The Death of the “Solely for the Benefit Of” Trust

Krause Financial

Disclaimer: With Medicaid, VA, and insurance regulations frequently changing, past blog posts may not be presently accurate or relevant. Please contact our office for information on current planning strategies, tips, and how-to's.

For years practitioners throughout the nation watched in envy as Michigan couples transferred their entire spend-down amount into a special needs trust solely for the benefit of a community spouse and immediately qualified for Medicaid.  The assets held in these “Solely for the Benefit Of” trusts, hereafter referred to as SBO trusts, were not considered countable, and the transfer to the trust was not considered a divestment.  Michigan practitioners were able to preserve 100% of married couples’ assets.  They had their cake, and ate it too.

Sadly, on August 20, 2014, we experienced the passing of a legend.  The Michigan Department of Human Services released a “policy clarification,” as they called it.  This clarification indicated that all SBO trust assets are to be considered countable resources.  The transfer of funds into the trust was still not a divestment though.  Read the full memo here.


So where does this leave Michigan practitioners?

At first, it left them scrambling.  At the time the above referenced memo was released Medicaid applications were being prepared to be filed for the month, and the execution of many SBO trusts were already in process.  These trusts have little to no ability to be dissolved after creation, and most had already been funded by the time the memo came out.


What if the SBO trust has already been funded?

In that case, one viable solution may be to use an immediate annuity compliant with the Deficit Reduction Act of 2005 – also referred to as a Medicaid Compliant Annuity.  The annuity should be structured so that the owner is the SBO trust, and the grantor is the annuitant – the community spouse.  All other requirements must also be met – irrevocable, non-assignable, equal payments, actuarially sound, and the state Medicaid agency as a beneficiary.  The annuity turns what would have been considered a countable resource into an income stream payable to the community spouse.


What about future cases now that SBO trusts can’t be used?

Using Medicaid Compliant Annuities is not a new spousal crisis Medicaid planning technique.  Although, it might be to Michigan practitioners.  In using an annuity, rather than transfer the spend-down amount to an SBO trust, it is instead transferred into a Medicaid Compliant Annuity owned by the community spouse.

The current trend in community spouse planning has been to utilize a short-term Medicaid Compliant Annuity – less than 12 months, in order to avoid a potential payback to the state.  However, it has always been the opinion of Krause Financial Services that this type of planning will lead to increased restrictions in community spouse planning (e.g. the NASMD letter).  As such, it is not always best to simply “go short.”

Several factors need to be taken into consideration when determining the appropriate length of a community spouse’s Medicaid Compliant Annuity.  Above all else, it is highly recommended that the length should not be so short as to create an unreasonable amount of monthly income.  The total monthly income received should be reasonable in light of the annuitant’s current and future monthly needs.


What will happen to SBO trusts at annual re-certifications?

Only time will tell.  If the trust corpus is determined to be countable, the above-referenced technique of having the SBO trust purchase a Medicaid Compliant Annuity with the community spouse being the annuitant may be the solution.


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