Proposed Michigan Policy Change: Transfers to SBO Trusts to be Evaluated for Divestment

Scott Engstrom, J.D.

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The Michigan Department of Health and Human Services (DHHS) has issued a proposed rule that would evaluate transfers by a Medicaid applicant or their spouse to a trust established for the benefit of the applicant’s spouse for potential divestment penalties. This proposed rule change appears to be in response to the Hegadorn v. Department of Human Services Director, No. 156132 (2019) decision issued by the Supreme Court of Michigan.


How the Hegadorn Case Led to This Michigan Proposal

In Hegadorn, the Court determined that the DHHS had made an incorrect determination that the corpus of a sole-benefit trust (SBO trust) established by the community spouse was not available to the applicant and remanded the matter to the administrative law judge. That decision was based on a review of the applicable Medicaid rules and the trust language itself. Click here to read more about the Hegadorn case.

In an attempt to square Michigan’s BEM with the United States Code, the DHHS has put forth the following recommendation for public comment:

Effective October 1, 2020, all transfers by the applicant or the applicant’s spouse to a trust established solely for the benefit of the client’s spouse will be evaluated for divestment, which will bring the MDHHS BEM 405 policy in alignment with 42 CFR [sic] 1396p(c)(2).

This change comes in response to current DHHS policy that does not distinguish between SBO trusts for the benefit of the applicant’s spouse and those established for the benefit of a blind or disabled child, or a disabled individual under the age of 65. The proposed issue date for the new rule is September 1, 2020, and the proposed effective date is October 1, 2020. Comments are due July 29, 2020.

In evaluating this change, it is important to review what the BEM states as well as the requirements of the U.S. code (erroneously referenced in the proposed policy draft as the Code of Federal Regulations). BEM 405 states, with respect to SBO trusts:


Transfers Involving Spouse

It is not a divestment to transfer resources from the client to:

  • The client’s spouse.
  • Another SOLELY FOR THE BENEFIT OF the client’s spouse.

Transfers from the client’s spouse to another SOLELY FOR THE BENEFIT OF the client’s spouse are not a divestment.

BEM 405 (p. 9 of 23). This language clearly permits a transfer to an SBO trust for the community spouse’s benefit.

The BEM language can be contrasted with the requirements of 42 U.S.C. § 1396p(c)(2):

An individual shall not be ineligible for medical assistance by reason of paragraph (1) to the extent that –

(B) the assets –

  • were transferred to the individual’s spouse or to another for the sole benefit of the individual’s spouse,
  • were transferred from the individual’s spouse to another for the sole benefit of the individual’s spouse,
  • were transferred to, or to a trust (including a trust described in subsection (d)(4)) established solely for the benefit of, the individual’s child described in subparagraph (A)(ii)(II), or
  • were transferred to a trust (including a trust described in subsection (d)(4)) established solely for the benefit of an individual under 65 years of age who is disabled (as defined in section 1382c(a)(3) of this title.

While transfers to a trust under subsection (d)(4) are exempt from transfer penalties when the trust is for the benefit of the applicant’s child or an individual under 65 years of age who is disabled, there is no such exemption under federal law for such a transfer where the trust is for the sole benefit of the applicant’s spouse. Subsection 1396p(c)(2) makes the exemptions identified by reference to subsection 1396p(c)(1), which includes transfers by both the institutionalized spouse and the community spouse.


How Does This Affect Medicaid Planning in Michigan?

Prior to this proposed change that would take effect in the fall of 2020, Michigan was unique in its approach to transfers by the community spouse to trusts for that community spouse’s own benefit by exempting such transactions from divestment penalties. If this change comes to pass following the comment period, Michigan attorneys will be left with one less Medicaid planning option.

One viable planning alternative to the community spouse placing assets in an SBO trust for his or her own benefit is the purchase of a Medicaid Compliant Annuity. The Medicaid Compliant Annuity will irrevocably convert an asset into an income stream with payment depending on the annuitant’s life expectancy and the specific structure suggested by the elder law attorney involved. Subject to the federal and state Medicaid requirements, the purchase of the Medicaid Compliant Annuity will not count as a divestment resulting in a period of ineligibility and, depending on the strategy utilized, can result in prompt Medicaid eligibility with proper planning.

While many elder law and estate planning attorneys like to use trusts as the trustee will be given latitude to invest the trust property for a return, Medicaid Compliant Annuities are a beneficial tool in that they are contractual in nature and are paid out by an insurance company. While a trustee may be an individual or corporate trustee (with corporate trustees sometimes charging significant fees), a properly structured Medicaid Compliant Annuity is a mechanical periodic payment that will not result in Medicaid eligibility concerns and will promote the public policy against spousal impoverishment.

If you have any questions regarding the Hegadorn case, the Michigan DHHS’s proposed rule, or crisis Medicaid planning, please do not hesitate to contact our team of professionals.


Scott Engstrom, J.D.
By Scott Engstrom, J.D. | Corporate Counsel and COO

Scott is our Corporate Counsel and Chief Operating Officer. In addition to working directly with clients and managing company operations, he provides his expertise in the legal field through videos, blogs, case law, white papers, and more to ensure our clients have the latest information.

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