Ladybird Deeds and Low Hanging Fruit

By Doug Chalgian on December 20, 2012

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Nearly two years ago, Michigan began implementing a Medicaid Estate Recovery Program.  “Estate recovery” means that people who receive Medicaid assistance in the nursing home, through the MI Choice or PACE programs, face the prospect that when they die the State could come back against their estates and seek repayment for the costs paid by the State for their care.

Curiously, Michigan was the last state in the nation to implement an estate recovery program. The laws that were implemented in 2011 were actually passed in 2007.  In 2007, those laws were intentionally written too lenient.  That is, Michigan lawmakers intended to adopt an estate recovery program that would be relatively easy to circumvent.  The part of the law that made Michigan’s program particularly lenient was the part of the law that provided that estate recovery could only be imposed against “probate assets.”

The term “probate assets” refers to assets that pass through the probate administration process.  To explain what “probate assets” are, it is easiest to describe the arrangements that cause assets to pass at death through non-probate means.  These include: through trust, by beneficiary or “transfer on death” designations, by joint ownership, and by life estate.  Assets that pass at death by any of these arrangements would not be probate assets and not be subject to estate recovery under Michigan’s current estate recovery law.

Michigan’s estate recovery law also excluded people who began receiving Medicaid assistance prior to September 30, 2007 (the day the law was passed), and provided that estate recovery would only be applied to Medicaid recipients who received written notice of the program when they first applied for benefits.

Starting and Dropping Cases

Shortly after Governor Snyder took office in January 2011, efforts by the State to finally implement the estate recovery program began in earnest.  Among other things, the State contracted with a company, Health Management Systems, Inc. (“HMS”), a company which operated the estate recovery programs for several other states.  Under the terms of the contract, HMS would operate Michigan’s estate recovery program and would receive a percentage of all funds collected.

In the summer of 2011, family members of Medicaid beneficiaries began receiving notices and questionnaires following the death of the Medicaid beneficiary, which documents were designed to allow them to determine whether they had grounds to pursue collections.

Initially, HMS and the Michigan Attorney General’s office aggressively pursued collections in several matters.  Ultimately, in a proceeding in which the Medicaid beneficiary’s family was represented by Chalgian and Tripp Law Offices, a case was heard and decided in Clinton County regarding one of the central issues in many of these lawsuits.  The issue was whether the State could collect against an estate of a person who began receiving assistance at a time prior to when Michigan was giving written notice of the estate recovery program.  The Judge ruled against the State and HMS in that matter, finding that because no written notice was given at the time the Medicaid beneficiary first applied for services, the State had no right to collect.

Over time this decision caused the State to dismiss several other outstanding cases, and it appears that now all cases involving Medicaid beneficiaries who began receiving assistance prior to the fall of 2011 have been dropped or settled.

For people entering the Medicaid long term care system after approximately November 2011, written notice has been provided to them regarding estate recovery, and this important defense is no longer viable.

Ladybird Deeds

Because the only asset that people who receive Medicaid typically own when they die is their house, early on in the process (back in 2007 when the law was passed) it became clear to attorneys practicing in this area that one way to avoid probate, and thereby estate recovery, which would not run afoul of other Medicaid eligibility rules, was the use of a so-called “ladybird deed”.

Low Hanging Fruit and the Future

So what we have today is a lenient estate recovery program that can be circumvented in most cases through appropriate planning, which often includes a “ladybird deed” – at least for single people on Medicaid.  While some at the State and HMS may be frustrated that they aren’t collecting what they hoped to collect through this program, the fact is that the law was written to allow for people to avoid the reach of estate recovery and that is what is happening.  As a result, to the extent the State is collecting anything through this program, it is from people who have no heirs and/or who failed to plan appropriately (i.e., the “low hanging fruit”).

Of course, there are some in the State and HMS who would like to change the law so that Michigan no longer has a lenient program and so that arrangements, like ladybird deeds, would not allow the Medicaid beneficiary to avoid estate recovery.  There seems to be a reasonable likelihood that such a law could be passed in the future.  Accordingly, people who have family members on Medicaid should pay careful attention to any changes in these laws and should not assume that a ladybird deed will necessarily protect their home if such changes occur.

The Fear Factor

The biggest issue with current estate recovery program is not that people who receive Medicaid assistance are required to repay the State for their care costs, because, as discussed above, that isn’t really happening.  Rather, the big concern about estate recovery is that it is  scary and confusing.  As a result, people who do not need to be in nursing homes, and who haven’t applied for Medicaid, are doing foolish things with their assets believing that if they don’t take these steps, they may lose their homes.

Making matters worse are the ever-present senior seminar scam programs which have jumped on the “estate recovery” development as a new opportunity to scare seniors into buying legal and financial products they don’t need and which, in most cases, are contrary to their best interests (most commonly annuities, and “living” or irrevocable trusts).  The world of long term care, Medicaid, and now even Veterans benefits, has become a hotbed for these bad actors.

As a result, the real damage of estate recovery is not so much the program itself, but the fear it creates in the aging community, and particularly the fact that it makes senior citizens vulnerable to making very bad decisions about their resources. Further, ladybird deeds themselves are at best an imperfect mechanism for most traditional estate planning situations, and should usually not be created where someone is not already in a nursing home or on the MI Choice or PACE programs.

In conclusion, only people who are, or who have a loved one who is, seeking Medicaid assistance in a nursing home, or through MI Choice or PACE, should worry about the Michigan estate recovery program.  If in fact they do need Medicaid assistance through these programs, there are standard approaches that can protect their assets under current law.  Seniors should avoid falling prey to “educational” sales seminars that seek to create fear about the topic. When advice is needed they should consult with an attorney who specializes in this practice area.

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mm By: Doug Chalgian
Doug Chalgian

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