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Thank you for your question.
Arkansas statute states:
(2) Whenever property is devised to a child, natural or adopted, or other descendant of the testator, either by specific provision or as a member of a class, and the devisee shall die in the lifetime of the testator, leaving a child, natural or adopted, or other descendant who survives the testator, the devise shall not lapse, but the property shall vest in the surviving child or other descendant of the devisee, as if the devisee had survived the testator and died intestate.
Under the statute, yes his daughter will inherit whatever her father would have inherited under the Will of his mother.
I do not have enough facts to know if Medicaid can claim a lien on the house or not, you or the executor of her estate should probably ask Medicaid.
I hope this information is helpful.