MEDICAID ESTATE RECOVERY

MEDICAID ESTATE RECOVERY H. CLYDE FARRELL FARRELL & PAK PLLC 1000 Mo-Pac Circle Austin, TX 78746 Ph: 512.323.2977 Fax: 512.708.1977 cfarrell@txelderlaw.com State Bar of Texas ADVANCED ELDER LAW COURSE April 3, 2014 Dallas CHAPTER 7

H. CLYDE FARRELL FARRELL & PAK PLLC 1000 MoPac Circle Austin, Texas 78746 512/708-1977 (Fax) 512/323-2977 (Telephone) cfarrell@txelderlaw.com BIOGRAPHICAL INFORMATION EDUCATION Certified as an Elder Law Attorney by the National Elder Law Foundation, 2000 CERTIFIED FINANCIAL PLANNER TM practitioner, 1987 J.D. Degree, The University of Texas School of Law, 1975 M.A. Degree (Political Science), The University of Wisconsin, 1971 B.A. Degree (Government), The University of Texas, 1970 PROFESSIONAL ACTIVITIES Former Staff Attorney with Texas Rural Legal Aid in South Texas (1975-80) Former Chief of Texas Attorney General s Consumer Protection Division and Elder Law Section (1983-93) Solo Practitioner in Austin, Texas (1993-present) Founding Board Member and Past President, Texas Chapter, National Academy of Elder Law Attorneys Past President, Family Eldercare, Inc. (Austin) Advisory Council, Planned Living Assistance Network of Central Texas Member of the Bars of United States Supreme Court, U.S. Court of Appeals for the Fifth Circuit, State Bar of Texas Member of Texas Advocates for Nursing Home Residents, Family Eldercare, Inc., Gray Panthers, AARP, National Academy of Elder Law Attorneys, College of the State Bar of Texas LAW-RELATED PUBLICATIONS, ACADEMIC APPOINTMENTS AND HONORS Included in THE BEST LAWYERS IN AMERICA (2008-2014) and AMERICA'S TOP FINANCIAL PLANNERS (2008-2013) Named a "TEXAS SUPER LAWYER" by TEXAS MONTHLY, each year 2003-2013 Recipient of the "TEXAS LEGEND" Award by South Texas College of Law in 2003 Co-Author, Texas Elder Law (Thomson-West Texas Practice Series) Author, Financing Long Term Care in Texas (15th ed., 2010) Author, Public Benefits in Texas for Texans With Disabilities (13th ed., 2013) Co-Author (with Joe C. Fiore), Texas Consumer Law (1993), 3rd Ed. Author/Speaker, State Bar of Texas Elder Law Courses (1996-2013); University of Texas School of Law Elder Law Courses (1997-2012); South Texas College of Law Elder Law Courses (2002, 2003); American Bar Association Estate Planning Institute (1998); Texas Chapter, National Academy of Elder Law Attorneys Elder Law Programs (1996-2012) Editor, Elder Law Alert (newsletter of the Texas Chapter of the National Academy of Elder Law Attorneys), 1995 to 2011

Nothing contained in this publication is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This publication is intended for educational and informational purposes only. Copyright 2014 by H. Clyde Farrell.

TABLE OF CONTENTS ABSTRACT... 1 I. INTRODUCTION... 1 II. ANALYSIS OF THE ESTATE RECOVERY RULES... 1 A. To Whom Applicable and Definitions... 1 1. Decedents to Whom Applicable... 1 2. Services to Which Applicable... 1 3. Applies Only to Decedent s Estate... 2 B. Exemptions and Hardship Waivers... 2 1. Claims Created... 2 2. Notice of Claim Requirements... 2 3. Exemptions From Claims... 3 4. Waivers General Grounds... 3 5. Waivers Pertaining to Homes... 3 6. Deduction of Certain Expenses... 7 7. Requirement of Cost-Effectiveness... 8 C. Timeline of the Claim Process... 8 D. Claim Procedure Issues... 9 1. Need for a Personal Representative... 9 2. Who May Apply for a Hardship Waiver?... 9 3. What is the Role of the Probate Court?... 10 4. Does Permissive 4-Month Notice Apply?... 10 III. PLANNING STRATEGIES FOR AVOIDING ESTATE RECOVERY... 10 A. The Fraudulent Transfer Issue... 10 B. Enhanced Life Estate Deed... 11 C. Transfers to Community Spouse... 12 D. Surviving Spouse, Certain Children... 14 E. Residence to Child Under 21... 14 F. Residence to Blind or Disabled Child... 14 G. Residence to Certain Siblings... 14 H. Residence to Caregiver Child... 14 I. Residence to Certain Trusts... 14 J. Unmarried Child in Residence... 15 K. Undue Hardship Waiver... 15 L. 5-Year Gifting... 15 M. Pre-Death Transfer... 15 IV. POST-DEATH CHECKLIST DECEDENT ON MEDICAID... 16 A. Need for Immediate Action?... 16 B. Probate Needed?... 16 C. MERP Notices & Questionnaires... 16 1. Waivers and Exemptions... 16 2. The MERP Questionnaire... 17 3. Practice Aids for Identifying MERP Defenses... 17 4. Obtaining a MERP Release... 17 5. Drafting an Affidavit of Death... 18 V. APPENDIX 1: ESTATE RECOVERY DEFENSE CHECKLIST... 19 VI. APPENDIX 2: MERP RELEASE... 23 VII. APPENDIX 3: ENHANCED LIFE ESTATE DEED... 25 VIII. APPENDIX 4: TRUST AS GRANTEE OF ENHANCED LIFE ESTATE DEED... 27 IX. APPENDIX 5: AFFIDAVIT OF DEATH... 31 X. APPENDIX 6: DOCUMENTATION OF EXEMPTIONS AND DEDUCTIONS FROM ESTATE RECOVERY... 33 XI. APPENDIX 7: CLAIM PAYMENT AND IMPORTANT NUMBERS... 37 i

XII. APPENDIX 8: TEXAS MEDICAID ESTATE RECOVERY RULES... 39 ii

MEDICAID ESTATE RECOVERY ABSTRACT With the advent of the Medicaid Estate Recovery Program, every attorney involved with a decedent s estate must now answer the question, Was this decedent a Medicaid beneficiary? If the answer is Yes, the potential Medicaid claim against the estate must be assessed and dealt with. This article offers practical defense strategies, checklists and forms to facilitate that work. I. INTRODUCTION On June 1, 2003, the last day of the 2003 legislative session, the Texas Legislature passed a law making the state a creditor of the estates of some Medicaid recipients after they die, with the right to recover for certain expenses it has paid through the Medicaid program. 1 The law is very brief, essentially providing that the Texas Health and Human Services Commission is to comply with the Estate Recovery requirement of the federal Medicaid law. 2 Therefore, the critical provisions as to how estate recovery is to be implemented are contained only in rules of the Texas Health and Human Services Commission, which became effective March 1, 2005. 3 The current rules are set out in full in Appendix 8 below. Both the state and federal laws discussed here refer to the Medicaid program asserting a "claim" as a creditor. They do not provide for a lien. They do not provide for the state's recovering any more than necessary to pay back the Medicaid program for what it has provided. For example, if the Medicaid claim against a decedent's estate is for $20,000 and a home in the estate is sold for $100,000, the Medicaid program would receive only $20,000. II. ANALYSIS OF THE ESTATE RECOVERY RULES This analysis summarizes and comments on the estate recovery rules at 1 Texas Administrative Code Chapter 373, in order of the sections of the rules. 4 A. To Whom Applicable and Definitions 1. Decedents to Whom Applicable Estate recovery applies only to decedents meeting the following requirements: 5 Received covered Medicaid services (defined below) Age 55 or older at the time of receipt of the covered Medicaid services Initially applied for the covered Medicaid services on or after March 1, 2005 (the effective date of the rules) Even at this writing (February 2014), we still occasionally encounter an estate of a decedent who initially filed an application for Medicaid long-term care services before March 1, 2005. If so, and if the application was (or will be) certified, they are "grandfathered." An application that is denied will not provide a basis for asserting this "grandfather" protection. Section 373.105(1) below defines an application for this purpose as one that results in a covered service being approved under Medicaid. The word "initially" was added in (a)(2) in the final rules in response to a comment. That should be read as securing protection for individuals who initially applied before March 1, 2005 and were certified but lost eligibility (e.g., went home from a nursing home) and later reapplied. Likewise, it would appear to protect individuals certified for one kind of Medicaid long-term care as a result of a pre-march 1, 2005 application and changing to another type of service later--for example, changing from a home care program to nursing home Medicaid or vice-versa. Although agency representatives were quoted earlier as saying otherwise, both of those interpretations were adopted in a memo dated July 11, 2005. 6 The same policy clarification commented that application for a Medicare savings program (QMB, SLMB or QI-1) before March 1, 2005 would not place a client outside the scope of estate recovery because those are not "covered services" as defined below. 2. Services to Which Applicable Covered Medicaid services are limited to longterm care services provided to a recipient age 55 years or older by the Texas Medicaid program, with funding under Title 19 of the Social Security Act, in any of the following categories: 7 Nursing facility services Services of Intermediate Care Facilities for Individuals with Intellectual Disabilities (ICF-IID, formerly called ICF-MR services) 1 Tex. Gov. Code 531.077 2 42 U.S.C. 1396p(b)(1)(B). 3 1 Tex. Admin. Code Chapter 373. 4 The full text is set out in Appendix 8 below. 5 1 Tex. Admin. Code 373.103(a) 1 6 LCE ME Bulletin No. 05-06, "Policy Clarifications" (no longer online at this writing). 7 1 Tex. Admin. Code 373.103(a)

Home and community-based services under Social Security Act 1915(c) (all the long-term care Medicaid waiver services) and 1929(b) ( Community Attendant Services ) Related costs of hospital and prescription drug services. Some home and community-based services are not within this definition. Most notably, the Family Care program is funded under Title 20 of the Social Security Act, not under either of the sections referenced above; and Primary Home Care (associated with SSI or TANF benefits) is not a covered service. There are other, smaller programs, some funded entirely with state money. Over the last few years they have been virtually wiped out by budget cuts, but advocates should always check the source of funding to determine whether an estate recovery claim is for a "covered service." The 1915(c) waiver services, which are covered, are the following: Community Living Assistance and Support Services, Deaf Blind with Multiple Disabilities, Home and Community-based Services, Texas Home Living, Consolidated Waiver Program, and Community Based Alternatives (CBA), which includes Star Plus services In the category related costs of hospital and prescription drug services, the word "related" was added in the December 3, 2004 proposed rules, presumably to make clear that estate recovery extends only to costs of hospital and prescription drug services related to long-term care and not to those incurred under the "regular Medicaid" services associated with the Supplemental Security Income and Temporary Assistance to Needy Families programs. Likewise, estate recovery does not apply to individuals whose only Medicaid benefits are Medicare Savings Programs (QMB, SLMB, QI-1). 8 3. Applies Only to Decedent s Estate Estate recovery applies only to a decedent s estate, defined as follows: 8 The real and personal property of a decedent, both as such property originally existed and as from time to time changed in DADS website at http://www.dads.state.tx.us/services/estate_recovery/faqs.ht ml 2 form by sale, reinvestment, or otherwise, and as augmented by any accretions and additions and substitutions that are included in the definition of the probate estate found in 3(l), Definitions and Use of Terms, Texas Probate Code [now Texas Estates Code 22.012]. This is a key definition, because it precludes recovery against non-probate assets such as remainder interests and the interests of survivors in multiple-party accounts (joint tenancy with right of survivorship, payable-on-death or in-trust-for). Likewise, it precludes recovery against property held by remainder owners of interests created by deed and remainder beneficiaries of trusts. Section 373.205(a) supports this interpretation by requiring that the MERP claim be "presented to the estate personal representative (executor, administrator, or guardian) or filed by depositing it in the appropriate Probate Court." Although the interests of survivors in multiple-party accounts can be reached by compliance with statutory requirements, 9 there is no statutory provision allowing an executor or administrator to reach remainder interests to satisfy creditors' claims. That would have to be done if at all by suit by the creditor directly against the remainder beneficiary, which is not allowed by the estate recovery rules. Also, under Estates Code 111.052(b), property passing by trust is expressly deemed "nontestamentary," which is generally understood to mean it is not within the definition of "estate" under Estates Code 22.012. The Medicaid estate recovery program may someday be extended to reach property claimed by a remainder beneficiary of a trust or deed, which is an option allowed by the federal law, but the Texas rules at present do not reach beyond the probate estate. B. Exemptions and Hardship Waivers 1. Claims Created When a decedent to which estate recovery applies has received covered services, the Medicaid Estate Recovery Program is given a Class 7 claim under Texas Estates Code 355.102(h) for the amounts expended on those services. The program is then an interested party in the estate of the deceased Medicaid recipient. 10 2. Notice of Claim Requirements This section is best quoted in full, as follows: 373.205.Medicaid Estate Recovery Program (MERP) Claim. 9 Tex. Estates Code 113.252. 10 1 Tex. Admin. Code 373.201.

(a) Contents of MERP Recovery Claim. The MERP claim will be presented to the estate personal representative (executor, administrator, or guardian) or filed by depositing it in the appropriate Probate Court and will include the amount of the claim, the date or dates of the covered Medicaid services provided, and a statement that to MERP's best knowledge the deceased Medicaid recipient had: a) No surviving spouse; b) No surviving child under age 21; c) No surviving child of any age who is blind or disabled as defined by 42 U.S.C. 1382c; d) No unmarried adult child residing continuously in the decedent's homestead for at least one year prior to the time of the Medicaid recipient's death; and e) That to the best knowledge of the MERP no undue hardship, as defined by these rules, exists and that recovery will be cost-effective. This provides a useful checklist for advising clients as to important categories of individuals not subject to estate recovery. Since the agency will often have no way of knowing whether all exceptions are absent, the assistance of legal counsel in identifying erroneous claims will be critical. The rules require filing of a MERP claim within 70 days after MERP has actual notice of the death. 11 That requirement is sometimes not followed, which may form the basis of a defense against estate recovery. 3. Exemptions From Claims This is another section best set out in full: 373.207.Exemptions From Claims. a) Medicaid Estate Recovery claims will be sought only after the death of the Medicaid recipient, and if there is no: 1) Surviving spouse; 2) Surviving child or children under 21 years of age; 3) Surviving child of any age who is blind or disabled as defined by 42 U.S.C. 1382c; or 4) Unmarried adult child residing continuously in the decedent's homestead for at least one year prior to the time of the Medicaid recipient's death. Also exempt under the same section are certain assets of American Indians and Alaska natives, seldom if ever encountered in Texas. It is important to distinguish between exemptions (listed above) and grounds for waiver (listed below). An exemption can be asserted at any time and requires no particular form or procedure for presentment. 4. Waivers General Grounds By contrast, a waiver application must be presented within 60 days after the date on Notice of Intent to File a Claim, on the form at http://www.dads.state.tx.us/forms/5006/5006.pdf 12 Section 373.209(c) lists the following grounds for waiver of estate recovery: a) The estate property subject to recovery has been the site of the operation of a family business, farm, or ranch at that location for at least 12 months prior to the death of the decedent; is the primary income producing asset of heirs and legatees, and produces 50 percent or more of their livelihood; and recovery by the State would affect the property and result in the heirs or legatees losing their primary source of income; b) Heirs and legatees would become eligible for public and/or medical assistance if a recovery claim were made; c) Allowing one or more survivors to receive the estate will enable him or her or them to discontinue eligibility for public and/or medical assistance; d) The Medicaid recipient received medical assistance as the result of a crime, as defined by Texas law, committed against the recipient; or e) Other compelling reasons. The "other compelling reasons" ground for a waiver may provide an important ground for advocacy. 5. Waivers Pertaining to Homes Section 373.209(d) provides as follows with regard to the decedent s homestead: (d) Undue Hardship Waivers Applicable to Homesteads. After receiving a Medicaid estate recovery claim, an heir may assert that recovery against a deceased Medicaid 11 1 Tex. Admin. Code 373.205(b). 3 12 1 Tex. Admin. Code 373.209(a).

recipient's homestead would be an undue hardship and that the homestead should therefore be exempt from recovery for the cost of Medicaid long-term care services. The Health and Human Services Commission will exempt a decedent's home from estate recovery based on undue hardship when the following conditions have been established to the Commission's satisfaction: in the household. In the case of the heir who is a minor, the heir's family will be the heir, his or her parent(s) or stepparent residing in the household, and the heir's minor siblings residing in the household, including half-, step-, and legally adopted siblings. 1) The tax appraisal district value of the homestead is less than $100,000. If the tax appraisal district value of the homestead exceeds this amount, the first $100,000 of the tax appraisal district value for the most recent tax year at the time of the recipients' death shall be exempt from estate recovery. Any equity value of the tax appraisal district value for the most recent tax year at the time of the recipients' death in excess of $100,000 is subject to estate recovery. 2) One or more siblings or direct descendents of the deceased person (lineal heir(s), such as children and grandchildren) will inherit the homestead of the deceased Medicaid recipient, provided that each sibling or lineal heir inheriting the homestead has gross family income below 300 percent of the Federal Poverty Level. 3) When there are multiple heirs and not all heirs qualify for the hardship waiver, only that percentage of the homestead that corresponds to the qualifying heir or heirs' share of the homestead will be exempt from Medicaid estate recovery. 4) "300 percent of the federal poverty level" is a gross income test; no exclusions or deductions are allowed. 5) "Family" means that the Health and Human Services Commission will consider each heir separately. Heirs will not be aggregated into one family unless the heirs are minor children who are siblings. In the case of the adult heir, his or her family will be limited to the heir, the heir's spouse, and the heir's biological or legally adopted minor children and stepchildren residing 4

Figure: 1 TAC 373.209(d)(5) [in the rule] Type of Heir Adult 18 years of age or older, or individual younger than 18 years of age and legally emancipated Individual younger than 18 years of age and not legally emancipated Family Members, If Living in the Heir s Household Heir Heir s spouse Heir s biological or legally adopted minor children or stepchildren under age 18 Heir Heir s parent(s) Heir s stepparent Heir s minor siblings residing in the household, including half-, step-, and legally adopted siblings under age 18 5

I read this to mean the following: Undue hardship will be conclusively presumed whenever one or more siblings or descendants of the decedent are members of family units with incomes less than 300 percent of the Federal Poverty Level and are distributees of an interest in the homestead through the probate estate of the decedent. If all distributees of interests in the homestead meet those requirements, and if the value of the homestead is less than $100,000, there will be no estate recovery. If all distributees of interests in the residence meet those requirements, but the equity value of the homestead exceeds $100,000, estate recovery will not exceed the amount by which the value exceeds $100,000 (that is, the first $100,000 will pass free of estate recovery). If one or more but not all distributees meet those requirements, the exempt amount will be the amount equal to the percentage interests of the distributees who do meet it, multiplied by the total value of the homestead. However, paragraph (d)(1) says, "Any equity value in excess of $100,000 is subject to estate recovery, so if the total amount exempt by that formula exceeds $100,000, the excess amount is subject to estate recovery. Presented below is the same summary in matrix form. For this purpose "qualified distributees" are siblings or descendants of the decedent in family units with incomes under three times the Federal Poverty Level. Distributees All are qualified distributees None are qualified distributees One or more are qualified distributees, one or more not qualified If equity value < $100,000 No estate recovery No automatic hardship exemption (all subject to estate recovery) Exempt amount = % share of qualified distributees X equity value of homestead If equity value > $100,000 Recovery limited to the equity value exceeding $100,000 No automatic hardship exemption (all subject to estate recovery) May be same formula as at left, provided that if exempt amount by that formula exceeds $100,000, the excess is subject to estate recovery Estate planning attorneys are at a disadvantage in interpreting this section because we define "heirs" as beneficiaries of the estate of an intestate decedent (one who died without a will). That is essentially how these rules define it, at 373.105(8), but is not the intended meaning here, because if it were, there would be no protection of a person who takes under a will and therefore is not an heir but rather a "legatee" or "devisee." That is, such a definition would deny any protection to the siblings and descendants of a decedent merely because the decedent had the foresight to execute a will. On the assumption that that was probably not the intended result (and could constitute a denial of equal protection to devisees if it were), this discussion assumes the term "heir" is intended to be synonymous with "distributee" of the decedent's estate, regardless of whether the distribution is under a will or by intestacy. It is possible the use of the term "heirs" is intended to restrict the scope of distributees who are entitled to protection, even if a will is involved. For example, if a sibling is a beneficiary of the will of an unmarried decedent survived by one or more descendants, is the sibling denied all protection because she would not have been an heir had the decedent died without a will? Such a restriction would be necessary if charitable beneficiaries or unrelated persons could otherwise assert a hardship claim. However, that right is available only to siblings and descendants of the decedent anyway, so probably "heirs" in this context just means "distributees." Another uncertainty is in paragraph (d)(1), which first allows for an exemption only if the "tax appraisal district value" is less than $100,000, then says any "equity value" in excess of that amount is subject to estate recovery. Why does "equity value" modify only the definition of that which is not exempt and not the definition of what is exempt? If there is a $50,000 mortgage against a homestead valued by the tax appraisal district at $120,000, the residence does not meet the literal requirement for exemption set out in the first sentence, but neither does it meet the requirement of the last sentence for being subject to estate recovery. Because that result would leave a large category of mortgaged homes in uncertain status, and there is a clear intent to take into account the existence of a mortgage in defining the value subject to estate recovery, the probable intent is to look only to the equity value in every calculation to be made. These rules do not purport to affect the shares distributable after application of the exemption. Consider, for example, a case involving a homestead 6

with equity value of $100,000 inherited equally by two children of the decedent, one of whom has less than 3 times Federal Poverty Level income and one of whom has income exceeding that limit. Fifty percent ($50,000) will be excluded from estate recovery, but the higher-income heir will still have a right to 50% of the protected $50,000 (each receives $25,000). Unless the higher-income heir voluntarily assigns her share to the one with lower income, only half the intended benefit will go to the one with presumed undue hardship. The agency apparently is taking the position it has no authority to change the shares of distribution, only the amount subject to estate recovery. This places the responsibility squarely on estate planning attorneys to determine the incomes of all siblings and descendants who are intended beneficiaries and advise as to the effect of estate recovery. The client may elect to provide for shares of the homestead only to those qualified for estate recovery; or a formula clause in the will or revocable trust, whose operation is contingent on some share of the residence being subject to estate recovery, may be used for that purpose. Such a formula clause is suggested at III.K. below. The chart at the end of Appendix 1 below sets out the "poverty guidelines" of the U. S. Commission of Health & Human Services in effect as of this writing. The term "federal poverty level" refers to the "poverty guidelines" determined by the U. S. Commission of Health & Human Services. 13 That is also the source of the eligibility numbers used in many other programs administered by the Texas Health & Human Services Commission and of the numbers in the chart above. Unfortunately, although the numbers are applied with seeming uniformity nationally, the definition of "income" varies from one state agency and program to another. 14 Probably, then, the intent is to use the numbers in the HHSC "poverty guidelines" in the table above, defining income in a way no other program does: gross income test, with no exclusions or deductions. 15 Even this seemingly clear definition leaves open some questions: Does "no deductions" really mean business expenses are not deductible in the case a selfemployed person? Probably not, as that would be a large and unjustifiable disadvantage to those who are self-employed. How will the agency handle "in-kind income," which is either excluded or limited by most definitions of income? For example, if a family 13 http://aspe.hhs.gov/poverty/index.shtml (see link to HHSC Poverty Guidelines for 2014). 14 http://aspe.hhs.gov/poverty/faq.shtml#before 15 1 Tex. Admin. Code 373.209(d)(4). 7 lives in a home owned by a family member who does not live there, is the family unit receiving "income" from the owner of the property? If so, how is it valued? Are gifts "income"? They don't show up on tax returns, but the SSI and Medicaid programs count them if they are cash or food or shelter. What will be the treatment of distributions from third-party trusts (which are not counted by the IRS, except to the extent they carry out the trust's income, but are counted by most benefit programs to the same extent as if they were gifts from individuals)? The rules provide, HHSC has exclusive authority to waive its Medicaid estate recovery claim and grant undue hardship waivers 16 This "exclusive authority" provision appears designed to make clear that the issue of waiver is not to be decided by the Probate Court. Rather, if a waiver is denied, the only appeal is the "informal review" process established under 373.211 below. The Hardship Waiver Application is at http://www.dads.state.tx.us/forms/5006/5006.pdf. It must be sent to MERP, Hardship Waiver Request, P.O. Box 13247, Austin, Texas 78711. 17 In addition to the application form, the applicant must provide documentary proof of all grounds for waiver. There is no hearing, and the rules of evidence do not apply, so all documents may be treated as self-authenticating; but of course, they will be of little or no value if their meaning is not clear and no explanation is provided. If the application for waiver is denied, a review may be obtained with a written request filed within 60 days of receiving notice of the denial. The request should be addressed to MERP, Hardship Waiver Denial Review Request, P.O. Box 13247, Austin, Texas 78711. MERP is required to review the request within 40 days of its receipt. 18 This appears to be a completely new administrative review process that expressly eschews the "notice and a hearing" requirements of the due process cases and denies the protections ordinarily afforded under the agency's own rules to individuals complaining of agency action. 6. Deduction of Certain Expenses Even if the claim is not avoided entirely with an exemption or waiver, it may be reduced by the amount of certain expenses for maintenance of the decedent s home and for home care provided to the decedent, as follows: 16 1 Tex. Admin. Code 373.209(d)(5). 17 1 Tex. Admin. Code 373.209(f). 18 1 Tex. Admin. Code 373.211.

373.213.Deduction Allowed for Expenses for Home Maintenance and Costs of Care: a) An amount equal to necessary and reasonable maintenance expenses and taxes may be deducted from the Medicaid Estate Recovery Program (MERP) claim for maintaining the home of the deceased Medicaid recipient, provided that sufficient supporting documentation of these expenditures, such as receipts, is provided to MERP by estate personal representatives, heirs, or legatees. Necessary and reasonable expenses for maintaining the home include real estate taxes, utility bills, insurance, home repairs, and home maintenance expenses such as lawn care. See Appendix 6. b) An amount equal to the necessary and reasonable expenses for the direct payment of the costs of care (including payment of personal attendant care) provided for a deceased Medicaid recipient that enabled the recipient to remain in his or her home and thereby delayed the institutionalization of the Medicaid recipient may be deducted from the MERP claim, provided that sufficient supporting documentation of these expenditures is provided to MERP by estate personal representatives, heirs, or legatees. See Appendix 6. c) Requests for obtaining allowable deductions from MERP claims for expenses under subsections (a) or (b) of this section must be made in writing within 60 days after receipt of the Notice of the Intent to File a Claim by MERP. All supporting documentation must be attached to the request and sent to MERP, Home Maintenance/Costs of Care Request, P.O. Box 13247, Austin, Texas 78711. Property taxes and maintenance expenses are limited to those paid for the time in which the decedent was receiving Medicaid benefits. Of course, expenses of the home incurred after the date of death are expenses of the probate estate, which must be paid in preference to all claims of creditors, including MERP. 8 Estate recovery personnel have in some cases allowed deductions for utility bills, home repairs and home maintenance expenses such as lawn care only for the period of time during which the decedent was eligible for Medicaid benefits and the homestead was vacant. However, costs of home care of the decedent may be deducted regardless of when incurred, provided only that the care enabled the recipient to remain in his or her home Of course, complete documentation of expenses is required for them to be deductible. Therefore, attorneys should advise all clients with residences who apply for Medicaid to keep receipts for all the expenses of maintaining the home listed above. In addition, such individuals paying for home care should keep receipts for all personal attendant expenses and other costs of care, even if they have not yet applied for Medicaid. An article by an attorney with the Medicaid Estate Recovery Program contractor provides a helpful checklist of documents acceptable for proving deductions for home maintenance expenses and home care. 19 That checklist is reprinted herein as Appendix 6. 7. Requirement of Cost-Effectiveness A MERP claim should not be filed if any of the following conditions applies: 20 Value of the recoverable estate is $10,000 or less Recoverable amount of Medicaid costs is $3,000 or less; or The cost involved in sale of the property would be equal to or greater than the value of the property The term recoverable estate arguably means the decedent s estate, net of estate expenses, and net of creditors claims in categories higher than Category 7. However, the agency interprets it to mean the estate recoverable by all creditors. C. Timeline of the Claim Process Here is an overview of the rules pertaining to estate recovery claim procedure: 19 Jason W. Malmberg, The Nuts and Bolts of the Medicaid Estate Recovery Program, pp. 4-6, University of Texas School of Law Estate Planning, Guardianship and Elder Law Conference (August 2009). HHSC representatives have sometimes said taxes and insurance are recoverable regardless of whether the home was occupied, but other expenses are recoverable only for times when the home was vacant. However, Mr. Malmberg s article says the home must be vacant for any home maintenance expenses to be deductible. 20 1 Tex. Admin. Code 373.215.

HHSC provides anyone applying for a covered service a written notice that property in their estate may be subject to MERP. 21 That notice is required to contain certain specific disclosures. 22 However, each such notice should be scrutinized carefully to determine whether if meets the notice requirements. That may be a ground for defense against estate recovery. Likewise, failure of the Medicaid Estate Recovery Program to meet the time deadlines discussed below may give rise to a defense. See Practice Aids for Identifying MERP Defenses at IV.C.3. below. The Medicaid estate recovery program receives notification of the death of a Medicaid beneficiary. That starts the clock ticking on a 30-day period within which the program should send Notice of Intent to File a Claim to the estate's personal representative and to other specified representatives and family members. 23 Usually a personal representative (executor, administrator or guardian) will not have been appointed by this time. Therefore, if they get the notice it will be because they received it in another capacity, or it will have been passed on by family members. The relevant date is the date the state received notice, not the date the contractor (HMS) received it, which is usually later. Within 60 days of the date on the Notice of Intent to File a Claim, the Undue Hardship Waiver Request "must be submitted." The agency is not required to give notice to surviving siblings and descendants or anyone else who may be entitled to a waiver, but it appears their right to file a waiver is cut off 60 days after the notice is sent, even if it is sent to somebody else. Likewise, at this point in administration of most estates, no executor or administrator has yet been appointed yet the rules purport to cut off his or her right to file a waiver request with no notice at all. 24 However, as discussed below, it appears likely it is the individual(s) alleging hardship and not the personal representative of the estate who has the right to file a waiver request. Within 60 days after receipt of the Notice of Intent to File a Claim, if deductions are to be requested for home maintenance or home care expenses, a written request and documentation must be provided. 25 Notice that this 60-day period begins with the date of receipt of the Notice of Intent to File a Claim, rather than the date on the notice, as is the case with the waiver request. Therefore, a good application for deductions may be filed months after the period for making a waiver application has expired. The waiver determination "will be made" within 40 days of receipt of the undue hardship request form and all required supporting documents by MERP. 26 Within 60 days after receiving notice that a hardship waiver is denied, the waiver applicant may request informal review. No right to a hearing, no appeal from the decision on informal review. 27 Within 70 days after the date MERP has actual notice of the death, MERP files a claim, "in accordance with applicable provisions of the Texas Probate Code." That is, if there is an independent executor or administrator, the MERP claim should not be filed in court but can be in any form and should go directly to the independent executor or administrator. If there is a dependent executor or administrator or a guardian, the claim must be filed in the probate court as a sworn claim meeting Probate Code requirements. D. Claim Procedure Issues 1. Need for a Personal Representative What if there is no personal representative of the estate (executor or administrator)? The rules do not authorize suit against heirs directly. Presumably, MERP will need to file an application for determination of heirship and appointment of a dependent administrator, or if there is a will, an application for probate and appointment of an executor as provided in the will. Only then will it have a forum for presenting a claim. 2. Who May Apply for a Hardship Waiver? Does the personal representative of the estate have authority to file a request for a general undue hardship waiver? The rules do not say who may apply for this kind of waiver, though an heir has authority to apply for an undue hardship request under the rule specifically applying to the home. 28 One probate expert concludes that in both kinds of waiver, it is the individual(s) alleging hardship and not the personal 21 1 Tex. Admin. Code 373.301. 22 1 Tex. Admin. Code 373.305. 23 1 Tex. Admin. Code 373.307. 24 C. Boone Schwartzel, Medicaid Estate Recovery (MERP) Claims in Probate, University of Texas School of Law Estate Planning, Guardianship and Elder Law Conference (August 12-13, 2010). 9 25 1 Tex. Admin. Code 373.213(c) 26 1 Tex. Admin. Code 373.211. 27 1 Tex. Admin. Code 373.211. 28 1 Tex. Admin. Code 373.209(d).

representative of the estate who has the right to make the waiver request. 29 3. What is the Role of the Probate Court? Do the MERP rules divest the probate court of all authority to determine the amount of the MERP claim? For example, what if MERP denies a waiver request on the basis that it was not filed within 60 days of the date on the notice, when the claimant did not actually receive the notice until after the 60 days had run? It is doubtful that administrative rules can trump the court s statutory authority to determine whether all legal offsets, payments and credits have been made. 30 The same argument may apply even more clearly to an issue as to whether MERP has properly applied a request for a deduction. 31 And any use of the MERP rules to cut off rights without actual prior notice is subject to a due process challenge. 32 4. Does Permissive 4-Month Notice Apply? The author just cited makes a strong case that the 4-month period of limitations an estate s personal representative may create with notice in specified form to an unsecured creditor (Tex. Estates Code 358.054) applies even to the state with regard to MERP claims. 33 The MERP program now appears to concede that, as it helpfully provides on its website the following address for such notices: 34 Accounts Receivable Mail Code E-411 Texas Department of Aging and Disability Services P.O. Box 149030 Austin, TX 78714-9030 III. PLANNING STRATEGIES FOR AVOIDING ESTATE RECOVERY A. The Fraudulent Transfer Issue When the estate recovery program was first required by Congress in 1993, there was speculation that it might lead to efforts by the states to characterize transfers permitted under the Medicaid laws (subject to 29 Schwartzel, supra at 19. 30 Schwartzel, supra at 20. 31 Schwartzel, supra at 21. 32 Randy Drewett, Handling a Medicaid Estate Recovery Program (MERP) Claim in Texas, University of Texas School of Law Estate Planning, Guardianship and Elder Law Conference (August 9-10, 2007), at 54, citing Tulsa Professional Collection Services v. Pope, 485 U.S. 478 (1988). Mr. Drewett proposes several other possible defenses to MERP claims, at pp. 53-55, and numerous defensive strategies, at pp. 55-61. 33 Ibid at 59. 34 http://www.dads.state.tx.us/services/estate_recovery/index. html. various "transfer penalties" and exceptions thereto) as "fraudulent transfers." However, a well-researched journal article demonstrated conclusively that any such state action was pre-empted by the comprehensive federal Medicaid regulatory scheme. 35 Moreover, if the property being conveyed is exempt from execution under nonbankruptcy law--such as the exempt homestead of the debtor--it is by definition not an "asset" that can be "transferred" in fraud of creditors under the Uniform Fraudulent Transfer Act. 36 If a residence can be lawfully conveyed without consideration to avoid its being taken in probate by general creditors, no reason appears why it could not be conveyed to avoid a claim after death by the state as a creditor. To the author's knowledge, since publication of the above-referenced article in 1994, no state has taken the position that a properly disclosed transfer for the purpose of Medicaid qualification was a fraudulent transfer, nor has any published article made that argument. However, the North Dakota Supreme Court has held that a post-eligibility transfer for no purpose other than avoiding estate recovery, by an individual who herself never applied for Medicaid, was a fraudulent transfer. 37 In that case the transfer was by the surviving spouse of a Medicaid recipient. The funds in question had passed from the institutionalized spouse to the community spouse to qualify the former for Medicaid, a transfer that the Court expressly stated could not be considered a fraudulent transfer. However, after the death of the institutionalized spouse, the community spouse transferred the funds to her sons at a time when she had been diagnosed with a terminal illness and had been advised that if she owned the funds at the time of her death, the Medicaid program might recover them to reimburse expenses of her late husband. Both the trial court and the appellate court focused on the question of whether funds traceable from the community spouse to the institutionalized spouse were subject to estate recovery in the estate of the community spouse, even though they came from the institutionalized spouse by lifetime gift and were not in his estate. That is not an issue in Texas, which (like most states other than North Dakota) does not attempt to recover from the estate of a community spouse in any event. The community spouse was not receiving Medicaid herself and had no 35 Pantaleo & Freedman, In Defense of Medicaid Planning: Federal Law Prohibits States from Applying Debtor-Creditor Laws to Asset Transfers, NAELA QUARTERLY p. 15 (Fall 1994). 36 Tex. Bus. & Comm. Code 24.002(2)(B), (12) 37 Estate of Lucille E. Bergman v. North Dakota Commission of Human Services, 688 N.W.2d 187 (N.D. Sup. Ct. 2004). 10

intention of applying for it, so the federal Medicaid transfer penalty rules were not involved. The issue of preemption was not discussed in the Supreme Court's opinion so apparently was not raised. In the author s view, the preemption argument is strongest where the transfer is made in contemplation of qualifying for Medicaid and is therefore subject to the comprehensive system of federal regulation of such transfers (that is, it potentially is subject to a transfer penalty). It is weakest in a case like the one just cited in North Dakota, in which the transferor is not on Medicaid and does not intend to apply for it. Where the transferor is on Medicaid and loses eligibility as a result of the transfer (pursuant to the comprehensive federal system), but the transfer was solely motivated by intent to avoid estate recovery (for example, the transferor has a terminal condition and the transfer occurs just before death), there may be some risk of a fraudulent transfer claim. However, even such a transfer may well be protected under the preemption doctrine. B. Enhanced Life Estate Deed The Enhanced Life Estate or Lady Bird Deed adds to the reservation of a life estate, the reservation of the power to take away from the remainder owner(s) the rights given them in the deed and give those rights to someone else, as well as the right to sell without liability to the remainder beneficiary. It has the following benefits in addition to the benefits of reserving a life estate: If a remainder owner displeases the grantor, his or her interest can be taken away. If creditors of a remainder owner threaten action affecting the property, the grantor can protect his or her interests by appointing the remainder to someone else. This would not be a fraudulent transfer if the life tenants are not "debtors" as to the creditors. 38 Of most interest to this discussion, under the policy cited next below, the conveyance creates no Medicaid transfer penalty. Effective March 1, 2012, the Medicaid for the Elderly and People With Disabilities Handbook provides as follows: 39 Transfer of the person s home does not result in a penalty when the title is transferred to the person s children, siblings, etc., if the 38 Tex. Bus. & Comm. Code 24.005. 39 Medicaid for the Elderly and People With Disabilities Handbook I-3100. See also State Medicaid Manual 3258.9A. deed is an enhanced life estate [sic] and has been approved by the regional attorney The following definition is added: 40 Enhanced Life Estate Deeds A legal document (sometimes known as a Lady Bird Deed) in which one transfers property to their heirs while at the same time retaining a life estate with powers including the right to sell the property in their lifetime. Since the life estate holder retains the power to sell the property, its value as a resource is its full equity value. If you see a document that appears to transfer property to heirs while retaining a life estate with powers, contact the regional attorney to determine the value of any transfer. The full value of the asset is treated as a countable resource to the individual, unless it is a resource that is otherwise excluded, such as a home to which the individual intends to return. All Enhanced Life Estate Deeds must be reviewed by the regional attorney. The determination that such a deed creates no transfer penalty is required by CMS policy. 41 Attached as Appendix 3 is a sample Enhanced Life Estate Deed. At the death of the grantor, title will pass under such a deed outside the grantor's probate estate and will therefore not be subject to Texas estate recovery under the current state law. If there is a need for eligibility purposes to transfer a home from a trust (where it would count and cause ineligibility) back to the applicant/medicaid recipient, the owner can then convey a contingent remainder interest (in an Enhanced Life Estate Deed) back to the revocable living trust, thus avoiding probate for final transfer of the home but overcoming the problem that a home in a revocable trust counts as a 40 Medicaid for the Elderly and People With Disabilities Handbook Glossary. 41 State Medicaid Manual 3258.9A: "Some States allow life estates with powers, wherein the owner of the property creates a life estate for himself or herself, retaining the power to sell the property, with a remainder interest to someone else, e.g., a child. Since the life estate holder retains the power to sell the property, its value as a resource is its full equity value. In this situation, the individual has not transferred anything of value, because he or she can terminate the life estate at any time and restore full ownership to himself or herself. Instead, the full value of the asset in question is treated as a countable resource to the individual (assuming, of course, that it is not an otherwise excluded resource)." 11

Medicaid resource. A trust may be the best structure for managing the home after the owner s life for convenience and efficiency, especially where there are many children or other heirs. If the client has already established a revocable trust, this is an elegant way of implementing his or her wishes without creating a new legal document. However, use of an Enhanced Life Estate Deed is by no means limited to cases in which an enhanced life estate in the home must be removed from a trust. The grantee can be any individual(s) or trustee the grantor may select. If there is not an existing trust to serve as grantee of the deed, it is sometimes very worthwhile to establish one. That is the case, for example, where there are numerous descendants who will need a trustee to sell the home and divide the proceeds without having to reach agreement of all the beneficiaries on every decision. A sample of a revocable trust established for that purpose is attached as Appendix 4. Notice that under the Handbook definition above, unless the property conveyed by an Enhanced Life Estate Deed is exempt, its full value is treated as a resource of the Medicaid applicant, because he or she retains the power to sell it and convert it to cash. Therefore, it is clear that you cannot use a Lady Bird Deed to make property exempt. Its only function with regard to Medicaid is to protect the property from estate recovery. For example, it will not make a farm or ranch exempt if the property cannot be exempted either as a residence or as business property. Likewise, if a residence is worth more than $543,000, conveying it by Enhanced Life Estate Deed will not solve the problem that (subject to certain exceptions) the value over $543,000 counts as a resource. However, the following could interfere with the "ideal" operation of this strategy: Some title companies are not comfortable with insuring a title based solely on such a deed. If such an objection is encountered, it may be necessary to change title companies or to do cleanup work such as probating a will or developing a family settlement agreement. It may be difficult or impossible to refinance a mortgage or take out a reverse mortgage. An attorney reported recently that a reverse mortgage application was denied on the basis that the grantee of the Enhanced Life Estate Deed was under 62 years of age, so a reverse mortgage would violate federal rules pertaining to such loans. The Medicaid program could seek to change its rules so as to make this device no longer effective. The Texas Legislature could adopt "expanded estate recovery," thus possibly bringing property so held within the scope of estate recovery, as has happened in many states. 42 Because at the time of this writing this strategy is routinely implemented by attorneys and accepted by the estate recovery program, in the author s view, it should be offered to all clients whose estates might benefit. However, clients should also be warned of the potential problems discussed above. The client s general power of attorney should include clear authority for the agent to act for the client with regard to the property so as to be able to revoke the grant or re-appoint it if necessary. Even with that precaution, though, title insurance may not be available once action by an agent appears in the chain of title. 43 Also, if possible, it is prudent to backstop an Enhanced Life Estate Deed strategy with one or more other strategies discussed below, in case it proves ineffective due to later developments. C. Transfers to Community Spouse All nonexempt property must be titled in the name of the community spouse not later than the first annual review, which is supposed to be one year after the date of the notice certifying eligibility of the institutionalized spouse. 44 There is no requirement that the property be conveyed to the community spouse as his or her separate property, which is necessary as a practical matter because in many cases, the institutionalized spouse has lost the capacity to make such a conveyance. If the property consists of interests in joint accounts, the funds or other assets can simply be transferred from the joint accounts to one or more accounts titled only in the name of the community spouse. However, if the institutionalized spouse has the capacity or has appointed an agent with authority to convey without consideration to the community spouse, they may elect to convert all the community property of the institutionalized spouse to separate property of the community spouse. That was done even before the advent of estate recovery, primarily to 42 Bonta v. Burke, 98 Cal.App.4th788, 120 Cal.Rptr.2d 72 (2002) held that property conveyed by this type of deed is subject to estate recovery in California, which has an expanded definition of estate recovery (including nonprobate assets). 43 See Patricia F. Sitchler and Kristen Quinney Porter, Collision Between Elder Law and Real Estate Law, in this course. 44 40 Tex. Admin. Code 15.503(b), Medicaid for the Elderly and Persons With Disabilities Handbook J-3100. 12

allow the community spouse to direct all the property away from the institutionalized spouse--either to a testamentary Supplemental Needs Trust for the community spouse or to the children--to avoid disqualifying the institutionalized spouse for Medicaid in case she or he is the survivor. Now it is even more important, because community property retained by the institutionalized spouse will not only disqualify him or her after the death of the community spouse but will be subject to estate recovery if any is left after the death of the institutionalized spouse. Some states seek to impose a lien on property of the institutionalized spouse and/or to trace it into the estate of the surviving spouse. Therefore, that strategy now has the additional advantage, even if the community spouse is the survivor, of emptying the estate of the institutionalized spouse so as to avoid the risk that Texas Medicaid may someday attempt to impose a lien on it and/or to trace it into the estate of the surviving spouse. Although a lien cannot be imposed on the survivor's homestead without a constitutional amendment, the program could conceivably seek to impose a lien against and/or trace non-homestead property, such as the institutionalized spouse's community interest in financial accounts if they are merely retitled by the community spouse. If the property involves low-basis assets, both spouses should be advised that making it separate property of the community spouse involves loss of the step-up in basis on the death of the institutionalized spouse. In two instances known to the author, a tax appraisal district has treated a deed converting community property of a homestead into separate property of one spouse as destroying the school tax freeze on the property--even though both spouses were over the age of 65. In each case, when a correction deed was filed reserving a life estate, the district restored the freeze. However, in the author s opinion, Texas Tax Code 11.26(c) is contrary to the position taken by the districts, and the author has been unable to find support for that position in the Tax Code. It may be prudent for the institutionalized spouse to reserve a life estate anyway, in order to qualify that half of the property for a stepped-up basis at his or her death. Also, since the two cases mentioned, the Property Code was amended in 2011 to restrict the use of correction deeds. Property Code 5.027-5.031. I am not certain that a correction deed adding reservation of a life estate would be effective under the new law. Because the agency cannot constitutionally impose a Medicaid lien on the community spouse's homestead, even if a Medicaid lien statute is someday passed, there is less need to convert the homestead (as compared to non-homestead property) to separate property of the community spouse. Moreover, there are considerations arguing for keeping it as community property. Here are some pro's and con's: Pro's (for transferring the residence to the community spouse as separate property): Avoids probate of the institutionalized spouse's estate. Avoids estate recovery against the estate of the institutionalized spouse if he or she is the survivor (assuming the community spouse directs the property away from the institutionalized spouse if he or she is the survivor). Facilitates sale of the residence if the institutionalized spouse is the survivor, living in a nursing home on Medicaid. (Otherwise, it could not be sold during his or her lifetime without interrupting Medicaid eligibility until the proceeds from his or her half interest are used up and/or gifted). Cons (against transferring the residence to the community spouse as separate property): If the community spouse owns the residence and it goes into a trust for the institutionalized spouse as survivor, the survivor will probably not be able to claim the homestead exemption from property tax, as the trust will own the residence. 45 If he or she is in a nursing home, the exemption would otherwise be available; but as indicated above, the residence could not be sold without interrupting Medicaid. (Most people in this situation rent the residence to someone, usually a family member, for the cost of taxes, insurance and maintenance.) If the residence goes directly to the children, they may or may not be able to claim a 45 One of the requirements for a residence owned by a trust to be the homestead of a beneficiary for property tax purposes is a qualifying trust, in which the trustor of the trust must have the right to use and occupy the residence rent free under certain terms. Tex. Tax Code 11.13(j)(3). To meet Medicaid requirements, the trust for the institutionalized spouse must be a testamentary trust. The trustor of a testamentary trust cannot be the beneficiary, as the trust comes into being only upon the death of the testator, who is the trustor. Therefore, although beneficiaries of revocable inter vivos trusts ordinarily may enjoy qualifying trust homestead treatment, it appears beneficiaries of testamentary trusts do not have that right (as to the interest in trust). However, the author has seen several tax districts give homestead protection to beneficiaries of testamentary trusts and other third-party trusts. 13

homestead property tax exemption, but it will not include the parent's school tax freeze nor (unless the "child" is age 65 or over) the age 65 residence exemption. Keeping ownership may make the institutionalized spouse feel more secure. D. Surviving Spouse, Certain Children This is not really a strategy because clients are not likely to marry or have or adopt children to save the residence from estate recovery. The residence qualifies for exemption under 373.207(2) whenever the decedent is survived by a spouse, a child under age 21 or a child of any age with blindness or any disability meeting the Social Security Disability standard. However, note that persons in these categories enjoy federal protection only to the extent the residence cannot be sold during their lifetimes. 46 By legislation, Texas could someday seek to trace the property and recover it from the estate of the surviving spouse or protected child, possibly in conjunction with a lien statute precluding its sale by that spouse or child. In addition, if the surviving spouse has an interest in the residence, the whole property is arguably exempt under the Texas Constitution from any lien for estate recovery purposes (in case Texas someday adopts lien recovery). 47 However, the program could conceivably try to trace the property into the estate of the child at his or her death. Because of the risk of a lien or tracing at some time in the future, if the beneficiary has the capacity to execute a gift deed or has given an agent that authority, it may be preferable to transfer the property to the child as discussed below. E. Residence to Child Under 21 F. Residence to Blind or Disabled Child G. Residence to Certain Siblings H. Residence to Caregiver Child The four strategies above are grouped for discussion here because they all fall under the same federal statute. 48 That law and the state provisions based on it provide that certain transfers of the residence of a Medicaid beneficiary or applicant are protected, in the sense that they are not subject to the transfer penalty. 49 They include the following transfers: 46 42 U.S.C. 1396p9b)(2). 47 Texas Constitution 50. 48 42 U.S.C. 1396p(c)(2). 49 42 U.S.C. 1396p(c)(2); 1 Tex. Admin. Code 358.401(d)(2)(A),(B); Medicaid for the Elderly and Persons With Disabilities Handbook I-3100, I-3200. To the applicant s spouse. To the applicant s child under age 21 To the applicant s child of any age who is blind or has a permanent and total disability (as defined by Social Security) To the applicant s brother or sister who has an ownership interest in the residence and who was residing in the residence for at least a year before the beneficiary was admitted to a nursing home or other medical institution To the applicant s child of any age who was residing in the residence for at least two years before the parent was admitted to a nursing home or other medical institution and who provided care that enabled the parent to reside at home rather than in a nursing home. To certain kinds of trusts for the benefit of persons under age 65 who have a permanent and total disability (as defined by Social Security) The applicant should be advised that unless a life estate or other interest is reserved, resulting in inclusion in the beneficiary's gross estate for transfer tax purposes, the transferee will receive the beneficiary's basis in the property. That will not matter if the property qualifies for exemption of tax on capital gains on sale of a residence ($250,000 in capital gains for an unmarried person, $500,000 for a couple); but under current law, if the transferee should move away for as long as three years then sell the property, the transferor s basis would apply and the transferee would be taxed on all gains above that basis. 50 Also, the over-65 property tax exemption and the school tax freeze will be lost upon transfer of a homestead, if the transferee does not also qualify for such exemptions (being either age 65 or over, or with a disability). I. Residence to Certain Trusts There is an exemption from the transfer penalty for transfers to two types of trusts for the sole benefit of any person with a disability, regardless of age of the transferor, and regardless of relation of the beneficiary to the transferor. One type is the under-65 special needs trust discussed above. The other is a trust that is actuarially sound based on the life expectancy of the individual involved. 51 Based the State Medicaid Manual of the Centers for Medicare & Medicaid Services, actuarially sound in this context means the same as in the annuity 50 Internal Revenue Code 121. 51 1 Tex. Admin. Code 358.430(d)(2); Medicaid for the Elderly and Persons With Disabilities Handbook I-3300. 14

context. 52 That is, distributions must be made over a period not longer than the actuarial life expectancy of the beneficiary, as determined from the Social Security Administration table at http://www.ssa.gov/oact/stats/table4c6.html. For example, the table says a female age 40 has a life expectancy of 42.24 years. It should therefore be sufficient to require that 1/42 of the initial contribution be distributed in the first year of the trust s operation. In the second year, 1/41 of the amount in the trust at the end of the first year must be distributed, etc. Presumably, the trust could restrict distributions so as to protect Medicaid and other benefits of the beneficiary, in addition to allowing the settlor to qualify. J. Unmarried Child in Residence The residence is exempt from estate recovery, regardless of value, if an unmarried adult child resided continuously in the decedent's homestead for at least one year prior to the time of the Medicaid recipient's death. 53 The estate recovery program sometimes requires proof of the child s intent to remain in the home, but no such requirement appears in the rule. K. Undue Hardship Waiver As discussed above, there is a provision for waiver of estate recovery against a residence for "undue hardship" that applies only to siblings and descendants of the decedent living in families with income below three times the federal poverty level. If there are one or more distributees of interests in the residence who do not qualify, the exemption will be limited to a share of the residence value equal to the share of those who do qualify. Therefore, as long as at least one distributee qualifies, it apparently is possible to ensure the exempt share will be 100% of the maximum exemption (limited, perhaps, to $100,000 total exemption) by providing in the will or trust that if this problem arises, only those eligible for this benefit will receive interests in the residence. As discussed above, at this writing, homes passing under an Enhanced Life Estate Deed are both exempt for eligibility purposes and pass outside estate recovery. Unless the law is changed, the deed alone will protect the residence. However, the law could very well change or be reinterpreted, putting the residence again at risk. Therefore, as a backup strategy, here is a formula clause for the client s will, for maximizing use of the exemption: 52 State Medicaid Manual 3258.10B, referencing the definition in the annuity section, 3257. 53 1 Tex. Admin. Code 373.207(a)(4). It is my understanding that at this time, the Medicaid law allows for exemption from Medicaid estate recovery of an interest in a residence that passes to specified family members who have incomes below certain levels. In the event that such a provision exists in the Medicaid law at the time of my death, establishing a means test of any kind or otherwise giving an advantage to any beneficiaries in this regard, and that but for it, [this trust][my estate] owns a residence that would otherwise be subject to Medicaid estate recovery, the following shall apply notwithstanding any other provisions herein: If but for this paragraph the residence would otherwise pass to more than one person, one or more of whom do not qualify for exemption of part or all of their share from the Medicaid estate recovery program, the gifts to any who do not qualify shall not go to them but instead shall be distributed in equal parts to those beneficiaries who do qualify for that more favorable treatment. For example, if three persons would otherwise receive equal shares of the residence, but Medicaid estate recovery applies and only two of them qualify for special treatment under it, the one who does not qualify shall receive no part of the residence and those who do qualify shall receive all. L. 5-Year Gifting Of course, the client can avoid estate recovery against any property by lifetime transfers that create a penalty period. This is likely to be the "strategy" clients think of first. Often it is the attorney s job to help find other options, including in many cases the avoidance of Medicaid eligibility altogether. Perhaps the feature of estate recovery that makes it most harmful to the interests of older Americans is that many feel they must part with the last remnant of their life's work and savings before getting help--if by bad luck they are stricken with a condition requiring long-term care not reimbursed by Medicare. M. Pre-Death Transfer Estate recovery will apply only to property owned at death. Therefore, the client presumably may convey a residence or any other property at any time before death, for the purpose of avoiding estate recovery. Such a transfer would have to be reported to the Medicaid program, and unless an exception to the transfer rules applies, it would result in termination of Medicaid eligibility. However, if life expectancy is short, paying privately may be a small price for the transferee to pay for avoiding estate recovery. 15

As discussed above, this is more likely to draw a "fraudulent transfer" claim than a transfer with purposes other than avoiding Medicaid estate recovery. If this strategy is contemplated, the client should be advised of the need to execute a power of attorney authorizing gifts to the intended donee(s) and specifically describing any real property to be conveyed. If the primary agent is an intended donee, a special agent should be appointed for making gifts to the primary agent, to avoid possible title problems. Such a power of attorney allows the agent to make the conveyance even after the principal has lost capacity. IV. POST-DEATH CHECKLIST DECEDENT ON MEDICAID This section is drawn from a checklist in the author s firm for advising a surviving beneficiary, trustee or executor of a decedent who received longterm care Medicaid benefits. A. Need for Immediate Action? When anyone calls with a question about the Medicaid Estate Recovery Program, tell them, Undue hardship waiver requests, and requests for reductions of the claim based on certain expenses, must be made in writing within 60 days of the date on the Notice of Intent to File a Claim. Have them talk with an attorney on the phone immediately to determine whether a waiver request may be needed and if so, how soon the 60-day deadline may be. If there is any chance a waiver may be needed, give them the earliest possible appointment date that is definitely within the 60-day deadline. If you cannot schedule them safely in that way, refer them to someone who can. On the other hand, if there is a surviving spouse, a surviving child with a disability or any of the other exemptions listed at C.1. below, there is no hurry. Exemptions can be claimed at any time. When arranging the first conference, ask them to bring all communications they have received from the Medicaid Estate Recovery Program; and if available, the application for Medicaid, all Form 8001 s and any other acknowledgments of estate recovery that may have been signed by or on behalf of the decedent. B. Probate Needed? The most common question when a deceased client s surviving family member calls is, Is probate necessary? The initial conference may include the following inquiries: Did the decedent own real property at the time of death? If so, did it pass by Enhanced Life Estate Deed or other non-probate means? 16 Is there a bank account, annuity or other contract right that did not have a right of survivorship or payable-on-death provision? Is there any such account on which the decedent s estate was named beneficiary? Is there personal property such as a vehicle, jewelry, furniture or collectables of significant value that cannot be readily and peaceably divided by persons claiming them? Are there debts that must be paid before any assets can be distributed? If there is a will, where is the original? Who is our client? If anyone in your firm drafted the will or revocable trust, you cannot claim the attorney-client privilege with regard to any dispute among claimants against the probate or trust estate. Texas Rules of Evidence 503(d)(2). Therefore, in the event of a dispute, the drafter is a necessary witness for the proponent of the will or trust, prohibited by Disciplinary Rule 3.08(a) from serving as the proponent s counsel before a tribunal. In such a case, you can agree to represent the proponent of the will or trust so long as there is no dispute requiring testimony of someone from your firm. You should advise anyone offering to engage your firm of that fact, so they can engage another firm from the beginning if they wish; and in any case you don t want them to be surprised if you have to withdraw after a conflict develops. C. MERP Notices & Questionnaires 1. Waivers and Exemptions Grounds for undue hardship waiver are the following: The property involved is a residence and at least one beneficiary has less than 3X poverty level income, or The property is a family business, farm or ranch meeting certain requirements, or A beneficiary would become eligible for public and/or medical assistance if a recovery were made, or Allowing one or more survivors to receive the estate will enable him or her or them to discontinue eligibility for public and/or medical assistance, or The Medicaid recipient received medical assistance as the result of a crime, or Other compelling reasons By contrast, there is no deadline for asserting an estate recovery exemption. The following are exemptions: Surviving spouse,

Surviving child under age 21, Surviving child of any age who is blind or disabled as defined by the Social Security Disability laws, Adult child residing continuously in the decedent s homestead for at least a year immediately before the death and still living there Certain property of American Indians and Alaskan natives, and Government reparation payments 2. The MERP Questionnaire After the death of a Medicaid beneficiary age 55 or over, the Medicaid Estate Recovery Program always sends a questionnaire to whoever assisted with the Medicaid application. Even when there is a surviving spouse or an Enhanced Life Estate Deed, it is necessary to respond in order to stop the stream of form letters and questionnaires; and as discussed in the next sections, an Enhanced Life Estate Deed is not fully effective until someone has recorded an Affidavit of Death and obtained a MERP release. When there is an absolute and unquestionable defense to estate recovery such as a surviving spouse or a surviving child with a disability, there is no need to fill out a questionnaire. Just send the estate recovery program a copy of the death certificate (showing the surviving spouse) or send a copy of a birth certificate of a surviving child with a disability attaching a recent notice from Social Security showing a disability determination has been made. In other cases in which a defense to recovery against certain assets is available, and there are no assets known to be subject to estate recovery, our practice is to recommend the client fill out the questionnaire or have us do it from information they supply. For example, there may be a residence protected by an Enhanced Life Estate Deed, but the Medicaid Estate Recovery Program cannot determine whether there may be a bank account, annuity or other asset subject to estate recovery unless the questionnaire is returned. 3. Practice Aids for Identifying MERP Defenses If there is estate property that appears to be subject to MERP, administer the Estate Recovery Defense Checklist at Appendix 1. If you still think there is a good claim, review the estate recovery rules (summarized above), to determine whether there may be a defense based on failure of the Medicaid Estate Recovery Program to follow them. If it appears you need to go that route, here are steps to follow: Request a copy of the file from Carlotta Vann at Carlotta.Vann@dads.state.tx.us. Be sure to send a copy of an authorization form signed by your client. When you have the file, review it to find Form H8001, Medicaid Estate Recovery Program Receipt Acknowledgment. It will probably be with or near the application, Form H1200. Form H8001 is also sent with each annual review, so you will need to review the whole file. This is one reason to request the whole file we can't prove the absence of something without reviewing all of it. The other reason is that it is more convenient to HHSC to produce a copy of the file (which is scanned) than to find individual documents in the file. Assuming you find deficiencies, prepare a demand letter requesting a release of the estate recovery claim, directed to the following: DADS Recovery Unit-HMS ATTN: Jennifer Lusk 5615 High Point Drive-Suite 100 Irving, TX 75038 Fax to: (214) 560-3918 4. Obtaining a MERP Release Some probate judges now require in applications to probate a will as a muniment of title, a certification to the effect that property in the estate is not subject to a claim by the Medicaid estate recovery program. One way of demonstrating this is with a "release" from MERP. You can make a request for a release by filling out the form at Appendix 2 and at http://www.dads.state.tx.us/services/estate_recovery/t XMERPCertificationForm.pdf and faxing it back to the number at the bottom of the form. This will work if the decedent is grandfathered out (certified for a MERPcovered program as a result of an application filed before 3/1/05) or if someone has provided documentation to MERP establishing an exception or waiver, or if there is an effective Enhanced Life Estate Deed. If the defense to the Medicaid Estate Recovery Program has not already been established, you will need to send with the request the necessary proof. That could be, for example, the following: Copy of recorded Enhanced Life Estate Deed or death certificate (proving there was a surviving spouse) with a letter like the sample in Appendix 2 page 2, or Other proof of an exemption such as a child with a disability, editing into the letter the explanation, or Proof that a waiver has been granted 17

5. Drafting an Affidavit of Death An Enhanced Life Estate Deed will be effective to establish record title only when the death of the grantor is in the real property records. One way to do that is to prepare an Affidavit of Death like the sample at Appendix 5 and record it in the county in which the property is located. 18

V. APPENDIX 1: ESTATE RECOVERY DEFENSE CHECKLIST This checklist is intended for use by attorneys as a reminder of issues as to whether or not a decedent's estate may have property subject to the Texas Medicaid estate recovery program and if so, whether exclusions or waivers may apply. It is not intended to give legal advice based on answers to the questionnaire alone. Caution: An Undue Hardship Waiver Request must be filed within 60 days of the date shown on the Notice of Intent to File; and documentation of home care, property tax and maintenance expenses (explained below) must be filed within 60 days of receipt of the same notice. See Appendix 6 for examples of acceptable documents. 1. Did the decedent file the application under which he/she qualified for Medicaid in a nursing home before March 1, 2005? (If so, the entire estate is exempt from estate recovery.) 54 Yes No 2. If No, did he/she file an application before that date for any kind of long-term care assistance in Texas (home care, Assisted Living Facility or nursing home) that led to eligibility for such assistance, no matter how brief? If Yes, provide specifics as to when the application was filed and what program. Yes No 3. Did the decedent receive any Medicaid services after his/her 55 th birthday? (If not, there is no right of estate recovery. 55 ) Yes No 4. What property if any is in the probate estate? (Property that passes outside the probate estate is not subject to estate recovery 56 --for example, a remainder interest after a life estate, a right of survivorship or a remainder interest under a trust agreement.) Homestead Other (describe): If all assets owned at death pass outside the probate estate, there should be no estate recovery 5. What is the value of property in the probate estate, without deduction for any debts or interests of co-owners? For value of the whole property, use fair market value as determined by the property tax district or the amount determined by independent appraisal, whichever is lower. 6. What is the total outstanding balance on debts secured by estate property? 7. What is the percentage ownership of others in the property of the estate? (If none, write "0") Homestead: $ Other assets: $ Homestead: $ Other assets: $ Homestead: % Other assets: % 8. What is the total amount of anticipated expenses of last illness, estate administration expenses and funeral expenses? (Those are 54 1 Tex. Admin. Code 373.103(a)(2). 55 1 Tex. Admin. Code 373.103(a)(1). 56 1 Tex. Admin. Code 373.103(a). 19

higher in priority than estate recovery claims; and some other claims have higher priority under Texas Estates Code 355.102.) 9. What was the total amount paid (by anyone) for property taxes and homeowner insurance for the period of time during which the decedent was eligible for Medicaid benefits? (Those amounts can be deducted from the estate recovery claim if documented--maybe 57 ) 10. Answer this question only if the decedent's homestead was vacant at some time while he/she was eligible for Medicaid: What was the total amount paid (by anyone) for utility bills, home repairs and home maintenance expenses such as lawn care for the period of time during which the decedent was eligible for Medicaid benefits and the homestead was vacant? (Those amounts can be deducted from the estate recovery claim, but only for the period of time the homestead was vacant and only to the extent they can be documented.) 58 11. Answer this question only if the decedent received home care: What was the total amount paid for home care (including personal attendant care) provided for the decedent that enabled him or her to remain at home and thereby delayed institutionalization, and that is supported by documents such as receipts? (Those amounts can be deducted from the estate recovery claim, to the extent they can be documented. It is not clear whether or not expenditures by the decedent can be included, so include them in case they can. 59 $ $ $ $ 12. Is it possible that the value of the estate, net of estate expenses and Yes No class 1-6 claims, is less than $10,000? 60 13. Is it possible that the amount paid by Medicaid (not counting the decedent's income, if any, paid to for his or her own care) did not exceed $3,000? Yes No 14. Is it possible that the cost involved in the sale of the property would be equal to or greater than the value of the property? (Estate recovery should not be pursued if it is not "cost effective." That is the case if (a) value of the recoverable estate is $10,000 or less, or (b) the recoverable amount of Medicaid costs is $3,000 or less, or (c) the cost involved in the sale of the property would be equal to or greater than the value of the property. 61 ) Yes No 57 1 Tex. Admin. Code 373.213(a). HHSC representatives have sometimes said taxes and insurance are recoverable regardless of whether the home was occupied, but other expenses are recoverable only for times when the home was vacant. However, a 2009 article by an attorney with the MERP contractor says the home must be vacant for any home maintenance expenses to be deductible. Jason W. Malmberg, The Nuts and Bolts of the Medicaid Estate Recovery Program, pp. 4-6, University of Texas School of Law Estate Planning, Guardianship and Elder Law Conference (August 2009). 58 1 Tex. Admin. Code 373.213(a). 59 1 Tex. Admin. Code 373.213(b). 60 1 Tex. Admin. Code 373.215(1). Actually, the rule says there should be no estate recovery if the "recoverable estate" does not exceed $10,000. Arguably, this means the estate recoverable by the Medicaid estate recovery program after payment of higherpriority claims such as secured debts, expenses of last illness, estate administration fees and funeral expenses. However, the agency interprets it to mean the estate recoverable by anyone who may have a claim against it. 61 1 Tex. Admin. Code 373.215. 20

15. Did the decedent have any of the following: surviving spouse, surviving child under age 21, surviving child of any age who is blind or disabled, unmarried adult child residing continuously in the decedent's homestead for at least one year prior to the time of death? (These are all "exemptions" to estate recovery. The "unmarried adult child" exemption may require showing the child's intent to remain in the home.) 16. Was the decedent an American Indian or Alaskan Native? (Certain property of such persons is exempt.) Yes Yes No No 17. Is it possible that any of the following conditions exist that would cause "undue hardship": a)the property has been the site of the operation of a family business, farm or ranch at that location for at least 12 months prior to the death of the decedent; is the primary income producing asset of heirs and legatees, and produces 50% or more of their livelihood, and recovery by the State would affect the property and result in the heirs or legatees losing their primary source of income; or b)heirs and legatees would become eligible for public and/or medical assistance of a recovery claim were made; or c) Allowing one or more survivors to receive the estate will enable him or her or them to discontinue eligibility for public and/or medical assistance; or d) The decedent received medical assistance as the result of a crime, as defined by Texas law, committed against the recipient; or e) A beneficiary is a sibling or a parent who has an equity interest in the decedent's home, who was residing there for at least one year before the decedent's date of admission to the institution, who has been residing in the home on a continuous basis, and who has no financial means for an alternative residence; 62 or f) A beneficiary is an adult child or grandchild who was residing in the home for at least two years before the decedent's date of admission to the nursing home, who can prove that he/she or she provided necessary care to the recipient that delayed institutionalization, and who has no financial means for an alternative residence; or g) Other compelling reasons 63 Yes No 62 This ground for waiver and the next one are not in the rules specifically but are included in the MERP Application for Hardship Waiver as two instances in which "other compelling reasons" for waiver may be found. 63 1 Tex. Admin. Code 373.209(c)(5). DADS Form 5006 lists the following as two situations in which it will find "compelling reasons": (1) a sibling or parent who has an equity interest in the decedent's home, who was residing there for at least one year before the decedent's date of admission to the institution, who has been residing there on a continuous bases, and who has no financial means for an alternative residence; or (2) an adult child or grandchild who was residing in the home for at least two years before the recipient's date of admission to the institution, who can prove he or she provided necessary care to the recipient that delayed institutionalization, and who has no financial means for an alternative residence. 21

17. Did the decedent own an interest in a home that was his/her homestead at the time of death? If your answer is "Yes," answer the next question below. If your answer is "No," do not answer any more questions. 18. What is the equity value of the decedent s homestead if any? (Depending on other facts, there may be a possibility of "waiver" of estate recovery against a maximum of $100,000 of the equity value.) 64 In answering this, consider all interests in the property, not just the interest of the decedent; but deduct the amount outstanding on any debt secured by the property. For value of the whole property, use fair market value as determined by the property tax district or the amount determined by independent appraisal, whichever is lower.) Yes $ No 19. Are one or more siblings or direct descendants of the decedent entitled to an interest in the homestead as a result of decedent's death? If your answer is "Yes," answer the next question. If it is "No," do not answer any more questions. 20. Do any of the siblings or direct descendants receiving an interest in the homestead have gross family income below 300% of the federal poverty level? See the chart below. Yes Yes No No 3 Times Federal Poverty Level Income for 3/1/14-2/29/15 Family Size Monthly Income Annual Income 1 $2,918 $35,016 2 $3,933 $47,196 3 $4,948 $59,376 4 $5,963 $71,556 5 $6,978 $83,736 6 $7,993 $95,916 7 $9,008 $108,096 8 $10,023 $120,276 Each Added $2,918 $35,016 64 1 Tex. Admin. Code 373.209(d). 22

VI. APPENDIX 2: MERP RELEASE The following is at http://www.dads.state.tx.us/services/estate_recovery/txmerpcertificationform.pdf: 23