Families should update estate plans after the Court expands Iowa Medicaid recovery powers.
DES MOINES - A series of Iowa Supreme Court decisions has dramatically altered the legal picture for families wanting to protect assets from Medicaid estate recovery, with courts interpreting state law far more broadly than federal requirements mandate.
The most significant ruling came in January 2014 when the court decided In re Estate of Melby. This case exposed how standard trust language can inadvertently grant the state access to hundreds of thousands of dollars in protected assets.
Arnold and Vesta Melby established irrevocable trusts in 1991, transferring their Monona County farm into separate trusts managed by their son. When both spouses later required Medicaid-funded nursing home care, the Iowa Department of Human Services (HHS) initially cleared the trusts. However, after Arnold passed away in 2009, the department reversed course and successfully claimed $321,263.96 from the trust assets.
The fatal flaw lay in a single provision stating that the trust would pay "any indebtedness owed by the trustor" if no other resources were available at the time of death.
"The court's interpretation fundamentally changed how we draft trusts," said Tyler Smith, a Medicaid planning attorney in Altoona who was not involved in the case. "What seemed like standard language became a $300,000 mistake."
Court Establishes Immediate Debt Creation
The Iowa Supreme Court ruled that Medicaid assistance “creates a debt immediately upon receipt of services,” not merely after death as many trust drafters had assumed. This interpretation meant the debt payment provision in the Melby trusts allowed full recovery from the trust corpus.
Justice Edward Mansfield, writing for the court, emphasized the state's interest in maximizing recovery to fund future services. The decision relied on Iowa Code § 249A.5(2), which defines "estate" for recovery purposes more expansively than federal law requires.
The ruling established that Iowa can recover not just mandatory medical assistance but all forms of Medicaid support, including discretionary services. This broad interpretation significantly expanded the state's recovery powers beyond what federal law mandates.
Three-Part Framework Guides Recovery Analysis
Iowa courts now apply a three-part test to determine whether trust assets are within Medicaid's reach.
- First, courts classify the type of trust. However, the Melby decision demonstrated that this factor carries minimal weight compared to the specific language of the trust.
- Second, courts examine the recipient's interest in the trust, focusing on retained rights that might create vulnerabilities.
- Third, courts determine whether that interest existed at the time of death, interpreted as immediately before death.
The Department of Human Services has aggressively pursued recovery claims using this framework. In fiscal year 2024, the department recovered $40.2 million through estate recovery efforts, according to state records.
Specific Language Creates Vulnerabilities
Several mal-drafted trust provisions have repeatedly failed to protect assets from Medicaid claims.
Debt payment clauses remain the most dangerous. Any language permitting payment of the trustor's debts opens the door to recovery claims.
Provisions covering "expenses of last illness" also receive expansive interpretation from courts seeking to maximize program sustainability.
Finally, tax payment provisions, even when seemingly limited to specific circumstances, can create unintended access points for state claims.
The Melby trust's language appeared reasonable when drafted in 1991. The provision allowed the trustee to pay debts only if no other resources existed. This limitation proved meaningless when the court ruled Medicaid created debts during the recipients' lifetimes.
Iowa Exceeds Federal Requirements
While federal law establishes baseline recovery requirements, states possess discretion to expand their programs. Iowa has embraced this authority more aggressively than neighboring states.
Minnesota and Wisconsin apply narrower interpretations of estate recovery statutes. Illinois limits recovery to probate assets in many circumstances. Iowa's approach stands out in the region for its breadth and depth.
The state legislature has shown no inclination to narrow the statute of limitations for recovery. Rising Medicaid costs—the program consumed $2.1 billion in state and federal funds in fiscal year 2024—create pressure for aggressive collection efforts.
"The fiscal reality drives policy," explained Medicaid attorney Tyler Smith. "With an aging population and rising care costs, the state views recovery as essential to program sustainability."
Properly Structured Trusts Remain Viable
Despite these challenges, Medicaid Asset Protection Trusts (MAPTs) continue to provide protection when drafted correctly. The key lies in avoiding provisions that create any creditor rights.
Successful trusts share common characteristics: complete absence of debt payment language, strictly limited beneficial interests, independent trustees without discretion to benefit creditors, and explicit exclusion of governmental claims.
The five-year look-back period remains critical. Assets transferred to properly structured trusts more than five years before a Medicaid application generally receive protection, assuming no vulnerable provisions exist.
Medicaid planning attorneys have adapted their practices significantly since Melby. Modern drafting eliminates any language that could benefit creditors, even when such caution seems excessive.
"We've completely restructured our trust templates," claims attorney Tyler Smith of Altoona. "Every provision gets scrutinized through the lens of potential Medicaid recovery."
Financial Stakes Continue Rising
The average monthly cost of nursing home care in Iowa is $8,200 in 2025, according to AssistedLiving.org. A typical two-year stay can deplete $200,000 in assets before Medicaid eligibility begins.
The financial pressure affects middle-class families disproportionately. Wealthy individuals can afford private care indefinitely. Lower-income residents qualify for immediate Medicaid coverage. Middle-class families face asset depletion followed by potential estate recovery.
Attorneys Emphasize State-Specific Expertise
The complexity of Iowa's approach makes specialized Medicaid planning counsel essential. General estate planning attorneys may lack the specific knowledge required to draft protective trusts.
Warning signs of inexperienced counsel include the use of generic trust templates, unfamiliarity with recent court decisions, and promises of guaranteed protection without a discussion of associated risks.
Medicaid attorney Tyler Smith recommends that families begin planning at least five years of anticipated care needs. This timeline enables the establishment of proper trust and avoids complications related to the look-back period.
"Every month of delay reduces options," according to Tyler. "Families who wait until a crisis emerges face limited choices and greater exposure to recovery claims."
Future Outlook
Court observers anticipate a continued broad interpretation of recovery statutes in the absence of legislative intervention. The fiscal pressures driving aggressive recovery show no signs of receding.
Several cases currently working through the Iowa court system may further clarify or expand recovery rights. Medicaid planning attorneys are closely monitoring these developments, as each decision can potentially affect thousands of existing trusts.
However, the message remains consistent: precise drafting that avoids creating any creditor rights provides the only reliable protection. Families seeking to preserve assets while ensuring access to care must work with Medicaid planning specialists who understand both current law and its likely evolution.
For now, properly structured trusts remain viable tools, but only when created with a complete understanding of Iowa's expansive approach to estate recovery.