To qualify for Medicaid, an applicant must have limited income and limited assets. Once a person receives benefits, the State of Oregon may, after the person and any surviving spouse dies, recover benefits paid by claiming against property the person held at the time of death. As a result, some people try transferring their property to trusts or their spouses. A recent case, Nay v. Dept. of Human Services, 360 Or 668 (2016), <http://www.publications.ojd.state.or.us/docs/S062978.pdf>, confirms that the state does not have the power to reach back to recover property given to a spouse before applying for Medicaid.
Estate recovery of Medicaid benefits is based on a state law that directs the Department of Human Services (DHS) to recover from property owned by the recipient at the time of death. (It is for this reason that all probates in Oregon require notice to DHS and to the Oregon Health Authority, which runs the Medicaid program.) In 2008, DHS used that law as the basis for new regulations claiming the power to recover property transferred by the recipient to his or her spouse in the five years before the initial application to Medicaid. Mr. Nay, a lawyer specializing in elder law, challenged the validity of the regulations.
Mr. Nay argued that the regulations exceeded the scope of the state law and were prohibited by a federal law limiting recovery of properly paid benefits to the estate of the recipient. The Oregon Supreme Court agreed with Mr. Nay.
Under Oregon law, there are three grounds for challenging a regulation’s validity in all situations, as opposed to a specific application. These are if the rule violates the state constitution, if it exceeds the authorizing law, or if it was adopted without proper procedures. A challenge also probably could be made on the ground that a rule violates federal law, but this is not spelled out in the state law.
When the argument is a violation of the authorizing state law, Oregon courts first confirm that the agency in question is authorized to make rules on the subject and confirm that the proper procedure has been followed. After that, they look to see if the rules depart from the express or implied policy of the governing law. Mr. Nay argued that the rules violated the definition of property allowed to be recovered.
Oregon, it turns out, allows recovery from any property in which the recipient held an interest at the time of death. Oregon also allows two categories of transfers to be set aside if needed for estate recovery. This meant that the analysis by the court involved looking at the policies behind recognition of rights in property that DHS argued remained after a transfer.
DHS argued that when property was transferred between spouses, legal rights were retained until the death of the transferring spouse for four reasons: (1) in divorce, the law presumes that each spouse contributed equally to acquiring the property; (2) a surviving spouse has the right to claim a percentage of a deceased spouse’s estate when the will does not give enough; (3) the power to undo transfers made after Medicaid payments begin but which receive insufficient payment; and (4) the power to undo transfers made in order to hinder estate recovery. The court ruled that reasons (1) and (2) were too attenuated to be recognizable as a recoverable property interest and reason (3) did not apply because the right only applied to transfers made after Medicaid benefits were received
Reason (4) was a trickier question. The court ruled that the failure of the regulations to require proof of intent to hinder recovery was a fatal flaw. The right to undo transactions only went that far, and a blanket reach back was too broad.
The court found, therefore, that the rules exceeded the scope of the law and ruled them invalid. It permitted transfers of property to a spouse before applying for Medicaid, and the state can’t do anything about it unless it proves an intent to hinder estate recovery.
It is probably a good idea to consult a lawyer before making any transfers so that you can focus on transfers that are excepted from the “intent to hinder recovery” law, and to wait a reasonable time before applying to forestall arguments by the state that you intended to hinder estate recovery. So long as you speak only to your lawyer about it, any intent should be difficult to prove.
This is a situation where state laws are likely to differ somewhat, so if you are not in Oregon, you should not take the advice of this article blindly. For example, I do not know if Washington has a similar regulation. If it did, it would likely be upheld. Washington has community property, which means that both spouses have an interest in property acquired during the marriage, and that interest applies when the property is acquired. As a result, it is difficult to make a transfer from one spouse to another without making significant efforts to eliminate one’s own interest. If you are considering this strategy, contact a lawyer in your own state for advice on how to pln the arrangements effectively.