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What to Do When You Get a Medicaid Estate Recovery Letter (Part 2)

Last week I was telling you about Joe’s problem with Medicaid.  After his Dad died he received a Medicaid estate recovery letter from the State of New Jersey looking to recoup $150,000 in benefits.

He was not happy when I explained to him that under Medicaid rules they are owed that money.  When Joe purchased Dad’s house, he did not pay fair market value for it.  That’s because he reduced the purchase price by $300,000 to pay for repairs and upgrades that benefitted Joe, not Dad.  In essence, Dad made a transfer for less than fair value which is subject to a Medicaid penalty.

So, why then did Medicaid approve the application and pay for Dad’s care for 3 years?  Because the state never came back to check on whether the home was sold.  Remember I told you that Joe first put the home on the market to try to sell it so the State processed Dad’s application and approved it.  They just never checked backed to see the status of the sale until after Dad died.

It’s never easy telling someone they have a $150,000 bill to pay but Joe was actually financially much better off than had he sold the home for fair market value before applying for Medicaid.  If he sold the home and netted $300,000 for Dad before he applied for Medicaid, then that money would have been spent on Dad’s nursing home care at a rate more than double what the State was paying.  In approximately 2.5 years the money would have run out, at which time Joe would then have filed a Medicaid application.

Instead, he applied for Medicaid before the house sold.  Once Dad died New Jersey came looking to be reimbursed but for only half of what Dad should have netted from the house sale, which means Joe can keep the rest.  He also received what is the equivalent of an interest free loan, since the State is not charging him interest on the money it paid out in benefits.

With all the improvements he made, Joe told me the home is now worth probably $600,000 or more.  If he doesn’t have the cash to pay the State, he can take a mortgage on the home.  And again, he is still $150,000 ahead.

I knew it would take time for it to sink in but I told Joe he was lucky.  What he did ended up to be the best move from a Medicaid standpoint.  He just didn’t know it at the time.  Joe’s story is a cautionary tale.  He went through the Medicaid system blindly and, albeit, with a repayment of $150,000 to Medicaid, it turned out OK.  It certainly could have been a lot worse.

Keep in mind that each situation is different.   What was the right move for Joe and his Dad may not be the right one for the next person.  Each situation has its unique set of facts and circumstances and is why I always tell people there is too much at stake to try this on your own.