NAELA filed an amicus brief and argued in support of the appellants in Hegadorn v. Michigan Dept. of Human Services Director. Michigan Supreme Court approves the use of a trust for the sole benefit of a community spouse as a valid way to set aside assets for the spouse of a Medicaid long-term care beneficiary beyond those allowed under Spousal Impoverishment.
In Hegadorn v. Michigan Dept. of Human Services Director, decided May 9, 2019, the Michigan Supreme Court approved the use of a trust for the sole benefit of a community spouse as a valid way to set aside assets for the spouse of a Medicaid long term care applicant. The court held that the assets held by the trustee of such a properly drafted “sole benefit” trust were not “countable resources” of either the Medicaid or the community spouse and were not subject to the Spousal Impoverishment resource limits unless there were “any circumstances” under which payment could be made by the trustee to or for the benefit of the nursing home spouse at the time of application.
Michigan elder law attorneys began using trusts for the “sole benefit of the community spouse” as early as the middle 1990s as a means to qualify married nursing home residents for Medicaid. Such “sole benefit trusts” made some resources unavailable to either spouse at the time the application for benefits was filed, by an exempt transfer to the trustee of such a trust, and thus not affected by the resource limits of Spousal Impoverishment, 42 U.S.C. § 1396r-5(c)(2)(B) and (f)(2)(A). They argued, and the state Medicaid program agreed, first, that such trusts were exempt from the anti-transfer rules of 42 U.S.C. § 1396p(c) by reason of 42 U.S.C. § 1396p(c)(2)(B)(i) or (ii) because they went to a trust for the sole benefit of the community spouse and, second, that the assets were not available to the community spouse because no distributions could be made from the trust to the community spouse at the time of application and the community spouse did not have the power to liquidate the trust. They met the sole benefit requirement because the community spouse was the only beneficiary entitled to distributions from the trust during his/her lifetime and the trust required such distributions to be made on an “actuarially sound” basis.
In 2014, the Michigan Medicaid agency changed its interpretation of its manual and took the position that the funds in a trust for the sole benefit of the community spouse were subject to the “any circumstances” test of 42 U.S.C. § 1396p(d)(3)(B)(i), that is, they were available if there were any circumstances under which payment could be made to or for the benefit of the community spouse.
Three couples who had funded trusts for community spouses had benefits denied under the agency’s new interpretation. Two different trial courts reversed the agency on appeal, but the state’s intermediate appellate court reversed them. The state supreme court granted review to all three together and reversed the court of appeals.
The court first held that assets held by a trustee who is not the spouse him or herself are not assets “held by” either spouse for purposes of 42 U.S.C. § 1395r-5(c)(2)(A), the Spousal Impoverishment provision that is the basis for determining the community spouse resource allowance.
The court then turned to the nub of the case: where Congress directed in 42 U.S.C. 1396p(d)(3)(B)(i) that assets in a trust be considered available if there were “any circumstances” under which payments could be made to “the individual,” who was “the individual”? Subsection (d) began by stating that in determining “an individual’s eligibility,” the rules of (c)(3) applied. Thus, the rule in (c)(3) to use the “any circumstance” test for payments to “the individual” could only mean the one applying for benefits – the nursing home or institutionalized spouse – not the community spouse. After a thorough review of the statutory history, and the wording of 42 U.S.C. 1396p(d), the court rejected the agency’s argument that the reference to the “individual” should be read more broadly to include the community spouse as beneficiary as well as grantor.
The court did not reverse but instead sent the case back to the administrative law judges for a final determination of whether under the terms of these trust there were any circumstances under which payment could be made to the nursing home spouse. However, the Court noted that it rejected the logic of Johnson v. Guhl, 357 F.3d 403 (3rd Cir. 2004), which held that payment to the community spouse could be considered, without more, to be for the benefit of the institutionalized spouse.
The Court did not explore further what test would determine whether the trust assets were available to the community spouse, presumably because it was satisfied that these were sole benefit trusts not available as a matter of Congressional mandate.
A concurring opinion accepted the majority view but questioned whether the transfer enjoyed the exemption, asking whether the community spouse was getting the sole benefit. At one level, the concurrence itself recognizes the problem of how the federal agencies define “sole benefit,” and suggested that funding a sole benefit trust “should always result in the imposition of a divestment penalty,” slip op. at 22 n. 16 (original emphasis). But that of course proves too much: it means that a person could never make an exempt transfer to a trust for the sole benefit of a disabled child or a disabled person under age 65 under 42 U.S.C. § 1396p(c)(2)(B)(iii) and (iv), flatly contrary to what Congress authorized. The claim by the concurring opinion is also contrary Hughes v. McCarthy, 734 F.3d 473 (6th Cir. 2013).
Appellants were represented by James Steward, CELA, and Angela Hentkowski, CELA. NAELA filed an amicus brief in support of the appellants by Ron Landsman, Esq., CAP, Fellow, and Jennifer VanderVeen, CELA, CAP, Fellow. Mr. Steward and Mr. Landsman argued the case before the Michigan Supreme Court.
(An earlier version of this case note has been updated.)