SBO Trusts and Government Assistance

Navigating estate planning can be a daunting task for any family. Matters can become even more complicated if you, like most Americans, fall into the frightening grey area associated with having enough assets to sustain you during your life, as long as there are no serious medical complications. This is made even more unsettling when considering that the Administration for Community Living has estimated that those aged 65 and older have a nearly 70% chance of needing some type of long-term care in their remaining years.

One important strategy to protect yourself and family from the possibility of ending up underwater in medical debt is the use of various “special needs” or “solely for the benefit of” (SBO) trusts, which have been a legal grey for some time. The issue of using SBO trusts in such circumstances recently came to a head in the Michigan Supreme Court. In Hegadorn v Dept of Human Services Dir, 503 Mich 231; 931 NW2d 571 (2019), multiple Plaintiffs, all with a spouse receiving long-term care at live-in facilities created irrevocable, solely for the benefit of (SBO) Trusts, and transferred the majority of their individual and marital property to those trusts. All trusts were written requiring the trustee to distribute income and resources within the spouse's expected lifetime to deplete the trust prior to the Plaintiff’s death.

After creation, the Plaintiffs’ institutionalized spouses applied for Medicaid benefits. They were subsequently denied by the Dept. of Health and Human Services, who determined that the SBO trusts were countable assets for the purpose of determining Medicaid eligibility. As such, the institutionalized spouses were ineligible to receive benefits.

Ultimately, the courts found that The Dept. of Health and Human Services, and subsequently the MI Court of Appeals, erred in interpreting that assets placed an SBO Trust created for a “community spouse” automatically count for the purpose of determining eligibility.

This was a huge win for Michigan residents, especially those who may rely on Medicaid Assistance later in life. To clarify further, the Department of Health and Human Services has since published updated rules and terms in its Eligibility Manual that help navigate how to properly transfer assets and avoid ineligibility.

While this distinction and subsequent change has made these tools available to Michigan residents, there are still many factors which need to be addressed to ensure the trusts are created and executed properly. Thankfully, you can rely on the experienced guidance of an estate planning attorney. They can help you determine what options are right for you. Choosing to have an estate plan is the first step in protecting your wishes, and a comprehensive estate plan can help you accomplish this.