There are different rules regarding the imposition and repayment of Medicaid liens prior to funding special needs trusts (as opposed to the imposition and recovery of Medicaid liens from estates of deceased recipients.(Notably, the lien rules are different in the context of institutional liens (see N.J.S.A. 30:4-80.1) and DDD services (see N.J.A.C. 10:7-6.1). The differences depend on (1) whether the Medicaid benefits were correctly paid and (2) the source of the funds that will be funding the trust. (States that participate in the Medicaid program are required to enact provisions to recover from estates of deceased Medicaid recipients all monies expended on behalf of that recipient during the recipient’s lifetime. See 42 U.S.C. §1396p(b)(1)(B). New Jersey’s Medicaid estate recovery statutes/regulations (for recovery of Medicaid benefits correctly paid) are set forth in N.J.A.C. 10:49-14.1, N.J.S.A. 30:4D-7.2 and N.J.S.A. 30:4D-7.)

I. INCORRECTLY PAID BENEFITS:

According to federal statute,

No lien may be imposed against the property of any individual prior to his death on account of medical assistance paid or to be paid on his behalf under the State plan, except &133; pursuant to the judgment of a court on account of benefits incorrectly paid on behalf of such individual [or in certain cases against real property of an institutionalized recipient].

42 U.S.C. §1396p(a)(1).

New Jersey imposes a statutory duty on the Commissioner to “take all necessary action to recover the cost of benefits incorrectly provided to or illegally obtained by a recipient, including those made after a voluntary divestiture of real or personal property or any interest or estate in property for less than adequate consideration made for the purpose of qualifying for assistance.” N.J.S.A. 30:4D-7(i). That action includes recovery “from a recipient, legally responsible relative, representative payee, or any other party or parties whose action or inaction resulted in the incorrect or illegal payment or who received the benefit of the divestiture, or from their respective estates, &133; except that no lien shall be imposed against property of the recipient prior to his death except in accordance with [N.J.S.A. 30:4D-17].” Id.

N.J.S.A. 30:4D-17, in turn, imposes criminal and civil penalties for willfully obtaining (or causing to be obtained) benefits to which the person is not entitled.

II. CORRECTLY PAID BENEFITS:

As set forth above, the Commissioner is statutorily obligated to recover correctly paid benefits from the estate of the (deceased) Medicaid recipient. N.J.S.A. 30:4D-7(i).

However, with respect to pre-death repayment of correctly paid benefits, repayment of benefits depends upon the source of the Medicaid recipient’s funds.

A. Personal Injury/Tort Judgments/Settlements:

As set forth above, 42 U.S.C. §1396p(a)(1) prohibits Medicaid liens from being imposed prior to the recipient’s death, except in certain cases against an institutionalized recipient’s real property.

Although this federal provision barring “liens” imposed prior to a recipient’s death would seem to end the inquiry of Medicaid pre-death recovery, recovery is sought by Medicaid from third-party personal injury recoveries, based upon the “assignment” provisions of 42 U.S.C. 1396k:

(a) &133; [a] State plan for medical assistance shall&133;

(1) Provide that, as a condition of eligibility for medical assistance&133;the individual is required —

(A) to assign the State any rights &133; to payment for medical care from any third party.

Pursuant to 42 U.S.C. §1396a(1)(25)(H), “where a third party has a legal liability to make payment for [medical] assistance,” the State must,

[have] in effect laws under which, to the extent that payment has been made under the State plan, &133;the State is considered to have acquired the rights of such individual to payment by any other party for such health care items or services.

In furtherance of this mandate, N.J.S.A 30:4D-7.1 provides that the Attorney General enforce the Commissioner’s rights as assignee against third parties, and contains requirements for Medicaid recipients who independently institute actions against third parties for damages. See Waldman v. Candia, 317 N.J. Super. 464 (App. Div.), certif. granted, 158 N.J. 686 (1999), appeal dismissed, 166 N.J. 599 (2000); In re Keitur, 332 N.J. Super. 18 (App. Div. 2000).

Pursuant to N.J.S.A. 30:3D-7.1(b) (which is not specific to trusts),

When a recipient, his guardian, executor, administrator or other appropriate representative brings an action for damages against a third party, written notice shall be given to the Director of the Division of Medical Assistance and Health Services. In addition, every recipient or his legal representative shall promptly notify the division of any recovery from a third party and shall immediately reimburse the division in full from the proceeds of any settlement, judgment, or other recovery in any action or claim initiated against any such third party subject to a pro rata deduction for counsel fees, costs, or other expenses incurred by the recipient or the recipient’s attorney; provided, however, that the director may make application to a court of competent jurisdiction for an award of counsel fees and costs incurred in the pursuit of a claim under this subsection.

Any settlement, judgment, dismissal, exchange of releases, or action affecting the disposition of a recipient’s independent action against a third party shall not serve to bar a claim or cause of action brought by the Attorney General on behalf of the commissioner against that third party under this section.

To effectuate these assignment provisions, N.J.A.C. 10:71-4.11(g)(1)(v) mandates that, to qualify as a first-party special needs trust,

The trust shall specifically identify, in an attached schedule, the source of the initial trust property and all assets of the trust. If the trust is being established with funds from the proceeds of a settlement or judgment subsequent to the bringing of a legal cause of action, Medicaid’s claim for its expenditures that are related to the cause of action shall be repaid immediately upon the receipt of such proceeds and prior to the establishment of the trust.

Although benefits correctly paid can be collected by the State under this “assignment” provision, the Supreme Court has held that the “anti-lien” provisions of 42 U.S.C. §1396p(a)(1) limit the amount that can be collected under the “assignment” provision to that portion of a third-party recovery that represents payment for medical care. Arkansas Dept. of Health v. Ahlborn, 547 U.S. 268 (2006).

B. Inheritance/Outright Bequest (as opposed to a testamentary SNT):

i. In General

As set forth above, according to federal statute,

No lien may be imposed against the property of any individual prior to his death on account of medical assistance paid or to be paid on his behalf under the State plan, except &133; pursuant to the judgment of a court on account of benefits incorrectly paid on behalf of such individual [or in certain cases against real property of an institutionalized recipient].

42 U.S.C. §1396p(a)(1).

See also N.J.S.A. 30:4D-7(j) (“[The commissioner is authorized] to take all necessary action to recover the cost of benefits correctly provided to a recipient from the estate of said recipient in accordance with [N.J.S.A. 30:4D-7 to 30:4D-7.7]”).

Thus, a Medicaid lien for correctly paid benefits would not have to be repaid prior to the funding of a special needs trust.

ii. Institutional liens; DDD

Despite the general rule barring the pre-death imposition of a Medicaid lien for correctly paid benefits, an institutional lien (including a DDD lien) may be imposed during the recipient’s lifetime. See, e.g., In re Flood, 417 N.J. Super. 378 (App. Div. 2010) (outright inheritance to DDD recipient cannot be sheltered from a DDD lien during the DDD recipient’s lifetime through the use of a trust); Boe v. Department of Human Services, 376 N.J. Super. 572 (App. Div. 2004) (following patient’s involuntary commitment to a state hospital, the hospital filed a pre-death lien claim pursuant to N.J.S.A. 30:4-80.1 on patient’s real property for the cost of care).

N.J.S.A. 30:4-80.1 provides as follows:

Lien against property of person receiving functional services from institution or other residential service

Every institution or other residential service maintained in whole or in part by State or county funds, which provides inpatient care, supervision and treatment for persons with developmental disabilities, shall have a lien against the property of a person receiving functional services from that institution or service for the total cost of the care and maintenance of the person in the institution at the per capita cost rate of maintenance fixed in accordance with law. The lien shall also attach to the real and personal property of any person chargeable by law with the support and maintenance of the person and against whom a court of competent jurisdiction has entered an order directing the person to pay all or a part of the cost of maintaining the person in an institution, provided that the amount of the lien shall not exceed the amount of maintenance required to be paid by the order of court. The lien shall also attach to the real and personal property of any person chargeable by law with the support and maintenance of the person pursuant to subsection b. of R.S.30:4-60, but the amount of the lien shall not exceed the amount of maintenance to be paid. Liens under this section, when properly filed as set forth herein, shall have priority over all unrecorded encumbrances and shall be at the rate to be determined as provided in Title 30 of the Revised Statutes.

However, state and county psychiatric hospitals are no longer permitted to file statutory liens against the property of clients. N.J.A.C. 10:7-6.1.

If an institutional lien is filed, N.J.S.A. 30:4-80.6(c) provides that it may be compromised:

Discharge of lien; compromise and settlement of lien

the Commissioner of Human Services is hereby authorized to compromise for settlement any lien filed under the provisions of this act for the maintenance of any patient. A memorandum of the compromise and settlement shall be entered in the records of the institution affected thereby and shall be sufficient authorization for a complete discharge of the lien.

Pursuant to N.J.A.C. 10:7-6.1,

DDD through its agencies and designated agents shall file all liens against the real and personal property of every State and county settlement DDD client admitted to services, whether or not a client has any known property. The only exception is that liens for Medicaid clients shall be filed by the DMAHS. The chief executive officer of the agency shall file liens against LRRs of DDD clients only when the LRR fails to pay the assessed amounts which were based on his/her ability to pay. (N.J.S.A. 30:4-80.1)

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