Michigan Court of Appeals Affirms SBO Trusts
In the recent decision of Hegadorn, the Michigan Court of Appeals delivered good news to married couples facing expensive long term care. It affirmed a Medicaid planning technique that helps married couples preserve their assets. Specifically, it upheld the use of what are called solely for the benefit of trusts (“SBO Trusts”). This type of trust is set up when a spouse is receiving long term care at home, in certain assisted living facilities, or a nursing home and is seeking Medicaid. The other spouse (known as the “community spouse” under the Medicaid rules) is able to transfer countable assets to the SBO Trust and those assets will be protected from having to be spent down on long term care.
These are the takeaways from the decision:
- SBO Trusts are still valid. As mentioned above, the Michigan Court of Appeals affirmed SBO Trusts as a Medicaid planning technique for married couples. In addition to protecting a married couple’s assets, this is an important planning tool to avoid having to cash in investments and pay income taxes. It’s also critical for preserving a married couple’s real estate (e.g. a cottage, vacant land, or rental) and preventing it from having to be sold to qualify for Medicaid. SBO Trusts must be structured and drafted in a very precise way to comply with the Medicaid rules. First, the community spouse cannot be the trustee. Instead, a child or other family member must be in charge of the SBO Trust. Second, the trust can only benefit the community spouse. Third, the SBO Trust must distribute (i.e. pay out) a minimum amount each year to the community spouse similar to an IRA minimum required distribution. However, this rule fortunately doesn’t limit the amount that can be annually distributed to the community spouse. For this reason, SBO Trusts are a very flexible planning option for married couples.
- SBO Trust assets should go to the children or heirs upon the death of the community spouse. The Court of Appeals analyzed whether a SBO Trust could provide that the assets remaining after the death of the community spouse could be further held in trust for the Medicaid spouse. It ultimately remanded the issue to the administrative law judge. To avoid this legal issue and the State of Michigan from challenging it, a SBO Trust should name the married couple’s children or heirs as the remainder beneficiaries.
- Don’t press the limits of the Medicaid rules. The Medicaid rules allow certain planning to be structured to protect the assets of a married couple. When planning is done outside these bounds, there’s a risk the State of Michigan will challenge it as it did in Hegadorn. If this happens, it’ll result in additional significant costs (i.e. long term care as well as legal expense) and potentially not getting approved for Medicaid. It’s almost always best to not press the limits of the Medicaid rules and use what’s been accepted over time to protect a married couples’ assets.
