Hegadorn v. DHS

Michigan SBO Trusts: the Impact of Hegadorn

 

The Supreme Court of Michigan issued an important ruling in May of 2019. The case, Hegadorn v. Department of Human Services Director, No. 156132 (2019), addressed whether the principal of trusts for the sole benefit of (“SBO Trusts”) the Community Spouse were countable assets for purposes of the Institutionalized Spouse’s Medicaid application. The Court held that in this case, the trust principal was not countable for purposes of the application.

 

The Hegadorn decision involved a series of consolidated cases with similar fact patterns. Specifically, in each case, the Institutionalized Spouse began receiving nursing home care at their own expense. Subsequently, in each case the Community Spouse created a benefit for their sole benefit – the SBO Trust.

 

After the SBO Trusts were created, the couples funded their respective Trusts with marital property and relinquished title to the property in favor of the Trust or Trustee. Each Trust was set up of distribute actuarially sound payments to the Community Spouse at a rate that would deplete the Trusts within the Community Spouse’s life expectancy. The Institutionalized Spouses then applied for Medicaid benefits.

 

After reviewing the Institutionalized Spouses’ applications for benefits, the Michigan Department of Health and Human Services (the “Department”) determined that the entire value of the principal in each SBO Trust was a countable asset for purposes of Medicaid eligibility. Accordingly, finding that each Institutionalized Spouse did not have the requisite financial need, the Department denied each application for benefits.

 

In rendering its decision, the Michigan Supreme Court focused on a series of key points. First, the Court noted that the property transferred to the SBO trust was, in each case, held by the Trustee. This means that the trust was not owned by or directly available to the beneficiary.

 

The second key point that the Court identified pertained to the federal Medicaid trust rules. The Department argued under the federal Medicaid rules, if there are “any circumstances” under which the principal of the trust could be paid to or on behalf of the “individual,” that the trust was countable. The Department interpreted as referring to either the Institutionalized Individual or their Spouse. The Court disagreed with this interpretation, determining that the term “individual” in this context referred to an applicant for Medicaid benefits.

 

The third point the Court keyed on was the availability of the trust to the Institutionalized Spouse under the “any circumstances” test. The Court thoughtfully analyzed this issue, differentiating the trust rules applicable to revocable versus irrevocable trusts. The Court reasoned that because the “individual” referred to the Medicaid applicant, the question became whether under “any circumstances” the principal of the trust could be paid to or on behalf of the applicant.

 

Because “individual” in this case referred to the Institutionalized Spouse (to the exclusion of the Community Spouse), the Court was led to its fourth and deciding point – the language of the SBO Trust itself. The Court cited the CMS manual instructions to the Department, that it should “take into account any restrictions on payments, such as use restrictions, exculpatory clauses, or limits on trustee discretion” in determining whether payment could be made to or for the benefit of the Institutionalized Spouse.

 

The Court remanded the matter to the Administrative Law Judge for determination of whether, with the clarification provided in its opinion, circumstances exist under the language of the trust under which payment could be made to or for the benefit of the Institutionalized Spouse.

 

The full document text can be found here.