An Argument for the Recognition of the Community Spouse Sole Benefit Trust as a Medicaid Planning Option1

By James Schuster, CELA

Published NAELA News Online June 2016

The community spouse sole benefit trust (SBT) rose to prominence as a client protection strategy with the release of HCFA Transmittal 64, which interpreted the amendments made to Title XIX by the Omnibus Budget Reconciliation Act of 1993 (OBRA ’93). That policy statement, now part of the State Medicaid Manual (SMM), explicitly recognized that an applicant or spouse may establish and fund an irrevocable trust solely for the benefit of a community spouse. Elder law practitioners soon began using the SBT, sometimes called the "spouse annuity trust," as a Medicaid planning option.

Use of the SBT began to decline after the publication of a letter by Centers for Medicare & Medicaid Services (CMS) official Robert Streimer in April 1998 (at the time, the agency was known as the Health Care Financing Administration). Streimer was responding to an inquiry to the agency from an elder law attorney. In that letter the attorney argued that the SBT was akin to an annuity, because of the regular pay-outs. In response Streimer found that the trust was not an annuity but rather it was subject to § 1917(d) of the Act, section 3259.1.A.1 of Transmittal 64. His analysis stopped there. His letter failed to test the trust under those sections.
Court cases followed, denying the availability of the SBT based on various rationales. The courts did not arrive at a consensus as to why Title XIX does not allow the spouse sole benefit trust.

The confusion in interpretation of Title XIX comes as no surprise to practitioners. Any review of cases interpreting the statute makes clear that it was drafted by political interests with divergent goals. The Medicaid program’s logical inconsistency has led many state agencies and courts astray in an attempt to interpret the statute, having followed a particular statutory purpose to derive interpretation. One theme is that of preventing married couples from retaining assets from spend down while accessing the means tested benefits. In doing so the courts ignored a major theme of the statute dating back to its first decade, that of supporting dependents. In addition, given the complexity of the statute, courts have confused the standards of the SSI program of Title XVIII, administered by the Social Security Administration, with those of the Title XIX Medicaid program, administered by CMS.  While in general Medicaid adopts the SSI "resource" rules,  the statute expressly rejects the SSI standard for trusts.

The following analysis reviews: the trust provisions of Title XIX, 42 U.S.C. § 1396p(d), § 1917(d) of the Act Streimer referenced; Transmittal 64 sections 3259.1.A.1 and following, now found in the SMM; and the later decisions of the U.S. Circuit Courts of Appeal that discredit the rationale of earlier cases and implied Streimer position that all subject trusts are available assets. From this review, it will be evident that the SBT has become once again a strategy that elder law attorneys should consider for the right elder clients. Indeed it is the author's hope that practitioners will review Title XIX with a new eye for other areas where states are not implementing the Medicaid program in accordance with the statute.


Argument

1. Statutory Analysis Compels the Conclusion That an Irrevocable Trust of a Spouse That Does Not Distribute to the Individual Is Not a Resource of the Individual

The part of Title XIX, the Medicaid program component of the Social Security Act, that here applies is 42 U.S.C.  § 1396p(d).2 It covers the treatment of trusts in the consideration of eligibility for benefits and its provisions are often referred to as defining a “Medicaid trust.” Its plain language makes clear that the inquiry applicable to an irrevocable trust is “Does the trust pay out to the ‘individual’?” Individual does not mean “spouse.” The process may be broken into three steps.

First step: Determine whether the trust was established by “the individual.”
A trust is “established by” the individual if assets of the individual form all or part of the trust and if the individual or spouse established the trust.

(1) For purposes of determining an individual’s eligibility. . . . the rules specified in paragraph (3) shall apply to a trust established by such an individual.”

(2)(A) For purposes of this subsection, an individual shall be considered to have established a trust if assets of the individual were used to form all or part of the corpus of the trust and if any of the following individuals established such trust other than by will:
(i)    The individual.
(ii)    The individual’s spouse.

42 U.S.C. § 1396p(d)(1), (2)(A)

(emphasis added).

Section (d)(1) makes clear that the term individual is limited to “such an individual” whose eligibility is being determined. It is the act of applying for benefits that triggers the statutory provision and hence the fact that a community spouse is not an applicant or a recipient is of legal significance. We might further note that the “Medicaid trust” test does not apply where the applicant is beneficiary but did not settle the trust with his or her assets.

Second step: Determine if the individual could receive distribution (payment) from the individual’s trust, under any circumstance.

Section 1396p(d)(1) directs that “the rules specified in paragraph (3) shall apply to a trust established by such an individual.” In turn, § 1396p(d)(3)(B) directs that only irrevocable trusts that may make “payment” to the individual under “any circumstance” are considered resources available to the individual.

(B) In the case of an irrevocable trust—

(i)    if there are any circumstances under which payment from the trust could be made to or for the benefit of the individual, the portion of the corpus from which, or the income on the corpus from which, payment to the individual could be made shall be considered resources3 available to the individual, and payments from that portion of the corpus or income –

42 U.S.C. § 1396p(d)(3)(B) (emphasis added).

Where, as here, the individual is deemed to have established the trust with her assets and where she may not receive a distribution, then the next step tests the transfer to determine if it was for less than fair market value.

Third step: If the individual cannot receive distribution from the trust, determine if the individual transferred assets for fair market value.
Where the “individual” may not receive any trust distribution, then the trust corpus is considered to be assets disposed by the individual.

(3)(B)(ii) any portion of the trust from which, or any income on the corpus from which, no payment could under any circumstances be made to the individual shall be considered, as of the date of establishment of the trust . . . to be assets disposed by the individual for purposes of subsection (c) of this section . . . .

42 U.S.C. § 1396p(d)(3)(B)(ii) (emphasis added).

The referenced paragraph (c) in § 1396p(d)(3)(B)(ii) tests whether the individual or spouse disposed of assets for less than fair market value. Where the spouse transferred the assets for his or her sole benefit, the transfer is considered to be for fair market value and the individual is not ineligible for Medicaid because of that transfer:

(2)    An individual shall not be ineligible for medical assistance by reason of paragraph (1) to the extent that—
(B) the assets—
(ii)    were transferred from the individual’s spouse to another for the sole benefit of the individual’s spouse,

42 U.S.C. § 1396p(c)(2)(B)(ii) (emphasis added).

The transfer of assets for the sole benefit of a spouse is a fairly restrictive exception in that the transfer must be structured so that only the spouse may receive benefits during the spouse’s lifetime. The requirement may be satisfied by standard financial arrangements, including the allowance of contingent beneficiaries on the spouse’s death. It does not rule out trusts:

“We cannot presume that Congress operated in a vacuum when it enacted § 1396p(c)(2)(B)(i). By providing that a couple may transfer assets "to another for the sole benefit of the individual's spouse," the term "another" is not limiting. It naturally encompasses standard financial arrangements (such as an annuity) crafted for the spouse's sole benefit during his life. Our reading is supported by HHS, which takes the position that the term "another" includes an entity that issues the annuity. In this context, HHS's construction of the sole-benefit rule gives the statute meaning. The actuarial-soundness requirement reasonably assures that the assets were transferred to a third party for the individual spouse's sole benefit.”

Hughes v. McCarthy, 734 F. 3d 473, 483 (6th Cir. 2013) (emphasis added).

One point is clear: A transfer that meets the requirement of the statute contemplates that the funds may only be available for the spouse’s future needs and thereby cannot be considered resources available to the individual or spouse at the time of application for benefits.

a. Congress Intentionally Did Not Include the Term “Spouse” in Medicaid Trust provisions 42 U.S.C. § 1396p(d)(2)(B)
As we saw above, the statute only considers an irrevocable trust a resource of the applicant if the trust makes distribution to the applicant:

In the case of an irrevocable trust—

(i) if there are any circumstances under which payment from the trust could be made to or for the benefit of the individual, the portion of the corpus from which, or the income on the corpus from which, payment to the individual could be made shall be considered resources available to the individual, and payments from that portion of the corpus or income—

42 U.S.C. § 1396p(d)(2)(B) (emphasis added).

The word “spouse” does not appear in the section. Elementary statutory construction dictates that a court should not add provisions to a statute that the legislative body did not include. It necessarily follows from § 1396p(d)(2)(B) that a sole benefit trust “established” by the individual for the spouse, which by the definition of “sole benefit” cannot distribute to the individual, is not tested by the “any circumstance” test.

b. Congress Included the Term “Spouse” in SSI Trust Provisions

Congress knew how to add “spouse” and did so in the case of SSI trusts. The SSI trust provisions of 42 U.S. Code § 1382b(e) contain the term “spouse:”

(B) In the case of an irrevocable trust established by an individual, if there are any circumstances under which payment from the trust could be made to or for the benefit of the individual (or of the individual’s spouse), the portion of the corpus from which payment to or for the benefit of the individual (or of the individual’s spouse) could be made shall be considered a resource available to the individual.

42 U.S. Code § 1382b(e)(3)(B) (emphasis added).

The addition of “the individual’s spouse” in section 1382b(e) is evidence that if Congress wanted distributions to spouses to be included in § 1396p(d)(2)(B) it would have done so. It did not. That is further evidence, if any evidence further than the plain wording of section 1396p(d)(2)(B) were needed, that a spouse’s trust is not tested by the “any circumstance” test.

c. Congress Rejected the SSI Trust standard for Medicaid trusts by 42 U.S.C. 1396a(10)(G)
We need not rely on canons of statutory construction. Congress expressly rejected the SSI trust provisions of § 1382b(e)(3)(B):

(G) that, in applying eligibility criteria of the supplemental security income program under subchapter XVI of this chapter for purposes of determining eligibility for medical assistance under the State plan of an individual who is not receiving supplemental security income, the State will disregard the provisions of subsections (c) and (e) of section 1382b of this title ….”

42 U.S.C. § 1396a(10)(G) (emphasis added).

The fact that Congress expressly rejected the SSI trust standard of 1382b(e) means that Congress expressly rejected inclusion of “spouse” in § 1396p(d)(2)(B). This is conclusive evidence that the “any circumstance” test does not apply to trusts that distribute to spouses. Where the evidence is clear that Congress “expressly declined to enact” a provision, Gulf Oil Corp. v. Copp Paving Co., 419 U. S. 186, 200 (1974), the court cannot find that Congress sub silentio intended to include the provision:

"Few principles of statutory construction are more compelling than the proposition that Congress does not intend sub silentio to enact statutory language that it has earlier discarded in favor of other language." Nachman Corp. v. Pension Benefit Guaranty Corporation, 446 U. S. 359, 392-393 (1980) (Stewart, J., dissenting); cf. Gulf Oil Corp. v. Copp Paving Co., 419 U. S. 186, 200 (1974); Russello v. United States, 464 U. S., at 23.

INS v. Cardoza-Fonseca, 480 U.S. 421, 442-443 (1987).

The limitation on the “any circumstance” test is especially significant for interpreting the transfer to trust for the sole benefit of a spouse. Section 1396a(10)(G) limits the definition of “individual” in these instances. When § 1396p(d)(2)(A) refers to “assets of the individual” it refers to assets of spouses as well. However, the reference to distributions to the individual in § 1396p(d)(2)(B) does not refer to trusts that distribute to spouses because SSI trust provisions include such distributions as available resources and Congress rejected that provision in Medicaid trusts by § 1396a(10)(G).

Conclusion
1. If a spouse establishes an irrevocable trust wherein the individual Medicaid applicant is a beneficiary, it will be tested by the “any circumstance” test of § 1396p(d)(2)(B).

2. If a spouse establishes an irrevocable trust wherein the spouse is the sole beneficiary, it will tested by the transfer for the sole benefit of test, § 1396p(c)(2)(B)(ii).

3. If a spouse establishes an irrevocable trust wherein the beneficiary is not the spouse or the individual, it will tested to determine whether it is a transfer for less than fair market value, § 1396p(d)(3)(B)(ii).

2. CMS Guidance through the SMM Compels the Conclusion That a Spouse Irrevocable Sole Benefit Trust Is Not a Resource of the Individual or Spouse

CMS, the federal agency that administers the Medicaid program, provides guidance through its manuals. Through the SMM, CMS interprets Title XIX and gives guidance to state Medicaid agencies:

In the State Medicaid Manual, the "official medium by which [CMS] issues mandatory, advisory, and optional Medicaid policies and procedures to the Medicaid State [].

Although not entitled to Chevron deference, relatively informal CMS interpretations of the Medicaid Act, such as the State Medicaid Manual, are entitled to respectful consideration in light of the agency's significant expertise, the technical complexity of the Medicaid program, and the exceptionally broad authority conferred upon the Secretary under the Act.

SD ex rel. Dickson v. Hood, 391 F. 3d 581, 590 (5th Cir. 2004) (emphasis added).

Where a court finds that the SMM provides a well thought out explanation of a section of the statute, the manual is entitled to “Skidmore deference.”

We apply Skidmore deference to SMM 3259.7, which was issued by the agency to fill the gap left by Congress. See Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 89 L.Ed. 124 (1944) (holding that an agency's "rulings, interpretations and opinions" of an act administered by the agency, "while not controlling upon the courts by reason of their authority, do constitute a body of experience and informed judgment to which courts and litigants may properly resort for guidance").

Sai Kwan Wong v. Doar, 571 F. 3d 247, 250( 2d Cir. 2009) (emphasis added); see also Hughes v. McCarthy, 734 F. 3d 473 , 480 (6th Cir, 2013) (“The federal agency's construction is reasonable, supported by the statutory structure, and, [is] thus, due respect under Skidmore.”); Morris v. Oklahoma Dep’t, of Human Servs., 685 F.3d 925, 933, 937 (10th Cir., 2012) (Applying the SMM 3258 interpretation to spousal transfers, "[W]e defer to its provisions ‘to the extent that they are consistent with the purposes of the federal statute and provide a reasonable interpretation thereof.’") (citation omitted).

The SMM offers an insightful review of the statutory provisions and provides additional statutory interpretation. The CMS guidance may be broken down in steps the same way as the statutory analysis above.

First step: Is the trust under review established by an individual who has applied for or receives Medicaid assistance?
The SMM applies § 1396p(d) to those individuals who established a trust and are applicants for Medicaid:

3259.3 Individuals to Whom Trust Provisions Apply.--This section applies to any individual who establishes a trust and who is an applicant for or recipient of Medicaid. [] (See also § 3257 for a definition of individual as it is used in this section.)

The definitions found in SMM 3257(B) make clear that only when a spouse, a court or an administrative body acts for the individual does the term “individual” apply those parties.4 If there were any ambiguity about whether a spouse should be considered the “individual” the SMM makes clear that “spouse” may not be interchanged for “individual.”

“2. Spouse.--This is a person who is considered legally married to an individual under the laws of the State in which the individual is applying for or receiving Medicaid.”

SMM 3257(B)(2) (emphasis added).

It is clear that SMM sections 3259.3 and 3257 interpret the term “individual” in § 1396p(d)(2)(B) to refer only to the person who applies for benefits. Individual does not refer to the spouse nor does the term refer to a spouse who is a beneficiary of a trust that distributes to the spouse.

Second Step: Were assets of the individual used to fund the trust?
The Medicaid trust rules of 42 U.S.C. § 1396p apply if assets of the individual were used.

An individual is considered to have established a trust if his or her assets (regardless of how little) were used to form part or all of the corpus of the trust and if any of the parties described as a grantor in § 3259.15 established the trust, other than by will.

SMM 3259.3 (emphasis added).

Under this section the individual is deemed to have established the SBO Trust if her assets, in whole or part, were used to fund the trust.

Third Step: Determine if the individual can receive distribution from the trust.
SMM 3259.6(C) instructs that if a trust established by the individual cannot distribute to the individual6 then the transfer of assets to trust must be tested to determine if the individual, or spouse7, transferred assets for “less than fair market value”:

C. Irrevocable Trust - Payments From All or Portion of Trust Cannot, Under Any Circumstances, Be Made to or for the Benefit of the Individual.--When all or a portion of the corpus or income on the corpus of a trust cannot be paid to the individual, treat all or any such portion or income as a transfer of assets for less than fair market value, per instructions in §§ 3258ff.

SMM 3259.6(C) (emphasis added).

Fourth Step: Where the individual cannot receive “payments” from the trust, test the transfer of assets to determine if the individual, or spouse, received fair market value.
SMM 3258ff sections define “Transfers of Assets for less than Fair Market Value.” SMM3258.1 states the general rule. If the individual, or spouse, does not receive fair market value in return, then the Medicaid program must impose a transfer of assets penalty period.8

3258.1 General.--Under the transfer of assets provisions in §1917(c) of the Act, as amended by OBRA 1993, you must deny coverage of certain Medicaid services to otherwise eligible institutionalized individuals who transfer (or whose spouses transfer) assets for less than fair market value.

The transfer of assets to an irrevocable spouse sole benefit trust is not a transfer of assets for less than fair market value. Such transfers fall under SMM 3258.10.9

“Exceptions to Application of Transfer of Assets Penalties.--There are a number of instances where, even if an asset is transferred for less than fair market value, the penalties discussed above do not apply. These exceptions are:

“B.    The assets were:

[]

o    Transferred from the individual’s spouse to another for the sole benefit of the individual's spouse;”

SMM 3258.10 imposes a high standard of proof on claims of sole benefit transfers. It requires proof of a binding agreement by written instrument. It recognizes that a trust meets the high standard:

In determining whether an asset was transferred for the sole benefit of a spouse, child, or disabled individual, ensure that the transfer was accomplished via a written instrument of transfer (e.g., a trust document) which legally binds the parties to a specified course of action and which clearly sets out the conditions under which the transfer was made, as well as who can benefit from the transfer. A transfer without such a document cannot be said to have been made for the sole benefit of the spouse, child, or disabled individual, since there is no way to establish, without a document, that only the specified individuals will benefit from the transfer.

SMM 3258.10(B)(1) (emphasis added).

It is difficult to imagine any rationale that would reject the use of a trust to effect the sole benefit transfer. The SMM definition of “sole benefit” makes perfectly clear that it includes transfers to a trust:

“6. For the Sole Benefit of.--A transfer is considered to be for the sole benefit of a spouse, blind or disabled child, or a disabled individual if the transfer is arranged in such a way that no individual or entity except the spouse, blind or disabled child, or disabled individual can benefit from the assets transferred in any way, whether at the time of the transfer or at any time in the future.

Similarly, a trust is considered to be established for the sole benefit of a spouse, blind or disabled child, or disabled individual if the trust benefits no one but that individual, whether at the time the trust is established or any time in the future. []”

SMM 3257.6 (emphasis added).

It is absolutely clear. The CMS interpretation compels the conclusion that an applicant or spouse may transfer assets in trust for the sole benefit of the spouse and those assets will not be available assets for the individual-applicant. However, a finding that assets were transferred for the sole benefit of a spouse does not end the inquiry. Under § 1396r-5(c) the Medicaid program must determine the total value of available resources of the institutionalized spouse, the community spouse, or both.10

Fifth Step: Determine whether the spouse can receive a distribution at the time of application.

The spouse’s sole benefit trust must be tested to determine whether any portion of it is an available resource. This is not the “any circumstance” test, since the individual is not the beneficiary. The trust is tested under the Social Security Administration’s Supplemental Security Income (SSI) general resource standards.

SMM 3257.1 (B)( 4).    Resources.--For purposes of this section, the definition of resources is the same definition used by the Supplemental Security Income (SSI) program, except that the home is not excluded for institutionalized individuals. In determining whether a transfer of assets or a trust involves an SSI-countable resource, use those resource exclusions and disregards used by the SSI program, except for the exclusion of the home for institutionalized individuals.11

Under the SSI rules an asset will not be considered a “resource” if the individual or spouse cannot convert it to cash:

“(a) Resources; defined. For purposes of this subpart L, resources means cash or other liquid assets or any real or personal property that an individual (or spouse, if any) owns and could convert to cash to be used for his or her support and maintenance.

(1)    If the individual has the right, authority or power to liquidate the property or his or her share of the property, it is considered a resource. If a property right cannot be liquidated, the property will not be considered a resource of the individual (or spouse).

20 C.F.R. 416.1201(a) (emphasis added). The Social Security Administration’s Program Operations Manual System (POMS) provides additional guidance about what is an available resource:

A.    Policy Principle — General Rule
Assets of any kind are not resources if the individual does not have: any ownership interest; or
the legal right, authority, or power to liquidate them (provided they are not already in cash)"

POMS SI 01110.115, Assets That Are Not Resources (emphasis added).

The “power to liquidate” does not refer to a general right to distribution of trust corpus, or to the right to receive payment some time in the future. Nor is it an “any circumstance” test. In this context it means “does the sole benefit trust beneficiary have the power to convert the trust assets to cash?” The answer is simply “No”: The SBO Trust corpus is not an asset:

(a)    Resources; defined. For purposes of this subpart L, resources means cash or other liquid assets or any real or personal property that an individual (or spouse, if any) owns and could convert to cash to be used for his or her support and maintenance.

(1)    If the individual has the right, authority or power to liquidate the property or his or her share of the property, it is considered a resource. If a property right cannot be liquidated, the property will not be considered a resource of the individual (or spouse).

20 CFR 416.1201 (emphasis added).

Conclusion
The CMS interpretation of the trust rules of § 1396p compels the conclusion that a spouse of a Medicaid applicant may establish and settle a trust for his or her sole benefit and the assets transferred may not be considered available resources at the time of Medicaid application.

Finding That a Spouse Sole Benefit Trust Is Not an Available Asset Is Fully Consistent with the Structure and Purpose of Title XIX
1.    The Sole Benefit Trust Comports with the Policy Objectives of Title XIX of Support of Dependents
A consistent theme of the Medicaid statute has been support of dependents. ‘From the beginning of the statute, spousal responsibility was presumed. Schweiker v. Gray Panthers, 453 US 34, 44 (1981) ("from the beginning of the Medicaid program, Congress authorized States to presume spousal support"); Wisconsin Dept. Family Servs. v. Blumer, 534 US 473, 479 (2002).

Schweiker and its progeny focused on the responsibility of the community spouse to support the institutional spouse. Congress found this “one-way” approach unacceptable.

The Medicare Catastrophic Coverage Act of 1988
Soon after the pronouncements in Schweiker, Congress began grappling with the effects of an apparent one-way responsibility that compelled the community spouse to support the institutional spouse while receiving no support for him or her. Spousal protection from impoverishment was added to the Medicaid program by the "Medicaid Community Spousal Protection Act of 1987," that was later incorporated as an amendment into the “Medicare Catastrophic Illness Coverage Act of 1988." Its co-sponsors were senators Ted Kennedy, George Mitchell and Barbara Mikulski.12

Co-sponsor Senator George Mitchell observed that the Medicaid program had the terrible effect of forcing couples to divorce:

“This amendment is intended and will put an end to elderly women being forced to divorce their husbands in order to sue for support payments. No longer will women, who have contributed to a marriage all of their lives as homemakers, be forced to live out their lives in poverty, with the accompanying misery that occurs when their spouses must enter an institution. This is above all else a humane amendment.”

133 CONG. REC. 29357 (1987).

In support of the amendment, Senator Grassley spoke of the “truly grotesque” problem Medicaid spend down inflicted on the elderly:

“I believe it is widely understood that the spend-down phenomenon under Medicaid and the related problems of spousal impoverishment constitute one of the truly grotesque problems faced by older people. Some of my colleagues have already described in some detail the kind of experience that some older people have had to face when a spouse goes into a nursing home. Truly this is a problem we must address. This is primarily, although not always, a woman’s problem, since they more often than men remain in the community when their spouse goes into a nursing home.”

Id. at 29358.

Senator Mikulski explained the purpose of the Amendment.

“The Mikulski-Mitchell-Kennedy amendment provides a safety net to the people who all their lives played by the rules: to the savers who planned for their own retirement and who always were ready to help themselves before asking for help from others. This bill will help the nursing home widows and widowers. Having faced the need to place a husband or wife in a nursing home, these people should not be forced into poverty in order to pay for such care. This adds insult to injury.”

[]

“It provides that when one spouse must have long-term nursing home care, the other spouse does not have to become fully poverty stricken before Medicaid will help out.”

133 CONG. REC. 29353 (1987) (Statement of Senator Barbara Mikulski).

The same reasons were advanced in the House by sponsor Representative Henry Waxman:

“In this bill we reduce the risk of financial devastation from nursing home care by providing that the Medicaid program allow the spouse of a nursing home resident to retain enough of the couple’s income and resources to continue to live in the community. No longer will a wife be driven to choose between poverty and divorce if her husband enters a nursing home.”

Kevin C. Kelly, Protecting Assets for the Community Spouse When Long Term Care is Needed, 13 Probate & Property, Mar. - Apr., 62 (1999).

The Medicare Catastrophic Illness Coverage Act of 1988 (“MCCA”) added spousal protections. It implemented a “community spouse resource allowance” and provided for court support orders to determine the amount of income and assets the community spouse could retain. While this statute addressed the egregious problems caused by that iteration of the Medicaid program, Congress was not finished with addressing the needs of those family members dependent on the applicant.

2.    OBRA ’93 Expanded Transfers for Support of Dependents as a Core Part of the Program’s Purpose to Support Families and Applicant Responsibility.
Five years later Congress expanded the options of the Medicaid applicant to support her dependents. Prior to OBRA ’93 the Medicaid program recognized an exemption for a trust established prior to April 7, 1986, "solely for the benefit of a mentally retarded individual who resides in an intermediate care facility for the mentally retarded." See Ronney v. Department of Social Services, 210 Mich. App. 312, 318-319, 532 N.W.2d 910 (1995).

We may safely presume that in enacting OBRA ’93 Congress did not “operate[] in a vacuum,” Hughes at 483, when it expanded the class of allowable transfers “solely for the benefit” to include more dependents of the individual.

Under the CMS interpretation, SMM 3258.10 supra, OBRA ’93 added the provisions that an applicant may transfer assets for the “sole benefit” of spouses, blind and disabled children and other dependents and those will not result in disqualification of the applicant.

As the program now stands an applicant or spouse may transfer:
     unlimited assets to the spouse or for sole benefit of the spouse;
     unlimited assets to a blind child or for sole benefit of a blind child;
     unlimited assets to a disabled child or for sole benefit of a disabled child;    
     transfer the home to the spouse or a minor, blind, or disabled child;
     transfer the home to a sibling co-owner who lived there as his/her own home;
     transfer the home to a child who provided in home care to the applicant for two years that forestalled a nursing home placement.

42 U.S.C. § 1396p(c)(2).

The spouse sole benefit trust is exactly what Congress intended to allow.

3.    Transfer for Sole Benefit of Spouse Is in Keeping with Statutory Separation of Assets after Eligibility. And It Is In Keeping with the History of the Statute That Considered the Assets of the Community Spouse Not Available to the Institutional Spouse.
The concept that a spouse’s assets are separate from the individual’s is a consistent theme of Title XIX. “Prior to the MCCA, ‘each spouse was treated as a separate household.’ [].” Morris v. Oklahoma Dept. of Human Services, 685 F.3d 925, 928 (10th Cir. 2012). Morris quoted from the District Court opinion in Johnson v. Guhl, 91 F. Supp. 2d 754, 761 ( D. New Jersey 2000):

Prior to enactment of the MCCA, shortly after a spouse was institutionalized, each spouse was treated as a separate household. Income, such as Social Security checks, pensions, and interest or dividends from investments, were considered to belong to the spouse whose name was on the instrument conveying the funds. Consequently, when the husband, for example, entered a nursing home and the couple's pension check had the husband's name on it, all of that income was attributed to him when determining Medicaid eligibility, leaving the wife destitute. Conversely, if the wife entered the nursing home, the husband had no obligation under federal law to contribute any of that income toward the cost of the wife's care. See H.R.Rep. No. 100-105(II), 100th Cong., 2nd Sess., at 66 (1987), reprinted in 1988 U.S.C.C.A.N. 857, 889.

Id. at 761.

The MCCA changed the “separate household” into a joint household during the application phase. However, it did not change the recognition of separate assets after the applicant is deemed eligible. Upon a finding of eligibility of the individual, the statute provides that "no resources of the community spouse shall be deemed available to the institutionalized spouse." 42 U.S.C.
§ 1396r-5(c)(4).

4. The Spouse Sole Benefit Trust Does Not Protect Assets for the Individual’s Heirs.
While Title XIX provides for the protection of the spouse and dependents, it has none for the protection of heirs. That is intentional. One of the overriding reasons for the “Medicaid trust” rules was that individuals were preserving assets for their heirs. See Ronney v. Department of Social Services, 210 Mich. App. 312, 319, 532 N.W.2d 910 (1995) (“The Medicaid program would be at fiscal risk if individuals were permitted to preserve assets for their heirs . . .”); Lewis v. Alexander, 685 F. 3d 325, 333 (3rd Cir. 2012) (“Individuals have gained access to taxpayer-funded healthcare while retaining the benefit of their wealth and the ability to pass that wealth to their heirs.”); Miller v. Ibarra, 746 F. Supp. 19, 32 ( D. Colo. 1990) (“Congress sought to prevent wealthy individuals, otherwise ineligible for Medicaid benefits, from making themselves eligible by creating irrevocable trusts in order to preserve assets for their heirs [].”) Cohen v. Commissioner of the Division of Medical Assistance, 423 Mass. 399, 403 (Mass. 1996) (“Thus, a grantor: was able to qualify for public assistance without depleting his assets; could once more enjoy those assets if he no longer needed public assistance; and, if such a happy time did not come, could let them pass intact pursuant to the terms of the trust to his heirs.”)

The SBO Trust fits perfectly with the statutory theme of supporting dependents and not preserving assets for heirs.

5. The Interpretation of the Sole Benefit Trust as Not an Available Asset Is in Keeping with the American Law of Self Settled Trusts.

Though the “Medicaid trust” of 42 U.S.C. § 1396p(d) is a statutory trust, it is analogous to a self settled trust under the common law of trusts. Just as an individual may not shield his assets from consideration by the Medicaid program by an irrevocable trust, under the general law of self settled trusts a settlor cannot shield his assets from his creditors by an irrevocable trust. The amount available to the creditors from the self-settled trust is “the maximum amount the trustee could pay to the beneficiary:

Restatement (Second) of Trusts § 156 (1959) provides:

"Where the Settlor is a Beneficiary ... (2) Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit."

Cohen v. Commissioner of the Division of Medical Assistance
, 423 Mass. 399, 414 ( Mass., 1996).

Cases in Opposition either do not fully analyze the statute or rest on rejected assumptions.
A survey of some cases rejecting the viability of the spouse sole benefit trust shows that they do not stand on rigorous statutory interpretation but rather on faulty assumptions of statutory intent.

Palomba-Bourke v Comm’r of Social Services, 312 Conn. 196, 92 A3d 932, 941, 943-944 (2014) cited for the proposition that a trust available to the community spouse is also available to the institutional spouse. Palomba is not apposite here since in that case “the plaintiff has conceded that the trust is available to her.” Id. footnote 13 at 936, 943.

1. Morris v Oklahoma Dep’t of Human Servs, 985 F3d 925, 933 (10th Cir., 2012) cited for the propositions that a) “neither spouse maintains an ownership interest in the funds used to purchase the annuity” and b) the sole benefit trust “established by [] the institutionalized spouse [] whose corpus is intended to be distributed to the community spouse is within reach of the community spouse.” Proposition a) is not supported anywhere in the opinion. Nowhere does the court hold or observe that the spouse did not have an ownership interest in the annuity. Proposition b) is not supported by the case since the court did not address the issue of a trust. The court did refer to the SMM 3258.11 that transferring assets for the sole benefit of the spouse may make those “beyond the reach of either spouse and thus not counted for eligibility purposes.” Id at 930.

2. Johnson v. Guhl 357 F.3d 403, 409 (3rd Cir. 2004) In a decision virtually devoid of analysis, in one paragraph the court finds that upon receiving a trust distribution a spouse could use the assets for the support of the institutional spouse. “Once the community spouse receives these payments, there is nothing preventing her or him from sharing them with the institutionalized spouse as well.” This reasoning involves no analysis of the trust whatsoever and conflicts with the statutory command that after eligibility no asset of the community spouse shall be deemed available to the institutional spouse of 42 U.S. Code § 1396r–5 (c)(4).13

Johnson’s spouse income sharing rationale was later rejected by the Third Circuit in the case where the state department argued that the income stream from an immediate annuity could be sold. The court rejected the argument for the reason that “no income of the community spouse shall be deemed available to the institutionalized spouse.” James v. Richman, 547 F.3d 214, 219 (3rd Cir. 2008).

Perhaps the only way to understand Johnson is that it is an affirmance of a lengthy district court opinion, Johnson v. Guhl, 91 F. Supp. 2d 754 (D. New Jersey 2000).

The lower court in Johnson addressed the issue of availability of a trust such as in issue here. The court recognized that “the "sole benefit of" trust does not trigger a penalty period and is not a countable resource to the grantor or institutionalized spouse under § 1396p, page 778. However, while the trust may not be considered an available asset under § 1396p the court found that the MCCA Community Spouse Resource Allowance (CSRA) provision, § 1396r-5(a), (c), conflicted with § 1396p, and that under the former prevision the trust must be considered an available resource since the community spouse could not retain or transfer assets over the calculated community spouse resource allowance. “ [A]ny excess must be spent down for the care of the institutionalized spouse.” Id at 779. This portion of the opinion rested on virtually no statutory analysis. The court’s reasoning was rejected by two circuit courts of appeal.

5. Morris v. Oklahoma Dept. of Human Services, 685 F.3d 925 (10th Cir., 2012). In Morris the community spouse husband used $41,000 of assets in excess of the community spouse resource allowance.

“As the federal agency charged with administering Medicaid has noted, a couple may convert joint resources — which may affect Medicaid eligibility — into income for the community spouse — which does not impact eligibility — by purchasing certain types of annuities. This result is not dependent on the CSRA provisions, which provide an independent basis for sheltering certain resources. In other words, a couple may purchase a qualifying annuity payable to the community spouse in addition to the community spouse's retention of the CSRA.

Id at 928 (emphasis added).

6. Morris was followed in the Sixth Circuit, Hughes v. McCarthy, 734 F. 3d 473 (6th Cir. 2013). Hughes conducted an extensive statutory analysis and found no conflict between the MCCA community spouse allowance, § 1396r-5(f) and the transfer of assets provisions of § 1396p(c).

“[] HHS explains that § 1396r-5(f)(1) “has nothing to say about the inter-spousal transfers that are permissible before a determination of eligibility.” The federal agency’s State Medicaid Manual confirms that § 1396r-5(f)(1) applies to post-eligibility reallocation of resources and that § 1396p(c)(2)(B)(i) permits transfers to a third party for the sole benefit of the individual’s spouse. See State Medicaid Manual §§ 3258.11, 3262.4. HHS has taken the same position in a series of opinion letters issued to state plan administrators and to the public, reasoning that § 1396r-5(f)(1) does not conflict with, and thus does not supersede, § 1396p(c)(2)(B), as the two provisions apply to different situations, before and after eligibility is established; and that permitting inter-spousal transfers under § 1396p(c)(2)(B) does not render § 1396r-5(f)(1) a nullity, as the latter provision still has meaning with respect to resource allocation after eligibility is established.”

Id at 479.

Hughes held that the spouse’s purchase of a $175,000 annuity in excess of his community spouse resource allowance did not render his wife ineligible for benefits, since the statute permits an unlimited transfer of assets “to another for the sole benefit of the individual’s spouse.” Id at 475.

CONCLUSION
In light of recent interpretations of Title XIX by the Sixth Circuit and Tenth Circuit decisions in Morris and Hughes, the SBT again becomes a powerful tool in protecting the security of elders. In addition, those decisions give reason to re-examine how Title XIX has been implemented since OBRA ’93 because we may find  that clients have options that state Medicaid programs have tried to foreclose.


About the Author
James Schuster, CELA, is a NAELA member practicing Elder Law in Southfield, Mich.
 
Citations
1 This article arises out of an appeal brief contesting the Michigan Medicaid program's revoking recognition of the community spouse sole benefit trust. The matter is now in the Michigan courts.
 
2 The applicable statutory section is 42 U.S.C. § 1396p(d). The portion relevant to the testing of the trust of Appellant’s spouse provides:
(d)    Treatment of trust amounts
(1)    For purposes of determining an individual’s eligibility for, or amount of, benefits under a State plan under this subchapter, subject to paragraph (4), the rules specified in paragraph (3) shall apply to a trust established by such individual.

(2)
(A)    For purposes of this subsection, an individual shall be considered to have established a trust if assets of the individual were used to form all or part of the corpus of the trust and if any of the following individuals established such trust other than by will:
(i)    The individual.
(ii)    The individual’s spouse.
[]
(B)    In the case of a trust the corpus of which includes assets of an individual (as determined under subparagraph (A)) and assets of any other person or persons, the provisions of this subsection shall apply to the portion of the trust attributable to the assets of the individual.
(C)    Subject to paragraph (4), this subsection shall apply without regard to—
(i)    the purposes for which a trust is established,
(ii)    whether the trustees have or exercise any discretion under the trust,
(iii)    any restrictions on when or whether distributions may be made from the trust, or
(iv)    any restrictions on the use of distributions from the trust.
 
(A)     In the case of a revocable trust— []
(B)     In the case of an irrevocable trust—
(i)    if there are any circumstances under which payment from the trust could be made to or for the benefit of the individual, the portion of the corpus from which, or the income on the corpus from which, payment to the individual could be made shall be considered resources available to the individual, and payments from that portion of the corpus or income—
(I)    to or for the benefit of the individual, shall be considered income of the individual, and
(II)    for any other purpose, shall be considered a transfer of assets by the individual subject to subsection (c) of this section; and
(ii)     any portion of the trust from which, or any income on the corpus from which, no payment

(3)
(C)    Subject to paragraph (4), this subsection shall apply without regard to—
(i)    the purposes for which a trust is established,
(ii)    whether the trustees have or exercise any discretion under the trust,
(iii)    any restrictions on when or whether distributions may be made from the trust, or
(iv)    any restrictions on the use of distributions from the trust.
 
(A)     In the case of a revocable trust— []
(B)     In the case of an irrevocable trust—
(i)    if there are any circumstances under which payment from the trust could be made to or for the benefit of the individual, the portion of the corpus from which, or the income on the corpus from which, payment to the individual could be made shall be considered resources available to the individual, and payments from that portion of the corpus or income—
(I)    to or for the benefit of the individual, shall be considered income of the individual, and
(II)    for any other purpose, shall be considered a transfer of assets by the individual subject to subsection (c) of this section; and
(ii)     any portion of the trust from which, or any income on the corpus from which, no payment could under any circumstances be made to the individual shall be considered, as of the date of establishment of the trust (or, if later, the date on which payment to the individual was foreclosed) to be assets disposed by the individual for purposes of subsection (c) of this section, and the value of the trust shall be determined for purposes of such subsection by including the amount of any payments made from such portion of the trust after such date.

3 The term “resources” means income or assets that are “available” to the individual. The term is covered later in this article.

4 SMM 3257(B)
B.    Definitions.--The following definitions apply, as appropriate, to both transfers of assets and trusts:
1.    Individual.--As used in this instruction, the term "individual" includes the individual himself or herself, as well as:
o    The individual's spouse, where the spouse is acting in the place of or on behalf of the individual;
o    A person, including a court or administrative body, with legal authority to act in place of or on behalf of the individual or the individual's spouse; and
o    Any person, including a court or administrative body, acting at the direction or upon the request of the individual or the individual's spouse."

5 SMM § 3259.1 makes clear that the provisions apply to all applicants for Medicaid, even those recipients of benefits under programs where financial eligibility tests are not used.

6 As noted above in the discussion of § 1396p(d)(2)(B), the term individual does not refer to the individual's spouse.

7 While the trust rules inquire whether the individual, or others acting for the individual, transferred assets such that the individual may not receive any benefit, the transfer of asset rules concern actions of the individual and spouse, 42 U.S.C. § 1396p(c)(1)(A.)

8 The applicant will be disqualified for benefits for a period of time equal to the length of time she could have paid the nursing home with the assets transferred. See SMM 3258.5.

9 The complete SMM 3258.10 identifies persons dependent on the individual to whom transfers are not for less than fair market value:
3258.10 Exceptions to Application of Transfer of Assets Penalties.--There are a number of instances where, even if an asset is transferred for less than fair market value, the penalties discussed above do not apply. These exceptions are:
A.    The asset transferred is the individual’s home, and title to the home is transferred to: o    The spouse of the individual;
o    A child of the individual who is under age 21;
o    A child who is blind or permanently and totally disabled as defined by a State program established under title XVI in States eligible to participate in such programs or blind or disabled as defined by the SSI program in all other States;
o    The sibling of the individual who has an equity interest in the home and who has been residing in the home for a period of at least one year immediately before the date the individual becomes institutionalized; or
o    A son or daughter of the individual (other than a child as described above) who was residing in the home for at least two years immediately before the date the individual becomes institutionalized, and who (as determined by the State) provided care to the individual which permitted the individual to reside at home, rather than in an institution or facility.

B.    The assets were:
o    Transferred to the individual’s spouse or to another for the sole benefit of the individual's spouse; o    Transferred from the individual’s spouse to another for the sole benefit of the individual's
spouse;
o    Transferred to the individual’s child, or to a trust (including a trust described in 3259.7) established solely for the benefit of the individual's child (The child must be blind or permanently and totally disabled, as defined by a State program established under title XVI, in States eligible to participate in such programs or blind or disabled as defined under SSI in all other States); or
o    Transferred to a trust (including a trust as discussed in 3259.7) established for the sole benefit of an individual under 65 years of age who is disabled as defined under SSI.

10 The term “resources” means income or assets that can be reduced to cash. The Medicaid program uses the Social Security Administration SSI program rules to define “resources.” See 42 U.S.C. § 1396a(m) (“whose resources [as determined under section 1382b of this title for purposes of the supplemental security income program]”) and 42 U.S.C. § 1396r-(c)(5) (“Resources defined. In this section, the term "resources" does not include—(A) resources excluded under subsection (a) or (d) of section 1382b of this title”). We note once again that the provisions of 1382b(e), the SSI trust standards, are not included. “Resources” are further covered infra.

11 Reference to trusts and SSI exclusions means that under the SSI standards excluded assets retain their character except for the home, which loses its exclusion status and is considered an available resource. SSI exclusions are not in issue in this appeal.

12 "Deborah Moldover, An Analysis of the Federal Medicaid Statute’s Spousal Anti-Impoverishment Provision in Light of the Patient Protection and Affordable Care Act’s Medicaid Expansion and Current Federal Budgetary Constraints," Annals of Health Law, Volume 22, Spring 2013, page 158.

13 Granted that in this case the court was ruling on an application and hence the institutional spouse was not yet determined eligible, but its trust interpretation would apply even after the spouse had spent down and became otherwise eligible.

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