Does MassHealth’s Lifetime Lien Terminate upon the MassHealth Recipient’s Death?

By Brian E. Barreira

Federal Medicaid law allows states to place a lien on real estate that is not sold during the Medicaid application process. The state

Medicaid agency has the right to recoup what it spent on the Medicaid recipient if the real estate is sold during the Medicaid recipient’s lifetime, and that is the point of the lien. Even if a person applying for MassHealth in Massachusetts has a less than full ownership interest, such as a life estate, the MassHealth agency can place a lien on that ownership interest, with the understanding that, under Section (d) of Massachusetts General Laws, Chapter 118E, Section 31, the agency can collect what is owed to it as of the date of sale. After the MassHealth recipient’s death, however, the provisions of Sections (b) and (c) apply, and the agency is required to file an estate recovery claim against the decedent’s probate estate in order to collect this debt. The actual procedures for making the estate recovery claim are laid out in great detail in Massachusetts General Laws, Chapter 118E, Section 32, and no reference is even made to the lifetime lien.

It is my understanding that the MassHealth agency has recently claimed in court cases that the lien survives the Medicaid recipient’s death, but has glossed over the distinction between the lifetime lien and the post-death creditor claim which is filed against the deceased Medicaid recipient’s probate estate.

The MassHealth agency, which is part of the Executive Office of Health and Human Services of the Commonwealth of Massachusetts, is required to implement federal Medicaid law, and is answerable to the federal government under the funding scheme of Medicaid known as cooperative federalism. The federal agency that directly oversees the MassHealth agency in the federal-state structure, the Centers for Medicare and Medicaid Services, is a part of the U.S. Department of Health and Human Services. As the “single state agency” designated to deal with the federal government, the MassHealth agency is charged with ensuring that all federal laws that govern the Medicaid program are followed. The state agency cannot do anything that is contrary to the directions it has received from the federal government, and cannot take any actions that go beyond the Massachusetts laws that have implemented federal Medicaid law. Thus, in determining whether the lifetime lien survives the death of the Medicaid recipient, we need to look first and foremost at federal law, regulations and guidance, followed by state law establishing the MassHealth agency’s powers and duties, followed last by MassHealth regulations.

In memoranda of law filed at fair hearings, the MassHealth agency has often acknowledged its proper role in the federal-state hierarchy. For example, in the MassHealth memorandum filed in Appeal 1408932, the agency wrote:

[T]he Agency is bound by federal Medicaid law and its sub-regulatory guidance reflected in MassHealth regulations, and relevant Medicaid case law. Medicaid is a statutory program and not a program in equity. See generally Nissan Motor Corp. v. Comm ‘r of Revenue, 407 Mass. 153, 162 (1990) (there is no equity where a statute expresses a clear rule of law) … The state Medicaid statute and regulations are to be construed as showing a primary intent that the MassHealth agency comply with federal law in order to receive federal financial reimbursement. Youville Hospital v. Commonwealth, 416 Mass. 142, 146 (1993); Cruz v. Commissioner of Public Welfare, 395 Mass. 107, 112 (1985); see also G.L. c. 118E, § 11; 130 CMR 515.002(B). The MassHealth regulations themselves make this point. “These regulations are intended to conform to all applicable federal and state laws and will be interpreted accordingly.” 130 CMR 515.002(B). See also 130 CMR 520.018; 130 CMR 520.021. In particular, federal law provides that the federal agency administering Medicaid can deny some of the federal funding to a state if the state commits eligibility errors that exceed a specified threshold. 42 U.S.C. §1396b(u). As the single state agency, MassHealth is charged with ensuring that all federal and state laws that govern the Medicaid program are followed. See generally … G.L. c. 6A, § 16 (designating the Agency as the state Medicaid entity charged with developing policies and programs to implement shared federal-state program); G.L. c. 118E, §§ 1, 2, 7(g), 7(h). … Since Medicaid is a statutory program, it cannot be trumped by common law, state law or equitable principles.

Before reviewing federal and state law on the issue of whether a lifetime lien terminates upon the MassHealth recipient’s death, it is important to note that the U.S. Department of Health and Human Services commissioned and published a 2005 report entitled Medicaid Liens and Estate Recovery in Massachusetts. Here is some of what the 2005 federal report found about our Massachusetts lifetime lien and estate recovery laws and procedures:

Passage of the Tax Equity and Fiscal Responsibility Act (TEFRA 1982) gave states the option of placing a TEFRA or pre-death lien on the real property of permanently institutionalized Medicaid recipients to prevent them from giving away a home in which they no longer reside before the equity in that home can be used to offset long-term care expenses paid on their behalf. In Massachusetts, TEFRA liens are referred to as living liens because they cannot be placed on the property of a MassHealth member once he or she has died. They give the State authority to recover Medicaid payments for a member’s long-term care expenses if his or her property is sold while the member is alive. … The lien gives the State authority to recover Medicaid payments that have been made if the property is sold while the member is alive.

It is important to note that, although Medicaid gives states authority to place post-death liens, in Massachusetts a lien is only filed while the member is still alive. A lien is never placed on any kind of property – real or personal – once the member has died. After the member’s death, the Estate Recovery Unit will recover MassHealth costs from the member’s probate estate. A probate estate includes property that a person possesses at the time of death and that descends to the heirs (with or without a will) subject to the payment of debts and claims. The probate estate may include real property on which a living lien was filed. However, the lien is no longer valid after the member’s death and must be released upon the request of the administrator/executor.

Massachusetts uses the living lien to prevent MassHealth members from giving away the home in which they no longer reside before its equity can be used to offset long-term care expenses paid on their behalf.

Upon payment, both the claim and any living lien that had been placed on the member’s real property are released. If there was a living lien on the member’s real property, the Estate Recovery Unit must release it after they have received notification of the member’s death and a copy of the death certificate. Generally the lien and the Notice of Claim are released at the same time. If an attorney representing the member’s estate requests release of the lien prior to settlement of the estate, the Estate Recovery Unit releases it, since a living lien is no longer valid when the member is deceased. However, in the absence of such a request, the lien is not released until the Estate Recovery Unit determines whether the member’s estate will be probated. If the estate is not probated within 1 year after the member’s death, the Estate Recovery Unit will forward a request to probate the estate to the Public Administrator in the county where the deceased member lived.

Since the time of the 2005 report, there was one change in federal estate recovery law, where estate recovery against annuities became mandatory rather than a state option, but otherwise there have been no federal Medicaid changes affecting estate recovery. If this report was not brought to the attention of the judges that the MassHealth agency was arguing before in recent cases, that seems like a significant omission, especially where the agency has the twin duties of candor to tribunals and administrative consistency, and this was a federal report not only about what Massachusetts law is but also how Massachusetts has implemented the federal law.

The MassHealth agency cannot go beyond what the Massachusetts legislature has specifically authorized the agency to do. Where there are specific provisions in Massachusetts General Laws, Chapter 118E, Sections 31 and 32 governing estate recovery, the agency is limited to these provisions of law. One provision in Section 31 explains that the point of the lifetime lien is to allow recovery during the MassHealth recipient’s lifetime, and no provision anywhere states that the lien is meant to survive the MassHealth recipient’s death. In fact, Section (f) of Massachusetts General Laws, Chapter 190B, Section 3-803 (part of the Massachusetts Uniform Probate Code), the most recent Massachusetts legislation that makes reference to estate recovery, may make the point even clearer that the estate recovery claim against the probate estate is the exclusive method for estate recovery by the MassHealth agency after a MassHealth recipient’s death:

If a deceased received medical assistance under chapter 118E when such deceased was 55 years of age or older or while an inpatient in a nursing facility or other medical institution, section 32 of chapter 118E shall govern the notice to be given to the division of medical assistance and such division’s claim for recovery under section 31 of said chapter 118E if the division so chooses.

The lifetime lien on real estate of a MassHealth recipient is the creature of a narrowly-drawn statute with a narrow purpose, and where there are specific provisions detailing what the agency must do after the MassHealth recipient’s death, the MassHealth agency has no authority to enforce the lien unless such action is taken during MassHealth recipient’s lifetime.

A Plymouth-based practitioner, Brian specializes in legal issues involving death, taxation and disability; including estate planning, probate, trusts, estate and gift taxation, MassHealth applications and appeals, guardianship, conservatorship, contested trusts and estates, special needs & elder law.  Brian can be contacted at brian@elderlaw.info.

Medicaid Planning with Trusts and Deed Alternatives (Video)

Plymouth/Hingham attorney Brian Barreira  speaks on the SJC's 2007 case, Daley vs. Secretary of the Executive Office of Health and Human Services, which affirmed the ability of Massachusetts citizens to use an irrevocable trust to shield their homes from Medicaid's excess assets requirements. Barreira recently prevailed in a Suffolk Superior Court case, Maas vs. Sudders et al, where the Court found that MassHealth's denial notices violated federal due process requirements.

An Operational Guide to Life Estates and Irrevocable Trusts for the General Practitioner Part Three

Concluding a Three-Part Series for REBA News Readers

Leo J. Cushing, Esq., CPA, LL.M. and Todd E. Lutsky, Esq., LL.M.

Editor’s Note;  This is the third and final  installment and an exclusive three-part series of articles in REBA News directed to transactional and general practice attorneys, exploring the use of life estates and irrevocable trusts in estate planning and Medicaid planning.  The first installment focused on the SJC’s landmark Daley case and discuss what is a life estate vs. a trust, along with related tax implications of carryover basis vs. step-up in basis.

The second installment explained some of the gift and income tax pitfalls associated with life estates and remainder interests, with some detailed examples.

This concluding installment will explore creating a life estate and transferring the remainder interest to a Medicaid irrevocable trust along with the related gift, estate, and income tax implications.

What are Some of the Benefits of Creating a Life Estate in which the Remainderman is an Irrevocable Income only Trust Instead of the Children or a Family Member?

1.               Step-up in basis:  The assets in the irrevocable trust will be includable in the decedents’ gross estate and receive a step-up in basis for capital gains tax purposes.  Since the Donor will have transferred the property to the trust and retained a life estate in the deed that would cause IRC Section 2036 to apply and cause the inclusion of the home into the Donor’s estate.  This inclusion would cause IRC Section 1014(a) to apply resulting in the basis of the property to be stepped-up in the hands of the beneficiary.  This will reduce the capital gains tax consequences associated with a sale of the property following the life tenants’ demise, if sold by the beneficiary shortly after their demise.

2.               Rent it:  The life tenant may choose to rent the property and the rent would simply be paid directly to the life tenant and would not be deposited or associated with the Trust in any manner.  (See Daley decision above.)  The life tenant would continue to report the rental income directly on their individual income tax return, form 1040 and provided there was no other income generating asset inside the Trust, the Trust would not be required to file an income tax return.  However, even if the trust did need to file a tax return, form 1041, since the trust is a Grantor trust it would not pay any tax and instead all of the trust income would simply flow through to the Donor and be reported on their individual return and the tax calculated at their rates, just like it was done before they created the Trust.

3.               Sell the home:  The Donors can sell the home any time they wish and do not need the permission of the trustee. In addition, there will be no adverse income tax consequences associated with the sale as was the case when the house was transferred to the children, as shown above.  An example of such a sale will be explored below.

Why Creating a Life Estate in which the Remainder Interest is in an Irrevocable Medicaid Income Only Trust may be Superior to Putting the Remainder Interest in the Hands of the Children or a Family Member

1. Does transferring a home or other real estate to an irrevocable income only trust have any gift tax ramifications?

If the Donor or creator, meaning the parent, of the Trust has reserved a right in the Trust to designate the final beneficiary either during life or through a will after the execution of the irrevocable trust, this would cause any transfer of assets to the Trust to be an incomplete gift for gift tax purposes under Internal Revenue Code Section 2511 and Regulation 25.2511-2C.  The effect of this reserved power by the Donor, i.e. mom and dad, means that when the remainder interest in the home is transferred to the irrevocable trust in which the Donor reserves a life estate, the transaction results in an incomplete gift for gift tax purposes thereby resulting in no gift tax consequences to the Donor or parents.  This is a very different result from the one encountered when the property was given to the children with a retained life estate.  However, a gift tax return is still required to be filed even though there would be no resulting gift tax liability (see example above for potential gift tax savings).  It is this regulation that enables you to transfer such valuable real estate to the trust without paying any gift taxes, or reducing your gift or estate tax exemptions or reducing your Massachusetts exemption amount.

2. Can the property be easily sold after it is transferred to the irrevocable income only trust and what are the income tax ramifications? 

In this case the life tenant, mom and dad would be able to freely sell the property without the need to obtain the remaindermen’s permission.  This arrangement allows mom and dad to control the life interest as well as the remainder interest since the remainder interest has been transferred to the irrevocable trust in which mom and dad control the trustee by retaining the ability to remove the trustee at any time.  This is accomplished by giving the Donor the right to remove and replace the trustee provided however that the replacement trustee cannot be the Donor or Donor’s spouse.                                                                                                                             

With regard to the income tax consequences associated with the sale, the sale proceeds will still need to be split between the life tenant and the remaindermen in the same manner as described above.  However, since the Donor of the trust, i.e. mom and dad, reserve that right to designate the income and principal of the trust to the final beneficiaries during their life, generally limited to charities but excluding nursing homes that maybe a charity or a nonprofit and governmental entities, this makes the trust a Grantor trust, under Internal Revenue Code Section 674(a) thus eliminating the adverse income tax consequences experienced when the remaindermen are the children, as shown above. 

In other words, the term Grantor trust means that all of the income from the trust will be deemed to be the Donors for income tax purposes, thereby allowing the portion of the sale proceeds allocable to the irrevocable trust to be eligible for the capital gains tax exclusion associated with the sale of their primary residence, via IRS Section 121, thereby eliminating any adverse income tax consequences associated with the sale.  In addition, since the portion of the proceeds equal to the remainder interest is being deposited into the trust and not into the hands of the children, as happens when the children are the remaindermen, there is no early inheritance passing to the children.  Furthermore, the life tenant by directing the trustee as mentioned above, would continue to be able to use the proceeds in the irrevocable trust to purchase another home or a downsize condo, or simply invest the money and live off the income.  Finally, this sale and repurchase transaction will not restart the five year waiting period for Medicaid eligibility purposes and the proceeds of the new home in the trust would remain protected from the nursing home.  Remember this transaction does not result in any new asset going into the trust but instead it is simply a reinvestment of assets that were already in there.

For Example:  Let’s assume the same example as mentioned above, in which the life tenant decides to sell the home during their life for $600,000 with a cost basis of approximately $200,000.  First, since the children are not involved in the transaction the life tenant does not require their permission to complete the sale.   Second, assuming the life tenant is age 79 and based on the applicable life estate tables used in the above example, this means that 81.741% or $490,446 ($600,000 x 81.741%) of the proceeds would be allocated to the trust as the remainder beneficiary and 18.259% or $109,554 ($600,000 x 18.259%) of the proceeds would be allocated to the life tenant or mom and dad in this case.  This also assumes that 18.259% or $36,518 ($200,000 x 18.259%) of the $200,000 cost basis would be allocated to the life tenant and 81.741% or $163,482 ($200,000 x 81.741%) to the irrevocable trust. 

The result would be that $109,554 of the proceeds would be allocated to the life tenant minus a $36,518 cost basis would result in a $73,036 capital gain.  There would also be a corresponding $490,446 allocation of proceeds to the irrevocable trust minus a $163,482 cost basis resulting in a $326,964 gain seemingly at the trust level.  However, since the Trust is a Grantor trust, as mentioned above, this would cause the $326,964 capital gain at the trust level to be allocated to the life tenant’s tax return where it will be added to their own $73,036 gain.  Therefore, the full $400,000 gain would be reported on the Life tenant’s, i.e. mom and dad, individual income tax return and since they have owned and used the property for two of the last five years as their primary residence, they would be able to avail themselves of the full $500,000 capital gain exclusion thereby resulting in no tax liability.  This is in stark contrast to the result when the property is transferred to the children with the retained life estate, which resulted in a tax liability of approximately $96,166.  Not to mention the fact that the children did not receive any of the proceeds, which allow mom and dad the ability to use the income from the proceeds to live on for the rest of their lives. Finally, this arrangement does not expose the proceeds to the kids’ creditors.

Conclusion:

The Daley case made it clear that a life estate is a property interest and not an interest in trust.  However, as you can see from this article, there are implications and considerations to think about when using a life estate arrangement.  Although life estates are commonly used, they may not always be fully understood.

Todd Lutsky, of Cushing and Dolan, P.C. Concentrates in the preparation of estate plans, including the use of revocable trusts, joint trusts, irrevocable life insurance trusts, qualified personal residence trusts and family limited partnerships. He has a specific interest in Medicaid and asset protection planning for the elderly, assisting clients with the Medicaid application, preparation and eligibility process of obtaining MassHealth benefits, fair hearings, and advanced Medicaid planning and the preservation of assets through the use grantor irrevocable income only trusts. He hosts  his own radio show called, “The Legal Exchange with Todd Lutsky,” and it can be heard every Saturday at 5:00PM on WRKO 680AM and on four other local stations. Todd can be contacted at tlutsky@cushingdolan.com.

Co-chair of REBA’s estate planning, trusts and estate administration section, Leo Cushing is the founding Partner of Cushing & Dolan, P.C., specializing in closely held businesses, taxation, sophisticated estate planning, elder law and real estate. Leo's practice includes all aspects of sophisticated estate planning techniques, asset protection, trust planning, charitable giving and resolution of tax controversies.  Leo has written and lectured extensively on all aspects of taxation and estate planning. Leo is a much sought after speaker as he is able to articulate complex issues in a way that is clear, concise and easy to understand.  Leo’s email address is lcushing@cushingdolan.com.