Bringing Back Sole-Benefit Trusts

In “Trust Me, But Not in the Third Circuit” I described the sole-benefit trust strategy to preserve excess assets for the community spouse of a person in a nursing home. We previously met Sam and Hazel, who live in Michigan. Sam is in a nursing home resident and will not be returning home. His monthly nursing home bill is $8,000, far above their combined income. They have a homestead worth $200,000 (even at today’s depressed home values) and $200,000 in savings. This puts Sam and Hazel well above median household net worth of around $180,000, but spending $8,000 a month just for Sam’s care will deplete their savings rapidly.

The Medicaid agency tells Hazel that their home is not counted and Sam could be eligible for Medicaid when half of their savings has been expended on his care. Hazel would like to keep more of their savings.

Until August 20, 2014, a sole-benefit trust (SBT) could preserve more assets for Michigan community spouses. By locking the money up in a properly-drafted trust and giving the community spouse only a monthly payment, the excess assets become an income stream. Federal Medicaid law protects the community spouse’s income, so that the excess assets become a protected income stream.

This worked because of the “sole-benefit” rule. Assets transferred to the individual’s spouse or to another – such as a trustee – for the sole benefit of the individual’s spouse do not make the institutionalized spouse ineligible for benefits. 42 USCA § 1396p(c)(2)(B). Furthermore, the income of the community spouse is not counted as available to the spouse in the nursing home. 42 USCA § 1396r-5(b)(1).

Since sole-benefit trusts are enshrined in federal law, it should be possible to use them to protect assets in all states. However, apart from Michigan, Indiana and Virginia no state was found where they are or were used, despite a lack of court decisions barring their use. Only in the states covered by the U.S. Third Circuit Court is there case-law holding that the corpus of an irrevocable sole benefit trust for the community spouse is counted as available for the benefit of the institutionalized spouse. According to that court, “Once the community spouse receives [irrevocable trust] payments, there is nothing preventing her or him from sharing them with the institutionalized spouse as well.” Johnson v. Guhl, 357 F.3d 403, 408 (3d Cir. 2004). Therefore, sole-benefit trusts cannot be used in Pennsylvania, New Jersey, Delaware and the Virgin Islands.

Surprisingly, the same court laid down contradictory law in 2008. In James v. Richman, the court stated that requiring the community spouse to share would undermine the rule 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). Despite the James case, attorneys in the states covered by the Third Circuit have not pursued a challenge to Johnson v. Guhl.

A prohibition on the use of SBTs in Michigan was laid down in an August 20, 2014 Michigan Department of Health and Human Services Memorandum. The Department decided that the principal of an irrevocable trust that repaid the grantor in installments would be counted as an available asset. There had been no change in Medicaid law, but the interpretation that the Department had applied for over 18 years was abandoned.

Since the issuance of the memorandum, Michigan elder law attorneys have been relying more on probate protective orders and annuities to preserve assets for community spouses, as explained in “A Courtly Alternative for Community Spouses” and “White-Water Rafting on the Income Stream.” While these strategies are usually effective, some probate judges are more concerned about the state’s fiscal health than about their petitioners’ and annuities can be difficult to purchase when the amount to be preserved is small or there are assets that are not easily liquidated.

The state’s change in policy toward SBTs was immediate and did not allow any exception for SBTs that were set up in reliance on the former policy. This put many applicants in a very difficult position – their assets had been tied up in irrevocable trusts based on long-standing Michigan Medicaid policy, but Medicaid had been denied. Administrative appeals were futile, since Michigan administrative law judges are only allowed to decide whether policy was followed, not whether the policy is constitutional or in accord with federal law. As a result, many of these denied applications required appeals to the state’s general trial court.

A year and a half after DHHS reversed its policy, cases which had been pending for Medicaid in August 2014 are being decided by circuit court judges and a majority of the rulings are not favorable to the state. It appears likely that the August 20, 2014 Memorandum will be overruled as inconsistent with federal Medicaid law. If so, SBTs can be used to protect the financial security of the spouses of nursing home residents, once more.

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200

©2015 John B. Payne, Attorney

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