This is the second post in my series on critical mistakes people make when facing a Connecticut Medicaid situation. Today I am going to look at a strategy that many people use for different reasons, disinheritance and non-binding oral trusts.

There can be a lot of anxiety when a loved one is in a nursing home and your assets are dwindling at the rate of +$9,000 every month. Unfortunately this anxiety can also lead to poorly informed decisions. Some families I meet come to me with an estate plan that disinherits a loved one that is in a nursing home or on Connecticut Title 19 Medicaid. The logic of this plan is to protect the family assets from being wiped out. This is a knee-jerk reaction that creates more problems than it solves in my opinion.

What can go wrong?

Many times I have family members contact me because a parent has disinherited the other parent (living in a nursing home or diagnosed with dementia) with the understanding that one child or all the children would actually use the funds to provide care for the surviving parent.

The first issue is that such an arrangement is almost non-existent on the scale of enforceability. At best there could be an oral trust but one side of the oral contract is deceased and if there is a conflict it is obvious that the other side of the contract (the child who received the funds) is saying there is no contract. Where is the evidence? At worst, the funds received by the child or children are treated as they look, outright bequests with no strings attached.

A second issue is liability concerns. The funds you intend to care for the surviving parent are now exposed to the liabilities of the person chosen to hold the funds. Common liability risks include divorce, bankruptcy, or even a car accident.

A family with a loved one in a nursing home or on a government benefits program has a choice. Disinheritance is not the only option. Disinheritance is not the preferred option and the government even recognizes this fact by providing specific protection to specific estate planning strategies.

A Special Needs Trust allows you to leave a legacy of care for a loved one in a nursing home without handing over everything to pay nursing home bills. It is absolutely critical that this unique planning is done by an experienced Connecticut special needs attorney because these trusts are reviewed by government benefits agencies and in Connecticut they are usually reviewed by the Attorney General’s office. One mistake in the document and the assets of the trust could be used to pay for bills you did not intend to pay.

I have seen too many families torn apart by using disinheritance as asset protection. There is no need for it. You have a choice. Put your plan on paper and leave your family with some security.

In August I first brought up the growing trend of insurance companies using ERISA laws to recover from the proceeds of personal injury suits pursued by their own customers against those responsible for the injury. You can read that article here.

I had hoped this would not become a snowballing trend because in many ways it is truly horrible. Unfortunately here I am writing about it again because Wal-Mart recently won an appeal to recover an entire settlement from one of their health insurance customers.

The customer suffered the injury and went through the process and expense to get the settlement, then Wal-Mart comes in after the customer did all the work and makes a claim for reimbursement of medical costs they paid. And to make it worse, they made the claim and were successful against the funds that went into a special needs trust.

Wal-Mart was paid, the attorneys were paid, and the injured person received nothing. If you ever pursue an injury lawsuit be sure your attorney has a plan for how to handle an ERISA reimbursement claim from your health insurer or you could end up with nothing to show for your time and effort at the end of the day.

You can read the full story here.

Your mother is in a nursing home and has qualified for Connecticut Title 19 Medicaid. She’s been able to keep her home because it is an exempt asset so long as she is living and intends to return home. But what happens to the house after she dies?

What if it was your spouse on Medicaid and the state has paid over $70,000 in benefits?

Will they attempt to recover benefits upon your spouse’s death?

After a Connecticut Title 19 Medicaid benefits recipient dies, the state has the right to recover any assets remaining in order to reimburse itself for Medicaid benefits paid out. This process is called estate recovery. Certainly, it makes sense from a public policy standpoint—-if the state is going to help pay for a resident’s care while they are living, then the state should be reimbursed, as fully as possible, by any assets remaining at the resident’s death. But while this policy may make sense, families are never happy to learn that the state may put a lien on your/your parent’s home after your spouse/parent dies.

At one time, states were only pursuing certain real and personal property the Title 19 Medicaid recipient had titled in their name, alone. But now states are taking advantage of the Federal laws expanded definition of “estate” that allows the states to recover most assets in which the Medicaid recipient has an ownership interest including jointly owned property, property held in trust, life estates, and life insurance proceeds. The states also have the right to recover assets conveyed at the Medicaid recipient’s death through transfer on death deeds or beneficiary designations.

In addition, states are now placing liens on the Title 19 Medicaid recipient’s home. This is a way for the state to secure a debt against the Medicaid recipient’s property, meaning that the property can not be sold or transferred until the lien is satisfied. However, the state will only place a lien on the home if Medicaid has paid for at least six months of nursing home care. The state would then inform the Medicaid recipient or the family before a lien is imposed and the family would have the chance to appeal the action.

Fortunately, the state will not place a lien on the home if the Title 19 Medicaid recipient’s spouse, minor child, or disabled child is still living in the home. Nor will the state place a lien on the home if the Medicaid recipient’s doctor thinks he or she may be able to go home. In fact, the federal government requires states to waive recovery all together if recovery would cause undue hardship (as determined by the state).

There are still, in certain circumstances, perfectly legal ways of avoiding estate recovery. For example, if mom is the Title 19 Medicaid recipient, and she has a child with a qualifying disability, she may be able to give her home to that child penalty free and avoid estate recovery at her death. Also, if mom has a child who moved into her home with her, cared for her, and that care kept her out of a nursing home for at least two years, then mom can transfer her home to that child, penalty free, and avoid estate recovery. This is called the caretaker/child exception. There may also be other strategies to consider for avoiding estate recovery including purchase of the home by family members or, perhaps, even using a reverse mortgage.

Connecticut Title 19 Medicaid estate recovery rules are complicated and change frequently. You should consult an Elder Law Attorney who practices in the area of Medicaid before drafting your estate plan with the intent of qualifying for Medicaid with the hopes of avoiding estate recovery. Plan today to protect yourself tomorrow.

I came across this story right before I left for vacation and I wanted to highlight it for everyone. Providing for a Special Needs Child describes an interesting conversation between two parents about the unique estate planning issues families with special needs children face.

I am afraid the discussion of providing a secure future in case things do not go according to everyone’s own life plan happens all too infrequently based on the number of conversations I have had myself recently with families unaware of how critical it is to implement a plan to provide quality of life to a special needs child if the unexpected should happen.

What is the plan for educational needs?

Who will pay the medical bills if your child is no longer on your health insurance?

Will your child only survive with the bare minimum from government benefits programs or will you put in place a plan for the same quality of life you would provide?

Update: The original article “Providing for a Special Needs Child” is no longer available from the original site.