The fact that a “Solely for the Benefit” (SBO) trust (1) includes former assets of a spouse who is now institutionalized and (2) allows the trustee to make payments to the non-institutionalized spouse does not automatically make the SBO trust assets countable for purposes of determining the institutionalized spouse’s Medicaid eligibility, the Michigan Supreme Court has ruled.

In Hegadorn v Dep’t of Human Services Director (Docket No. 156132), the Supreme Court reversed and remanded the Michigan Court of Appeals decision that said SBO trust assets are automatically countable for Medicaid eligibility. Hegadorn was consolidated on appeal with Trim v Dep’t of Human Services Director (Docket No. 156133) and Tindle v Dep’t of Health and Human Services (Docket No. 156134).

The Michigan Court of Appeals, in June 2017, had ruled in favor of the Michigan Department of Health and Human Services (DHHS) in all three cases. The DHHS had denied the plaintiffs’ applications for Medicaid benefits. The Court of Appeals held that assets which had been placed in so-called “SBO trusts” should be considered when determining Medicaid eligibility because the principal in the SBO trust could be paid to or used for the institutionalized spouse.

In a unanimous decision, the Supreme Court disagreed with the Court of Appeals’ interpretation of the applicable statutes.

“Neither 42 USC 1396r-5 nor 42 USC 1396p(d) automatically makes marital assets placed in an irrevocable trust for the sole benefit of a community spouse countable assets for the purpose of an institutionalized spouse’s initial eligibility determination,” Justice Richard H. Bernstein wrote for the Court. “Rather, such assets become countable only if circumstances exist under which the trust could make a payment to or for the benefit of the institutionalized spouse.”

Accordingly, the Supreme Court remanded all three cases “for any additional administrative proceedings necessary to evaluate the legal validity of the Department’s decision to deny each plaintiff’s Medicaid application.”

While Michigan estate planning practitioners are pleased with the Supreme Court’s decision, they are approaching it with cautious optimism because the justices did not outright hold that SBO trusts are an acceptable method to help an institutionalized spouse qualify for Medicaid benefits. Rather, the justices ruled that DHHS erred in how they treated the SBO trusts in these three cases, which are now returning to the administrative level for a more detailed review.

SBO Trusts & Case Background

The cost of nursing home care for a spouse can be daunting. While Medicaid is available to help cover long-term care expenses, one qualifier exists: the patient (institutionalized spouse) must have countable assets of less than $2,000.

The spouse of nursing home resident is known as the “community spouse” and he/she is limited to one-half of the couple’s joint assets up to $126,420 (in 2019) in countable assets (the amount changes annually to reflect inflation). This amount, called the “community spouse resource allowance,” is the most that a state may allow a community spouse to retain without a hearing or a court order.

It is important to remember that Medicaid is a state-regulated program, although there are federal guidelines that apply. This means that Medicaid policies tend to be somewhat different in each state. Here in Michigan, the SBO trust has for many years been a viable estate planning tool for married couples. With an SBO trust, certain assets are basically moved from the “countable” asset column to the “non-countable” asset column for purposes of Medicaid eligibility.

For decades, DHHS had no concerns with Michigan residents using SBO trusts as an estate planning tool. Then in 2014, without any announced rule or policy change, DHHS began counting assets in SBO trusts when determining Medicaid eligibility for spouses in nursing homes.

The DHHS’s revised stance on SBO trusts sparked the Hegadorn, Trim and Tindle lawsuits. All three cases involved Michigan nursing home residents (wives) whose husbands had created SBO trusts that permitted the trustees to distribute principal to the husbands, as needed. The expectation was that all the resources would be used up during the husbands’ lifetimes. When the wives applied for Medicaid benefits to help defray their nursing home expenses, DHHS deemed the assets in the SBO trusts countable and, as a result, benefits were denied. The wives appealed the DHHS decisions, claiming the SBO trust assets should not be counted for Medicaid eligibility because the assets were for the sole benefit of their husbands.

An administrative law judge (ALJ) in each case affirmed the DHHS’s determinations. The trial courts reversed, finding the assets in the SBO trusts were unavailable and should not be considered. DHHS appealed. Because the cases involved identical issues, they were consolidated on appeal.

The Court of Appeals reversed the trial courts’ rulings, finding the assets in the SBO trusts should be counted because when a Medicaid eligibility determination is made, “an institutionalized individual’s assets includes not only those that he or she has, but also those that his or her spouse has.” According to the Court of Appeals, because there was a “condition under which the principal could be paid to or on behalf of the person from an irrevocable trust,” the SBO trust assets were countable for Medicaid purposes.

Wrong Interpretation Of Statutes

In its analysis, the Michigan Supreme Court examined the specific language of the SBO trust documents to determine whether the trusts allowed for a payment to be made “to or for the benefit of” the institutionalized spouse. In so doing, the justices noted that the institutionalized spouses are individuals who established a trust pursuant to 42 USC 1396p(d) and that SBO trusts are irrevocable, which means the principal of each trust is not automatically rendered available to the institutionalized spouse.

“Furthermore, the property and income that make up the principal of the SBO trusts at issue are not held by the institutionalized spouses or the community spouses,” the Supreme Court wrote. “Rather, title to the property that is now the principal of each trust was transferred to the trust or trustee, and the money that forms part of the principal was moved into bank accounts controlled by the trustee. There also has been no suggestion that the community spouses retain possession of the tangible property that forms the principals of the trusts. Therefore, the principals of the SBO trusts are not automatically considered resources available to any of the spouses under 42 USC 1396r-5(c). Accordingly, the principal of each SBO trust can be considered a resource available to the institutionalized spouse, and thus a countable asset, only if made so by operation of the any-circumstances rule in 42 USC 1396p(d)(3)(B).”

According to the Supreme Court, the Court of Appeals erred in finding that because the community spouses could be paid by the trusts, this automatically created a “condition under which the principal could be paid to or on behalf of the person from an irrevocable trust,” which in turn meant the assets in each trust were countable assets by DHHS. In so ruling, the Supreme Court examined the Bridges Eligibility Policy Manual (BEM) issued by DHHS - specifically BEM 401 pertaining to Medicaid and trusts.

“The Court of Appeals read the word ‘person’ in BEM 401 as referring to both the applicants and their spouses in all circumstances,” the Supreme Court wrote. “[The] rule in BEM 401 is derived from 42 USC 1396a and the any-circumstances rule in 42 USC 1396p(d)(3)(B). The any-circumstances rule makes assets in an irrevocable trust available to a Medicaid applicant only if there are circumstances under which ‘a payment from the trust’ could be made ‘to or for the benefit of’ the applicant. … The Department’s contrary interpretation and application of BEM 401, which incorporates the federal any-circumstances rule into Michigan’s Medicaid policies, is not entitled to respectful consideration because it is foreclosed by the text of 42 USC 1396p(d)(3)(B).”

The SBO trusts in these cases included language stating that distributions or payments from the trust may only be made to or for the benefit of the community spouse and the trust resources may be used only for the community spouse’s benefit. “The ALJs and the Court of Appeals recognized this but erred by concluding that payments to or for the benefit of the community spouses were available to the institutionalized spouses,” the Supreme Court explained. “Because the community spouses are not themselves applying for or receiving Medicaid benefits, they are not ‘the individual’ referred to in 42 USC 1396p(d)(3)(B). Thus, the Court of Appeals erred by holding that the possibility of a distribution from each SBO trust to each community spouse automatically made the assets held by each SBO trust countable assets for the purposes of the respective institutionalized spouses’ initial eligibility determination.”

Therefore, “we reverse the Court of Appeals judgment because it was premised on an incorrect reading of the controlling statutes and thus was contrary to law,” the Supreme Court concluded. “It follows that the ALJs’ decisions are also contrary to law and cannot stand, given that they all suffer from the same faulty reasoning employed by the Court of Appeals.”

Remand For A Proper Analysis

The Supreme Court then turned to what type of relief should be granted to the plaintiffs.

“The sheer complexity of the Medicaid program and the Department’s legitimate concerns about potential abuse are paramount considerations in determining what relief is warranted,” the Supreme Court wrote. “We further note that, given the reasoning employed in resolving the administrative appeals, the ALJs may have forgone consideration of alternative avenues of legal analysis.”

In light of the foregoing concerns, “we decline to order that the Department approve plaintiffs’ Medicaid applications at this time,” the Supreme Court said. Rather, the justices vacated the final ALJ decisions in each case and remanded them to the appropriate administrative tribunal for the proper application of the any-circumstances test.

“If the ALJs determine that circumstances exist under which payments from the trusts could be made to or for the benefit of the institutionalized spouse, then the ALJs should explain this rationale and affirm the Department’s decision,” the Supreme Court concluded. “However, if no such circumstances exist, the ALJs should reverse the Department’s decisions and order that the Medicaid applications be approved.”

Concurrence: Divestment Penalties

Chief Justice Bridget M. McCormack wrote a separate concurring opinion, pointing out the transfer of assets into an SBO trust also triggers Medicaid’s divestment rules.

“In the Medicaid Act, Congress has balanced two competing policies: ‘protect[ing] community spouses from “pauperization” while preventing financially secure couples from obtaining Medicaid assistance,’” McCormack wrote. “These policies are well reflected in the (admittedly complex) statutory scheme. I agree with the majority that ‘the individual’ in 42 USC 1396p(d)(3)(B) refers to the Medicaid applicant.”

However, “if the plaintiffs’ transfers trigger the divestment penalty, it is not likely they will view this planning strategy as a success,” she stated. “The majority is correct to leave this question for a case in which it has been presented by the parties. I address it here only to caution individuals who might consider forming irrevocable trusts in an effort to achieve Medicaid eligibility, especially when other planning strategies are available, permission for which is well settled.”

Justice Megan K. Cavanagh did not participate in the case because the Supreme Court heard arguments before she took office.