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What to Do When You Get a Medicaid Estate Recovery Letter

                Joe called us because he received a letter from Medicaid looking for money.  Dad had been on Medicaid for 3 years before he passed away.  New Jersey was looking to recoup benefits it paid out on Dad’s behalf to the tune of approximately $150,000.

                Joe received what is called an estate recovery letter.  The State of New Jersey looks to recover as much of its money as it can from the estates of Medicaid recipients when they die.  “But, why would there be anything left when Dad died,” you might ask, since he had to spend down to less than $2000 in assets before qualifying in the first place.  Good question.

Well, you see, the problem goes back about 4 years.  Joe told me that his dad was living in his home until his health declined to the point where he needed to be placed in a nursing home.  Since Dad had only the house to his name and no other assets, Joe paid some of Dad’s care costs before and after he moved to the nursing home, about $100,000 total.  He then put the house up for sale and applied for Medicaid.

                New Jersey Medicaid will approve the application while you are trying to sell the home – as long as all the other Medicaid requirements are met.  And that is just what happened in the case of Joe’s dad.  But then the story takes a bit of a twist.

                After some time on the market without an offer, Joe decided to buy the home himself.   It needed a lot of work and upgrades so he and his wife and kids could move in.  He purchased the home for $400,000 and spent $300,000 in repairs and upgrades.  At the closing he reimbursed to himself the $100,000 he spent on Dad’s care from his own funds.  But, he also reduced the purchase price by $300,000.  In other words, Dad actually paid the costs of the repairs and upgrades and received no cash in the transaction.

                That was the root of the problem with Medicaid.  Dad actually made a gift of equity in the home to Joe, which would of course be subject to a Medicaid penalty.  But, why did Dad remain on Medicaid for 3 years?  Didn’t that mean everything was still OK? And how much does Joe actually have to pay back?  I’ll cover that next week.