In re Melby, No. 12-1593, 2014 Iowa Sup. LEXIS 3 (Iowa Sup. Ct. Jan. 10, 2014)
The Iowa Supreme Court has reaffirmed the extensive reach of the Iowa Medicaid recovery program, stressing the Medicaid program’s “broad purpose” of “providing for care for those in need” and “allowing for recovery by the state” to free “more funds for the provision of future services.” The Court again noted that the Iowa legislature has intentionally defined “estate” for purposes of the Medicaid recovery statute more broadly than required by federal law.
The issue arose in the context of separate irrevocable trusts created by a married couple in 1991. The trusts, which were funded with the spouses’ respective one-half interests in their farm, provided that the trusts were to pay net income to their respective trustors while they were living. The key provision at issue in this case was that if the trustor had no other resources available at his or her death, the trust was to pay “any indebtedness owed by the trustor.” The net income from the decedent’s trust was to be paid to the surviving spouse, and, at the death of both trustors, the remaining assets were to be distributed to the trustors’ three children. During their existence, these trusts rarely reported any income.
The wife began receiving Medicaid benefits in 2000. She died in 2002 after receiving Medicaid benefits totaling $53,118.62. After the wife’s death, the husband submitted information about the wife’s trust to the Iowa Department of Human Services Estate Recovery Program (the “Department”), which concluded that there were no assets from which it could recover Medicaid payments made on her behalf.
Just before the wife’s death, the husband began receiving Medicaid benefits. At his death in 2009, he had received benefits totaling $251,254.14. After the husband’s death, the Department reviewed the husband’s trust and concluded that the Department had an interest in the trust beyond the net income. The Department then determined that it had mistakenly found in 2002 that the wife had no interest in her trust beyond her net income. Consequently, the Department informed the estate that it would seek reimbursement from the corpus of the trusts for $321,263.96, the amount of all Medicaid expenses paid on behalf of both spouses.
Lower Court Findings
The probate court denied the Department’s Medicaid recovery claim, and the trustees sold the farm for $904,024, setting aside the proceeds for a potential Medicaid claim. In 2011, the successor trustee transferred the sale proceeds to Oregon where she resided, and the department filed an application in the estate seeking a judgment declaring that it could seek recovery from the corpuses of the trusts.
The district court ruled that the decedents’ interests in their trusts at the time of their deaths was limited to the net income from the trusts and that, as such, the Department could recover only $3,191.22. After both sides filed motions to enlarge and amend, the district court held that the Medicaid payments made on behalf of the decedents did not constitute debts of the decedents while they were living, but were instead only debts of their estates after death. The district court thus ruled that the Department was not entitled to recover from the corpuses of the trusts because the trusts provided only for the payment of the decedents’ debts, not the debts of their estates. The district court also found that the Department’s right to recover from the decedents’ income interests was limited to recovery for mandatory “medical assistance,” as defined by Iowa Code § 249A.2(7).
Supreme Court Analysis
On appeal to the Iowa Supreme Court, the Department argued that it had the right to recover from the decedents’ income interests and the corpuses of their trusts. It also argued that the plain language of the recovery statute allowed for a broader recovery than merely for mandatory “medical assistance.”
Recovery of Medicaid Payments under Iowa Code § 249A.5
The Court agreed with the Department and reversed the district court’s order. In so holding, the Court relied on an already-established three-part analysis to determine whether the assets were subject to Medicaid recovery under Iowa Code § 249A.5: (1) determining the classification of the trust; (2) determining the Medicaid recipient’s interest in the trust; and (3) determining whether that interest existed at the time of the recipient’s death.
1. Classification of the Trusts
Applying the analysis to the trusts at issue, the Court first found that the classification of these trusts had little bearing on whether the Department could recover. The Department could recover against the trusts to the extent of the decedents’ interests in the trusts. The parties agreed that regardless of how the trusts were classified, the language of the trusts gave the decedents an interest in the payments of any “debts they owed” from the assets of the trusts. Therefore, the Court found that the question of whether the Department could recover from the corpuses of the trusts turned on whether, under the recovery statute, the provision of Medicaid assistance created a personal debt owed by the recipient of the assistance (and not just a debt owed by his or her estate).
2. The Decedents’ Interests in their Trusts under Iowa Code § 249A.5(2)
Iowa Code § 249A.5(2), the recovery statute at issue, provides:
“[t]he provision of medical assistance to an individual who is fifty-five years of age or older…creates a debt due the department from the individual’s estate for all medical assistance provided on the individual’s behalf, upon the individual’s death.”
The Court stated that although Iowa Code § 249A.5(2) could be read to suggest that medical assistance payments are strictly debts of the recipient’s estate, the statutory language said nothing about the timing of the creation of the debt. Given this ambiguity, the Court looked to the “broad purpose” of the Medicaid program: providing for care for those in need and allowing for recovery by the state to free more funds for the provision of future services.
“With this ‘broad purpose’ in mind,” the Court ruled it “prudent” to resolve the ambiguity in favor of recovery by the Department. Thus, the Court said that “an interpretation creating the debt immediately upon provision of assistance, rather than at the death of the recipient, and allowing recovery from the corpus of the trust, is consistent with the Medicaid program’s goal of recovering from those with an ability to pay, so as to make future funds available for those having the most need.”
The Court reasoned that interpreting Iowa Code § 249A.5(2) to find that the provision of Medicaid assistance creates a personal debt of the recipient, not merely a future debt of his or her estate, dovetailed appropriately with the Iowa legislature’s “very clear deviation from federal law” in defining “estate” to favor broad Medicaid recovery powers.
3. The Decedents’ Interests at the Time of Their Deaths
The Court then turned to the third step of the analysis—determining the decedents’ interests at the time of their deaths. Because the Court had ruled that the recovery statute created a debt immediately upon the provision of services to a Medicaid recipient, the Court found that the decedents had interests in the corpuses of their trusts at the time of their deaths from which the Department could recover. As such, the Department was entitled to recover payments made for the provision of medical assistance on behalf of the decedents from the corpuses of their trusts.
The Meaning of “Medical Assistance” under Iowa Code § 249A.5
Finally, the Court reversed the district court’s holding that the Department’s right to recover under Iowa Code § 249A.5(2) was limited to recovering expenses constituting mandatory “medical assistance,” as defined by Iowa Code § 249A.2(7), and did not include those expenses constituting “additional medical assistance” and “discretionary medical assistance.” The Court found that the recovery statute’s phrase “all medical assistance,” included “additional medical assistance” and “discretionary medical assistance.” This interpretation, stated the Court, was also consistent with the legislature’s intent to enable broad recovery and promote as much care as possible for those in need.
This case again warns practitioners of the limitations of income-only irrevocable trusts in protecting assets from Medicaid recovery in Iowa. Even if clients are willing to (1) risk the look-back period, (2) pay potential gift taxes, (3) forfeit control of their assets, and (4) deprive their heirs of a stepped-up basis at death, they still may not achieve asset protection. The Iowa Supreme Court has clearly established that courts are to find in favor of Medicaid recovery when at all possible. Receiving “clearance” from the Department regarding trust language is not even a safeguard against future recovery. In this case, the Department gave the trustee clearance to dispose of the assets of the wife’s trust after her death, but then “changed its mind” seven years later and sought recovery. It is also unclear—and not answered by the opinion—how the Department has the authority pursuant to Iowa Code § 249A.5 to collect the sums expended on the wife’s behalf through an application against the husband’s probate estate. No probate claims are pending against the wife’s estate.
Practitioners should review their clients’ irrevocable trusts for language providing for the payment of their debts at death. This case establishes that the corpus of such a trust is subject to Medicaid recovery.
What should be clear from this case and other Iowa Supreme Court precedent is that irrevocable trusts as Medicaid planning tools should be used with caution in Iowa. Any interest a client retains in the corpus will destroy the purpose of the trust. Clients should be counseled that a long-term care insurance policy, purchased during middle age from a reputable insurer, is usually going to be the best Medicaid planning tool available. Clients may also need to be reminded that Medicaid planning is very state-specific. What may have worked for their relatives in other states won’t necessarily work in Des Moines. The Supreme Court has again confirmed that when it comes to Medicaid recovery, any doubts will be resolved in favor of recovery.
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