Are “Sole Benefit” Trusts Countable Assets for Medicaid?

Close up of a senior patient holding hands with his wife in hospital

Having to put a spouse in a nursing home can be devastating enough. Worrying about whether you will have enough assets left to provide for yourself after paying for your spouse’s care adds another layer of worry and stress to an already difficult situation. Care in a long-term care facility can cost upwards of $100,000 per year. Few people can afford to pay out of pocket for long. Most eventually qualify for Medicaid assistance.

In order to qualify for Medicaid, the spouse in the nursing home must “spend down” assets. The other spouse, called the “community spouse,” may keep a limited amount of the couple’s joint assets ($126,420 in Michigan in 2019), called the Community Spouse Resource Allowance (CSRA). Not all assets are “countable” for the purposes of qualifying for Medicaid.

Assets that are countable include stocks, bonds, and other investments, savings and checking accounts, real estate other than a primary residence, and, of course, cash. Assets that are generally considered non-countable, or excluded, include the primary residence of the Medicaid applicant and/or the community spouse. Other excluded assets include household furnishings, personal property, irrevocable prepaid funeral contracts, and an automobile.

Naturally, anyone faced with the possibility of someday needing nursing home care for themselves or a spouse would prefer to move as many assets as possible out of the “countable” bucket and into the “excluded” bucket. This led to the need for Medicaid planning, and to the creation of so-called “sole benefit, ” or “SBO” trusts.

What Are Sole Benefit Trusts?

About 25 years ago, elder law attorneys in Michigan began helping clients using trusts intended for the “sole benefit of the community spouse.” These trusts operated by rendering some assets unavailable to both the nursing home spouse and the community spouse at the time of the nursing home spouse’s application for Medicaid benefits. Because the assets were an exempt transfer to the trustee of the sole benefit trust, they were not affected by spousal resource limits set forth in federal law.

Initially, the Michigan state Medicaid program agreed that these sole benefit trusts were exempt from anti-transfer rules under federal law. The reasoning behind this conclusion was that the assets were going into a trust for the sole benefit of the community spouse; furthermore, the community spouse did not have the ability to liquidate the trust, nor did she or he have the ability to take distributions from the trust at the time of the Medicaid application. In addition, the community spouse would be the only person entitled to distributions during his or her lifetime, and those distributions had to be made on an “actuarially sound” basis.

The Fall and Rise of Sole Benefit Trusts

In essence, the funds were deemed available (and thus countable) if there were “any circumstances” under which a community spouse could receive a payment, or under which a payment could be made for his or her benefit.

Unfortunately, the Michigan state Medicaid program changed its tune regarding sole benefit trusts in 2014. The agency asserted that funds in such a trust were subject to the “any circumstances” test in federal law. In essence, the funds were deemed available (and thus countable) if there were “any circumstances” under which a community spouse could receive a payment, or under which a payment could be made for his or her benefit.

Three Michigan couples had created and funded sole benefit trusts, and three who had done so and had a spouse’s application for benefits denied filed appeals. The decision of the Michigan Medicaid agency was reversed in two cases, but those victories were themselves reversed in the Michigan Court of Appeals. Upon further appeal, the Michigan Supreme Court then reviewed all three of the cases together. The Court of Appeals decision was overturned, meaning that sole benefit trusts were again permissible to keep assets for the benefit of the community spouse from being counted by Medicaid.

The court reasoned that assets held by a trustee who was not the spouse were not assets “held by” either spouse for the purposes of the Spousal Impoverishment provision in federal law. The Community Spouse Resource Allowance is determined by this provision.

The Michigan Supreme Court also addressed the issue of who was “the individual” under federal law. 42 U.S.C. 1396p(d)(3)(B)(i) says that assets in a trust are considered available if there are “any circumstances” under which payments could be made to “the individual.” After careful analysis of the federal statute and its history, the court concluded that “the individual” refers to the nursing home spouse applying for benefits—not the community spouse. Since the sole benefit trust is for the benefit of the community spouse, assets in the trust are not available to “the individual,” the person who applied for benefits.

All of this complicated legal wrangling appears to be very good news for couples trying to preserve resources for the support of a community spouse while the other spouse is in long-term care. It remains to be seen how this ruling will be applied to new Medicaid applications where SBO trusts are used. Stay tuned!

If you are concerned that you or your spouse might need long-term care soon, or at some future date, it is wise to consider protecting the resources of the spouse who remains outside the nursing home. We invite you to contact our law office to schedule a consultation to discuss your options, which once again include sole benefit trusts.

Categories: Medicaid Planning