The Medicaid Death Tax:
Medical Assistance Estate Recovery in Pennsylvania
Written By: Attorney Jeffrey A. Marshall, CELA*
Introduction to the Regulations
On November 3, 2001, the Pennsylvania Department of Public Welfare (DPW) published the long-awaited final Medical Assistance Estate Recovery Regulations. The Regulations are of significance to any lawyer whose practice includes estate administration or long term care and Medicaid planning.
The Regulations create a number of new planning opportunities, especially in the area of undue hardship waivers. Procedures are set forth with some specificity and several “gray areas” are clarified. Unfortunately, however, the Regulations may raise as many questions as they answer. Some sections (e.g. postponement of collections) seem impractical, and others unduly burdensome.
It might be suggested that the clarity and practicality of the Regulations would have benefitted if DPW had sought input from the private bar in the drafting process. But, at this point, the Regulations are final, and both DPW and private attorneys will have to struggle with the practical problems that are created.
It is not the intent of this article to discuss the Regulations’ numerous unresolved issues. Attorneys will have to work through these perplexities for years to come. (For a discussion of some of these issues, see the author’s recent article published in the Pennsylvania Bar Institute’s coursebook for the program “Making Sense of the New Medical Assistance Estate Recovery Regulations,” held in December 2001). Instead, the goal of this article is to provide a simplified, basic description of how Medical Assistance Estate Recovery will function in Pennsylvania when the Regulations take effect on February 1, 2002.
What is Medical Assistance Estate Recovery (MAER)?
Most people don’t have health insurance that covers long term care costs. A major source for payment of long term care costs, including both nursing home costs and, to an increasing extent, home care costs, is the Medicaid Program (referred to as “Medical Assistance” or “MA” in Pennsylvania). Many home-based long term care recipients and over 2/3rds of Pennsylvania nursing home residents receive MA benefits. An important, but frequently misunderstood, aspect of receiving MA benefits for long term care is the repayment requirement known as Medical Assistance Estate Recovery. For families struggling to meet long term care costs, an understanding of the complicated Medicaid Program, including estate recovery, is essential.
As a requirement of federal law [42 U.S.C. §1396p(b)], Pennsylvania must seek repayment for the amount of MA paid out for long term care related services provided on behalf of certain recipients. Under the Pennsylvania Medical Assistance Estate Recovery (MAER) Program, the state’s repayment claim arises only upon the death of the MA recipient and no lien is placed against any property during the recipient’s lifetime. It is, in effect, a Medicaid ‘death tax” that takes effect only upon the death the person who received the benefits.
What Medicaid Benefits are subject to MAER?
MAER is applicable when an individual who is 55 years or older receives MA for nursing facility services or home and community-based services and related hospital and prescription drug services. The “home and community-based services” covered by MAER include a broad range of so-called “Waiver Program” MA services provided to individuals with the goal of avoiding institutionalization. Recovery only applies to MA benefits received after August 15, 1994.
What Assets are Subject to MAER and How Does the State Recover?
Upon the death of an individual who received benefits covered by MAER, the state has a claim against the decedent’s probate estate in the amount of the covered payments that were made. The MAER regulations, in effect, give Pennsylvania the status of a creditor with a claim against the estate. This creditor status does not exist prior to the death of the MA recipient. MA is a public benefit, not a loan. The state’s creditor status arises only at the time of the death of the recipient of covered benefits. In this regard, MAER works in a manner similar to a death tax. Thus, estate recovery is sometimes referred to as the Medicaid Death Tax.
The portion of the MAER claim that relates to MA benefits paid for services rendered during the decedent’s last six months of life receives priority over most other estate creditors. However, the reasonable costs of administering the estate, including attorney’s fees and funeral expenses, are given priority over MAER.
For purposes of MAER, an MA recipient’s probate estate includes all assets that were owned by the decedent and which come under the control of the Personal Representative of the estate. This normally includes all assets owned by the MA recipient in sole ownership at the time of death such as savings or checking accounts, stocks, personal property, and real estate. It also includes the proceeds from life insurance policies, annuities, and death benefits if those proceeds are payable to the estate rather than to a beneficiary.
The Regulations provide that the recovery claim also reaches certain assets which, while owned by the decedent, can be distributed directly to family members without the involvement of a Personal Representative or the probate process. This expansive interpretation of the term “probate estate” draws in such assets as life insurance proceeds paid directly to another family member under a facility of payment clause (if the estate was the policy beneficiary), and property distributed directly to family members under 20 Pa.C.S. §3101.
Since MA is a needs-based program, recipients of benefits generally have few assets other than those limited items which are exempt from MA spend-down requirements. The most significant asset that can be retained by an MA recipient is typically the home. In practical effect, MAER is a death tax levied against the homes of people over age 55 who received MA benefits to pay for long term care.
The MAER Regulations require the Personal Representative of the estate to contact DPW and request a statement of claim. In practice, DPW attempts to notify the family of the deceased MA recipient that a claim may exist, but the Personal Representative is responsible to determine if there is a MAER claim even if he or she never receives any notification.
After the Personal Representative requests a statement of claim, DPW will notify the Personal Representative of the amount of the claim, if any. The Personal Representative is held strictly liable to make certain that the claim is paid, provided assets for payment exist. A Personal Representative who distributes assets of the estate without paying the MAER claim will be held personally liable to pay the claim. Even paying some creditors of the estate (e.g. for a grave marker) may result in liability, so care should be taken before paying creditors whenever a MAER claim may exist.
What assets owned by a deceased MA recipient are NOT subject to MAER?
With minor exceptions discussed below, MAER does not apply to interests owned by a decedent which pass outside of probate to individuals and not to the decedent’s estate. Ownership interests which are exempt from MAER include assets owned jointly with right of survivorship, as tenants by entireties, or which are payable to a beneficiary other than the estate.
How Does a Personal Representative Request a Statement of Claim?
The Personal Representative’s request for a statement of claim may be submitted to DPW by certified mail return receipt, facsimile machine, or electronic mail. The notice must include:
(1) A statement that the Personal Representative is requesting a statement of claim against the estate of the decedent;
(2) the decedent’s name;
(3) the decedent’s last address;
(4) the decedent’s date of birth;
(5) the decedent’s date of death;
(6) the decedent’s Social Security Number;
(7) the Personal Representative’s name, address, and telephone number;
(8) written documentation of the gross value of the decedent’s estate.
The address for requesting a statement of the MAER claim is:
Third-Party Liability Section
Department of Public Welfare
Estate Recovery Program
Post Office Box 8486
Harrisburg, Pennsylvania 17105-8486
The Personal Representative should take care in paying creditors and making distributions, even in reliance on the statement of claim received from DPW, since DPW reserves the right to amend its statement of claim if new or updated information comes to its attention.
When Will Collection of a MAER Claim be Postponed?
The law protects certain relatives of a deceased MA recipient from MAER claims by requiring that collection of the claim be postponed until the last of one of the following occurs:
(1) The death of any surviving spouse;
(2) The death of any child who is blind or totally and permanently disabled;
(3) The date any surviving child turns age 21;
(4) The death of, property transfer by, or vacating of a home by a sibling with an equity interest in the property who has been living in the home for at least a year.
As discussed above, assets that pass to the surviving spouse or others through joint ownership with right of survivorship or beneficiary designation are not subject to any MAER claim and thus postponement is not relevant to those assets. They are exempt. For assets that are subject to postponement of claim, the Personal Representative is responsible for making certain the claim is protected during the postponement period. The rules regarding protection and postponement of claims are particularly troublesome and require careful review of the Regulations. The Personal Representative may be well advised to seek clarifications and prior approvals from DPW. The Personal Representative and beneficiaries may wish to consider options to a postponement. DPW should be willing to consider settling claims otherwise required to be postponed at significant discounts.
Are There Exemptions from Recovery if it Will Cause Undue Hardship?
In some situations, persons affected by a MAER claim may request an exemption due to undue hardship.
(1) Personal Residence Waivers. Claims against the primary residence of the decedent will be waived if the person requesting the waiver meets ALL three of the following conditions:
(A) The person resided in the residence for at least two years immediately preceding the decedent’s receipt of MA paid nursing facility or home and community-based waiver services;
(B) The person has no other alternative permanent residence;
(C) The person provided care or support to the decedent for at least two years during the period during which time the decedent needed care or support to remain at home.
(2) Income Producing Asset Waivers. An “income-producing asset” is property which is used in a trade or business such as a family farm, family business or rental property, excluding cash, stocks, and bonds, mutual funds or other marketable financial instruments. A MAER claim will be waived with respect to an income-producing asset where a spouse, child, parent, sibling or grandchild of the decedent meets both of the following conditions:
(A) The asset is used to generate the primary source of income for the household, and
(B) There would be a gross family income of less than 250% of the Federal poverty guideline without the use of the asset.
(3) Home Maintenance Expense Waivers. DPW will permanently waive from the amount of its recovery an amount equal to the necessary and reasonable expenses incurred in maintaining the decedent’s home while the decedent was receiving home and community based services, or in maintaining the decedent’s vacant home while decedent was in a nursing home.Necessary and reasonable expenses for maintaining the decedent’s home include real estate taxes, utility bills, home repairs and home maintenance such as lawn care and snow removal necessary to keep the property in condition for the decedent to return home or to sell at fair market value.
(4) Administered Estates under $2,400. The claim will be waived for administered estates with a gross value of $2,400 or less if there is an heir.
(5) Discretionary Waivers. DPW may also waive an MAER claim, compromise the claim, or postpone collection, in other circumstances where undue hardship exists, or where collection is not cost-effective.
Hardship Waiver requests should be sent to:
Estate Recovery Program
Post Office Box 8486
Harrisburg, PA 17105-8486
What happens if no one comes forward to administer an Estate?
When no one steps forward to administer an estate which is subject to an MAER claim, the Regulations authorize DPW to act to have the estate administered. DPW may proceed in either of the following ways:
(1) By referring the estate to local county bar associations and authorizing a member of the local county bar to obtain letters of administration on the Department’s behalf;
(2) By causing one of the Department’s employees to administer the estate. The Department employee may seek legal assistance from the Department’s legal counsel or private counsel.
In both of the above two situations, combined administrator’s commissions and attorney’s fees of the greater of $1,000 or 6% of the gross assets of the estate are authorized.
It will be interesting to see whether local county bar associations will be willing to participate in the collection program proposed by this section of the Regulations. Local bar associations may decide that assisting in the collection of MAER claims is not in furtherance of their missions. They may not wish to be involved in the enforcement of MAER claims against what, in most cases, will be poor, elderly, unsophisticated, and unrepresented surviving spouses and other family members. As noted, MAER is, in effect, a Medicaid death tax levied against the homes of the elderly poor, and local bar associations may not want to be seen in the role of tax collectors. In addition, local bar associations may be deterred by the potential for negative publicity that may result from their involvement. Participation is not likely to result in enhancing the image of attorneys in the community. Similar estate recovery referral programs tried in other states have met with significant criticism and negative publicity, which Pennsylvania’s local bar associations may wish to avoid.
Estate Recovery is a very real concern for elders in need of long term care. Some individuals may not apply for needed benefits due to fear of its effects. It is important for the attorney to reassure a community spouse that his or her separate assets are beyond the reach of MAER, and that assets held as tenants by entireties will not be subject to claim provided the community spouse is the surviving spouse. After the death of the MA recipient, MAER creates numerous problems and traps for attorneys representing estates. Many issues are unresolved. Attorneys who represent clients affected by MAER will need to spend significant time in study of the Regulations and other sources of relevant law.
The Regulations and related sources of law:
- 42 U.S.C. Section 1396p(b) (the provisions of federal law which mandate that states establish estate recovery programs);
- HCFA State Medicaid Manual Transmittal 75 [issued by the Health Care Financing Administration (now CMS) on January 11, 2001]. CMS Download
- Medical Assistance Estate Recovery (55 PA. Code Chapter 258). The Regulations are published in the November 3, 2001 issue of the Pennsylvania Bulletin (31 Pa.B. 6034) and may be reviewed online at www.pabulletin.com. Note that DPW’s preface to the Regulations precedes the Regulations. The Regulations themselves are found at “Annex A”;
- 62 P.S. § 1411 (Repayment from probate estates);
- PEF Code § 3392 (Classification and order of payment);
- PEF Code § 3101 (Payments to family and funeral directors);
- PEF Code § 3121 (Family exemption).