Michigan Update: Change to Treatment of SBO Trusts Now Official

Amy Beacham, MBA

Disclaimer: Since Medicaid rules and insurance regulations are updated regularly, past blog posts may not present the most accurate or relevant data. Please contact our office for up-to-date information, strategies, and guidance.

If you’ve been following along with the Krause blog, you may already be aware that Michigan is a unique state in terms of how they treat transfers of assets for the sole benefit of the community spouse. In particular, the state’s Medicaid manual, the Bridges Eligibility Manual (BEM), did not distinguish between the viability of transfers to a trust for the sole benefit of the community spouse versus the sole benefit of a minor or disabled child or disabled individual under age 65. Therefore, many Michigan attorneys were able to successfully transfer assets to a trust for the sole benefit of the community spouse, referred to as an SBO trust, while accelerating the eligibility of the institutionalized spouse.


What Do the Federal Rules Say?

The federal rules provide protections for certain transfers to trusts. 42 CFR § 1396p(c)(2) states:

(2) An individual shall not be ineligible for medical assistance…to the extent that…

(B) the assets:

  • (i) were transferred to the individual’s spouse or to another for the sole benefit of the individual’s spouse,
  • (ii) were transferred from the individual’s spouse to another for the sole benefit of the individual’s spouse,
  • (iii) were transferred to, or to a trust…solely for the benefit of, the individual’s child…or
  • (iv) were transferred to a trust…established solely for the benefit of an individual under 65 years of age who is disabled…

The key missing piece is the transfer penalty exception as it relates to assets transferred to a trust for the sole benefit of the community spouse. In other words, federal rules did not carve out protections for these transactions and intended they be treated as a divestment. Assets may be transferred outright to a community spouse; however, those assets may prevent eligibility since the community spouse is subject to an asset limitation in order for the institutionalized spouse to qualify for benefits.


What was Michigan’s Stance?

Since Michigan’s BEM failed to distinguish between an SBO trust for the community spouse and an SBO trust for a different party allowed under federal law, attorneys had an opportunity to transfer assets into a trust for the community spouse, essentially allowing couples to keep their assets while accelerating Medicaid eligibility.

However, some attorneys still faced pushback. Their cases were evaluated as an improper transfer based on the federal rules, despite the favorable ambiguity of the BEM. This came to a head in the recent Hegadorn case, in which the Court determined the Michigan Department of Health and Human Services (DHHS) incorrectly applied a transfer penalty to an SBO trust for the community spouse given the rules in the BEM.

As a result, Michigan decided to take a firm stance against this planning strategy by proposing a change that would clearly identify these SBO trusts as an improper transfer of assets. The change was proposed in June of 2020. On December 2, 2020, DHHS release a new policy bulletin indicating this change will go into effect on March 1, 2021.

Read our blog for a full analysis of the initial proposal from Krause Corporate Counsel and COO, Scott Engstrom.


How Does This Affect Michigan Attorneys Going Forward?

Although the change may disrupt the go-to planning strategy for some attorneys, this presents an incredible opportunity for Medicaid Compliant Annuities (MCAs) for the community spouse in Michigan. Unlike other states, DHHS provides the community spouse an opportunity to purchase an MCA without naming the state Medicaid agency as a beneficiary.

Naming the state as beneficiary is typically an essential requirement for using an MCA, and it’s a common concern for attorneys and their clients. They don’t want to subject the community spouse to estate recovery on the annuity. While there are planning strategies to help reduce this risk, the rules in Michigan eliminate this concern altogether. As long as the annuity is actuarially sound and is owned by the community spouse, they do not have to name the state as a beneficiary.

Therefore, attorneys can use an MCA to convert a couple’s excess assets into an income stream with no cash value without the fear of reclaim from the state Medicaid agency in the event of an early death. It’s truly a win-win situation for attorneys and their clients.

If you’re a Michigan attorney in need of a new crisis planning strategy for married couples, you’re in the right place. Our team at Krause Financial can help you. Contact our office to learn more.


Amy Beacham, MBA
By Amy Beacham, MBA | Marketing and Communications Director

As Marketing Director, Amy is responsible for all company communications and ensuring our clients have the most accurate and up-to-date information. In addition to her communication expertise, she has prior experience as a paralegal and a Krause Benefits Planner.

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