Irrevocable "Sole Benefit" Trusts Countable as Medicaid Assets in Michigan

A trio of Michigan cases have invalidated the use of Irrevocable Sole Benefit Trusts in Medicaid planning for marital couples.  A Michigan appeals court has held that assets placed in an irrevocable trust by a Medicaid recipient's spouse are countable assets because the principal in the trust can be paid to or for the benefit of the community (non-institutionalized) spouse.  See,  Hegadorn v. Department of Human Services Director (Mich. Ct. App., No. 329508, June 1, 2017); Lollar v. Department of Human Services Director (Mich. Ct. App., No. 329511, June 1, 2017); and Ford v. Department of Health and Human Services (Mich. Ct. App., No. 331242, June 1, 2017).

Three women entered nursing homes. Their husbands created irrevocable "sole benefit trusts." The trusts allowed the trustee to distribute principal to the husbands as necessary with the expectation that all the resources would be used up during the husbands' lifetimes. The trusts prohibited distribution of assets to the women A few months later, the women applied for Medicaid. The state determined that the trusts were available assets and denied the applications.

The women appealed, arguing that the trusts were not countable assets because they were for the sole benefit of the husbands. After three trials, two trial courts ruled that the assets in the trust were not available, and the state appealed and the Michigan Court of Appeals decided the cases together.

The Michigan Court of Appeals held that the trusts are available assets and reversed the decisions of two trial courts. The court ruled that when states make an initial eligibility determination, "an institutionalized individual’s assets includes not only those that he or she has, but also those that his or her spouse has" (emphasis in the original).  According to the court, because "there was a 'condition under which the principal could be paid to or on behalf of the person from an irrevocable trust,' the assets in the trusts were properly determined to be countable assets."

The cases underscore the challenges consumers and planners face in crafting estate planning documents.  The holdings remind consumers that there are a variety of types and kinds of irrevocable trusts, and that they do not all work the same or accomplish the same objectives.  Competent counsel can and do sometimes misapprehend the planning area and options, particularly when planners rely upon consensus planning, and periodic approval by low level caseworkers.  

The best long term care plans consider and accomplish, if possible, each of the following (in order of priority): 1) adoption of the best available health care plan, including medically necessary home health care in order to avoid unnecessary long term institutional care; 2) adoption of an "Aging in Place" philosophy and incorporation and expression of the philosophy in estate planning documents; 3) adoption and maintenance of a sound financial plan to protect income and ensure available resources to pay for alternatives to long term institutional care;  4) settling a revocable trust to protect against guardianship, protect assets and decision-making from institutional control in order to reduce the risk of unnecessary institutionalization; 5) settling an asset protection trust to shield selected assets  for the benefit of a community (non-institutionalized) spouse and to protect inheritance;and; 6) making the home suitable for long term care needs.  

It is vitally important to begin the planning with consideration of the proper Medicare health care option.  Quite simply, every legal and financial plan is made more capable by proper health care insurance planning, and many may be rendered utterly useless by inadequate health care planning.  Please contact our office if you want or need a referral to competent and capable health care planners.  

To read the full opinion, go here.  If you are interested in the history of the use of Sole Benefit Trusts, particularly in Michigan, go here and here, and for an argument advocating why Sole Benefit Trust assets should be protected from Medicaid spend down, go here.