MI Medicaid Changes

On August 20, 2014, the Department of Human Services (DHS) made a massive, unexpected change to Medicaid planning for married couples in the state of Michigan by changing the way they analyze assets put into the Solely for the Benefit Trust.

For past 18 years, DHS has allowed the spouse of a nursing home resident, commonly known as the “community spouse,” to place assets into a special “solely for the benefit” trust (SBO Trust). The SBO Trust is a unique irrevocable trust that was used to hold excess marital assets solely for the benefit of the community spouse. Assets which would normally be looked at as “countable” and prevent the nursing home applicant from qualifying for Medicaid were considered “unavailable” when transferred into the SBO Trust, thus allowing the applicant to immediately qualify for Medicaid while retaining the bulk of the assets for the community spouse. Additionally, martial assets that were transferred to this SBO Trust were not considered a divestment and, therefore, did not create a penalty period as an outright gift of assets would.

There were restrictions as to when the assets in the SBO Trust could be accessed but, generally, would be distributed one time each year to the community spouse. The trust essentially converted excess “countable assets” into an income stream for the community spouse. If the community spouse passed away, any remaining trust assets would pass to the beneficiaries of the trust, which was spelled out by the community spouse, and not to the state.

The SBO Trust was the best Medicaid planning tool available to a married couple. With the average cost of nursing home care around $8,000.00 per month, a couple’s life savings can easily be depleted over a short period of time leaving the community spouse destitute for the remainder of their life. The SBO Trust was a way that Medicaid planners were able to ensure that the spouse of a nursing home resident was able to live securely on the savings they worked so hard to accumulate throughout their lives.

How Has Medicaid Planning Changed?

As of August 2014, without any prior notice, DHS has begun denying eligibility in cases where the community spouse has placed assets into a SBO Trust. DHS has emphasized that this is not a change in the law or policy, but a change in the way they are applying the existing policy, or, in other words, they have been applying it wrong for the last 18 years.

Although the Medicaid policy specifically allows assets to be placed into a SBO Trust without creating a divestment penalty as an outright gift would, DHS is now saying the new interpretation of the policy will allow them to include the assets in the SBO Trust as a “countable asset,” even though the assets are not readily available to the community spouse or nursing home spouse. DHS relies on the policy which states:

Count as the person’s countable assets the value of the countable assets in the trust principal if there is any condition under which the principle could be paid to or on behalf of the person from an irrevocable trust.

DHS is now interpreting the word “person” as either the nursing home spouse or the community spouse, even though the remainder of the policy clearly distinguishes when they are referring to the community spouse. Additionally, the terms of the SBO Trust do not allow any payments to be made to the nursing home spouse. Even though the trust pays directly to the community spouse, and no income of the community spouse is supposed to be deemed available to the nursing home spouse, DHS has begun counting these assets.

So, What Does This Mean?

What is on the horizon for Medicaid planning for married couples?
Although this is a huge change and will definitely make this more difficult for a married couple to qualify for Medicaid, there are still options; however, it will mean in order to qualify for Medicaid and save 100% of the estate for the surviving spouse, people will have to plan earlier.

For many years, we have been doing Medicaid pre-planning for clients by using what is called an Irrevocable Trust. The Irrevocable Trust and can be a highly effective asset preservation strategy. It allows you, the “settlor,” to create the trust and to name one or more persons – other than yourself or your spouse – to manage the trust. You may even appoint a “trust protector” who will have the right to change the trustee at any time if the trustee is not handling the assets to your satisfaction, or for any other reason. The principal generally stays in the trust until your death, at which point the trust assets pass directly to your heirs, without the expense and delays of probate. After the assets have sat in this trust for a period of 5 years, they will be 100% protected from a nursing home. Because of the 5 year requirement, it is important to begin planning as soon as possible. In the past, this technique was used more frequently with single people that were not able to take advantage of the SBO Trust, which was only available to married couples. After DHS’s new interpretation of the policy, this has become the best planning option for a married couple as well.

If, however, a married couple has not planned 5 years in advance, we start what is called a “crisis medical plan.” This means we are trying to protect as much of the estate as we can for the community spouse. Other planning options include: protective orders, commercial annuities and promissory notes. Each of these options have challenges and considerations which will need to be considered, and a plan will need to be specifically tailored to each family’s unique situation.

Veterans Benefits and Irrevocable Trusts

Planning ahead with irrevocable trusts for Veterans Benefits eligibility has many of the same benefits as in Medicaid planning. However, the most prominent difference and benefit to using an irrevocable trust to hold assets to achieve Veterans Benefits eligibility is the “look back” period. As we discussed above, in order for the assets in the irrevocable trust to be protected from a nursing home, they must be in the trust for a minimum of 5 years. For VA Aid & Attendance benefits, current VA rules do not impose a waiting period before you can access the benefit because you have transferred assets into an irrevocable trust. That being said, there have been talks about a law that would impose a 3 year look back for VA planning. It looks like at some point this law will pass; therefore, preplanning will be particularly beneficial to veterans and their surviving spouses that may need to take advantage of the extra income from VA in the next few years to pay for the high costs of long term care.

Asset Protection Planning, whether in the context of VA benefits or Medicaid benefits, can be very beneficial to families. SSR Law Offices is here to educate you about what choices you have no matter where you are in the process. Remember, it is never too early to start planning!