Dec. 4, 2013 – Last month, the legislature passed SB 384, overhauling the Wisconsin Trust Code. This update has been in the works for well over a year. But SB 384 also changes recently passed law relating to Medicaid estate recovery and divestment.

SB 384 was crafted as an adoption (with modifications) of the Uniform Trust Code (UTC), but also included provisions repealing some of the worst aspects of the Medicaid estate recovery and divestment changes that were passed in Act 20 (the 2013-15 budget bill).

As explained in an earlier article, “Divestment, Estate Recovery Provisions Will Impact Family Transfers,” (WisBar InsideTrack, Sept. 4, 2013) Act 20 dramatically expanded the state’s power to recover the costs of long-term care from elderly and disabled individuals who received Medicaid assistance. But SB 384 now removes some of Act 20’s provisions.

The bill awaits Gov. Scott Walker's signature, and he is expected to sign it on Friday, Dec. 13. Assuming the law is enacted this month, the majority of the bill's trust code provisions will not go into effect until July 1, 2014.

However, SB 384's Medicaid provisions will be effective as of the date of Act 20’s original provisions. In other words, with enactment of SB 384, it will be as though some of Act 20’s provisions never happened.

Below is a summary of the Medicaid changes, including what is repealed by the bill, and what parts of the prior Act 20 changes are still on the books. This article does not address the many changes in the Trust Code that are related to the UTC part of the bill. Watch for a future InsideTrack article on the trust code changes.

State’s Power of Recovery and Divestment

Medicaid is the long-term program that provides coverage when an individual needs care in a nursing home facility. Family Care, also a Medicaid program, provides similar coverage for the disabled or elderly who remain at home or in assisted living facilities.

In order to qualify for long-term care under Medicaid, income and asset limits apply. In other words, individuals with too many assets or too much income are not eligible. However, some assets are exempt from that determination under federal law.

After a Medicaid recipient dies, the state can make “claims” against the estates of Medicaid recipients to recover money paid out in the form of Medicaid benefits, including liens against the homes of Medicaid recipients that are eventually sold.

Under Act 20, the state expanded the types of property subject to Medicaid estate recovery “claims,” made it possible for the state to pursue recovery claims against the estates of surviving spouses, and restricted and complicated property transfers.

In addition, provisions within Act 20 essentially prevented intrafamily transfers of businesses or farms, if the original owner needed long-term care through Medicaid.

Act 20 also changed “divestment” laws in Wisconsin. Divestment involves the gifting of assets, or the selling of assets at less than fair market value, to qualify for Medicaid.

If a person “divests” assets within five years of applying for Medicaid, the person will be ineligible for Medicaid benefits for a period of time, which is based on the amount divested. There are exceptions. For instance, spouses can gift anything to each other.

Some assets that are exempted from the Medicaid eligibility determinations are also not counted for purposes of divestment penalties under federal law. Thus, the transfer of certain assets would not subject the individual to divestment penalties.

What SB 384 Repealed

SB 384 repeals or amends major provisions that threatened the transfer of family farms or businesses and prohibited promissory notes between family members. It also redefined what “property” is available for estate recovery. Here are the specifics:

• The prohibition on transfer of excluded resources in Wis. Stat. section 49.453(2) is repealed, meaning that the threat to family farms and businesses is off the table. It also means that transfer of other exempt resources, such as burial plots and cars, would not cause a penalty period;

• The prohibition on promissory notes between family members in section 49.453(4c)(c) is repealed. This means that now, the simple fact that funds were loaned to a son or daughter will not create a divestment penalty. The loan does, however, have to meet all of the existing requirements of state law. For instance, it must be payable over the Medicaid applicant's life expectancy, must provide for fixed regular payments such as monthly, quarterly, or annually, and it must include interest at the applicable federal rate;

• Section 49.496(1)(cm), regarding the recovery of nonprobate assets, is amended to change the phrase “living trust” to “revocable trust” and to add a restriction that prohibits the state from recovering funds from irrevocable trusts;

• Section 49.496(cm)(2) is repealed. This is the statute that defined property available for estate recovery as “all real and personal property in which the nonrecipient surviving spouse had an ownership interest at the recipient's death and in which the recipient had a marital property interest with that nonrecipient surviving spouse at any time within 5 years before the recipient applied for medical assistance or during the time that the recipient was eligible for medical assistance.” This repeal means that the state cannot recover property by using a time frame that goes all the way back to five years prior to the application;

• Section 49.496(6m) is amended to provide an undue hardship waiver provision for recovery from estates of surviving spouses that was previously precluded;

• The state's ability to "void" certain property transfers, section 49.4962, is entirely repealed;

• The cumbersome property notice requirements in section 49.848 are repealed, and the complex restrictions on an individual’s ability to sell property are gone;

• SB 384 eliminates virtually all of the negative trust-related estate recovery statutes in Wis. Stat. section 701.065, including the cumbersome reporting requirements for trustees of living trusts, the requirement that pooled trusts may retain only 30 percent of funds, the pooled trust trustee reporting requirements, and the personal liability of a trustee. The exception is the retained provision that the state will still be allowed to recover from revocable trusts, but this is not in section 701.065 anyway.

What Remains of Act 20

Various parts of Act 20 still remain, including divestment penalties that are tied to transfers by spouses, and an expansion to include recovery of nonprobate assets.

• The provision in Wis. Stat. section 49.455(5)(d) stating that if the community spouse transfers any resources within five years after the institutionalized spouse becomes eligible for Medicaid, the community spouse's transfer will create a divestment penalty for the institutionalized spouse;

• The provision in section 49.455(5)(e) prohibiting “spousal refusal” by stating that the department “may” deny eligibility if the institutionalized spouse and the community spouse do not provide the total value of their assets and information on income and resources to the extent required under federal Medicaid law, or do not sign the application for Medical Assistance;

• The provision in section 49.453(8)(a) that requires any divested funds to be returned in full before a divestment penalty will be reduced or cancelled.

• The expansion of estate recovery in section 49.849(1)(d) to include many nonprobate assets, such as life estates and living trusts;

• The expansion of estate recovery in section 49.496 to allow recovery of assets at the time of the community spouse's death, if he or she dies after the nursing home spouse. However, SB 384 makes some positive changes to the process. First, it includes the requirement that the presumption that all of the assets owned by the community spouse at the time of his or her death also belonged to the institutionalized spouse must be consistent with Wis. Stat. ch. 766.31 and therefore incorporates marital property law into the determination. The bill also changes the proof needed to rebut the presumption by removing the “clear and convincing” standard. Finally, it reinstates the undue hardship waiver provision that was removed;

• The cumbersome limitations on the ability of a disabled child, a minor child, or a surviving spouse, to transfer property they have received from the estate of a deceased recipient. This is now located at section 49.849(4)(c);

• The expansion of estate recovery for Family Care Services, to include the full capitated rate instead of the actual cost of services the participant received. This provision is 49.496(3)(ad);

• The provision allowing recovery from life insurance policies at section 632.697.

Conclusion

Because there is still a significant expansion of estate recovery for married couples under Act 20, it remains extremely important for lawyers to assist clients in establishing property classifications to minimize estate recovery problems, and in carefully documenting assets at the death of the first spouse.

Documenting property interests as of the first death is not something that many low-to moderate-asset couples (i.e. essentially all Medicaid clients) think much about, since most assets are owned jointly. However, it may be more appropriate to forego nonprobate transfers and instead use a probate process such as a summary assignment, a confirmation of interest in property, or even an informal probate, in order to get a court order regarding the estate assets.

Many advocates – including the State Bar of Wisconsin's Elder Law Section, Family Law Section, and Real Property, Probate and Trust Law Section – worked tirelessly to pursue the repeal of the arguably illegal government overreaching that was included in Act 20, the biennial budget. This bill shows that the hard work paid off, at least in large part. But Wisconsin residents still have reason to be concerned, and to be careful.