I can't be sure, but it sounds like you are facing an Estate Recovery issue. Medicaid has the right to seek reimbursement from certain assets (including a legal claim) to reimburse them for some or all of what they have paid for a person. It is not unusual. You really need to have your attorney handle this. IF the state has a valid Estate Recovery claim, there may be room to negotiate so you might keep some of the money.
Medicaid very well may be right. Medicaid can recover against medicals damages for ALL Medicaid expenditures that wouldn't have occurred if the accident never happened. Medicare's recovery right is similar except it isn't limited to medical's damages. If an expenditure wouldn't have occurred if the accident didn't occur M&M can recover for it regardless of whether it relates to the lawsuit. For instance, if mom was on dialysis but could drive to the dialysis center before the accident and now must take an ambulance, M&M can recover for the ambulance. BTW, mom also may have Medicare set aside obligations. A special needs lawyer can address your issues.
Lawrence Friedman, Bridgewater, NJ. Certified as an Elder Law Attorney by the ABA approved National Elder Law Foundation, former Chair NJ State Bar Association Elder and Disabilities Law Section, Member Board of Consultors of NJSBA Real Property, Trusts & Estates Law Section, Vice Chair Special Needs Law Section of National Academy of Elder Law Attorneys, and Master of Laws (LL.M.) in Taxation from N.Y.U. School of Law. Visit SpecialNeedsNJ.com for articles and Q&A on elder law, special needs, wills, trusts, estates, and tax. Visit SpecialNeedsNJ.com/blog and subscribe for free timely updates to be delivered to your inbox. Information on both Avvo and SpecialNeedsNJ.com does not constitute legal advice, as it is general in nature and may not apply to your situation or be subject to important changes. No attorney client relationship exists unless set forth in written engagement terms.
I agree with my colleagues but want to highlight one point: Are you facing a claim from Medicare as well as Medicaid? Under these facts, both Medicare and your state (through Medicaid) may very well have a valid claim or lien on the settlement proceeds. Medicare's lien arises out of the fact that it should be reimbursed to the extent that the settlement covered medical expenses. Medicaid's claim comes from the general requirement for your mom to spend down all her assets before assistance kicks in. As a final note, you already have a lawyer: discuss this issue with him.
I hope that this answer helps you in a general sense, but it does not constitute legal advice, nor tax advice of any kind, and does not create an attorney-client relationship between you and myself or my firm.