a bank loan. It did not matter that none of her money was in the account.
Control is emphatically lost if a joint owner of investment accounts or real estate exercises veto power. For example the co-owner may nix a sale, a reverse mortgage or major improvements to a property.
Finally, jointly owned property is a crude form of avoidance in that it transfers property no matter how circumstances change. What if a co-owner later develops an addiction and steals from the elder? What if a son dies? Should his children should receive his share? Jointly owned property has no solution for these contingencies.
Bank accounts and insurance policies offer a safer but still incomplete way to avoid probate through beneficiary designations on accounts. Contingent beneficiaries can sometimes be named as well. The advantage is that the named beneficiaries have no right or access to the accounts during the owner’s lifetime. They only get property at death. The problem is that many beneficiary designation forms make no allowance for a pre-deceased beneficiary. In that case the share will either go through probate or will completely bypass the family of the beneficiary. That is not the preferred result of most parents when a child predeceases.
A living trust is widely regarded as the best way to avoid probate, for reasons I’ll detail shortly. However, Michigan Medicaid does not allow the homestead of the recipient to be in a trust. The spouse may put the homestead in a trust after Medicaid is approved for the recipient. If there is no spouse then the “Lady Bird” deed is often used to avoid probate for the single recipient.
The living trust is the safest way to avoid probate. It allows the owner of the property to be the “settlor” of the trust and reserve all privileges of ownership during life. Beneficiaries are not co-owners and their rights to the property only mature on death of the settlor. In addition the trust, like the Will, allows for in-depth contingency planning. A child may predecease, become estranged, develop an addiction, become disabled and reliant on government benefits – all of these events can be anticipated in a living trust. Grandchildren may take their deceased parent’s share held in trust if they are not mature enough to handle money and so on. The trust can provide for these and other contingencies of life.
Conclusion
There it is. Medicaid Estate Recovery is complicated and dangerous. Avoiding can tricky, complicated and dangerous. You may not need a lawyer, but if you have any question get it answered immediately by an elder law attorney.
All the best,
Jim Schuster