DHHS policy on sole benefit trusts is overturned

On May 9, 2019, the Michigan Supreme Court issued its decision in the case of Hegadorn v Dept. of Human Services Director, overruling the policy adopted by the Department of Health and Human Services in August 2014, and holding that a sole benefit trust (SBO trust) intended for the benefit of a community spouse can shelter a couple’s assets and make them non-countable for the purpose of qualifying the institutionalized spouse for Medicaid benefits for long-term care.

James Steward and Angela Hentkowski of Steward & Sheridan, Ishpeming, were the lead attorneys for the plaintiffs challenging the policy and should be congratulated for an excellent win.

Prior to August 2014, an SBO trust was a common tool that was available to use to avoid spousal impoverishment under the statutes and regulations requiring that a person seeking Medicaid coverage for long-term care must spend down all countable assets to a maximum of $2,000.

The requirements were:

• The transfer to the SBO trust must be irrevocable.
• The distributions or payments from the trust must be made solely for the benefit of the community spouse; 
• The distributions to the community spouse must be made on an actuarially sound basis over his or her the projected lifetime; 
• There may not be any conditions or circumstances under which either principal or income could be distributed to or used for the benefit of the institutionalized spouse. 

The Hegadorn ruling involved three consolidated cases, each following the same fact pattern. The essential ruling by the Court was that the DHHS had improperly interpreted the provisions of the Federal Medicaid law with respect to a trust whose assets may be made available under any circumstances. The Federal law provides that such a trust would be countable if its assets may be used “for the individual” under any circumstances. The DHHS interpretation was that the word “individual” would apply to both the institutionalized spouse and the community spouse. The Supreme Court disagreed. The statutory language, it ruled, applies only to the institutionalized spouse, the person for whom Medicaid benefits are sought.

Under the Medicaid statute, the definitions that apply are found at 42 USC 1396d. There is no definition of the word “individual” in that section, but it is important to note that that word appears in section 1396d a total of 72 times, and each time it is used it is clear that it refers to the institutionalized person, the person receiving Medicaid benefits, and not to his or her spouse.

Chief Justice Bridget McCormack, concurring in the decision, wrote separately to say that, in her opinion, the transfer of assets by the community spouse into the trust would be regarded as a “divestment” which would trigger a period of disqualification for Medicaid benefits under the divestment rules. She observed that that was not an issue involved in the case before the Court and thus did not require consideration.

We believe that the Chief Justice is probably wrong on this point. At page 9 of the Bridges Eligibility Manual, section 405 (divestment), the DHHS says that:

It is not divestment to transfer resources from the client to:
The client’s spouse.
Another [person] SOLELY FOR THE BENEFIT OF the client’s spouse. Transfers from the client’s spouse to another SOLELY FOR THE BENEFIT OF the client’s spouse are not divestment.

And this DHHS policy statement is based on the Federal Medicaid statute, 42 USC 1396p-c-2-B-i:

(2) An individual shall not be ineligible for medical assistance by reason of paragraph (1) to the extent that—
* * *
(B) the assets—
(i) were transferred to the individual’s spouse or to another for the sole benefit of the individual’s spouse,
(ii) were transferred from the individual’s spouse to another for the sole benefit of the individual’s spouse,
(iii) were transferred to, or to a trust (including a trust described in subsection (d)(4)) established solely for the benefit of, the individual’s child described in subparagraph (A)(ii)(II), or
(iv) were transferred to a trust (including a trust described in subsection (d)(4)) established solely for the benefit of an individual under 65 years of age who is disabled (as defined in section 1382c(a)(3) of this title)

Two estate recovery decisions

In In re Estate of Keyes, 310 Mich App 266; 871 NW2d 388 (2015), lv den, ____ Mich ____ (2016), the Court of Appeals held that estate recovery could proceed for the expenses paid for a nursing home admission which began in April 2010, even though the Medicaid beneficiary did not receive the notice required under MCL 400.112g-7 at that time. It was noted that the required information had been included in a May 2012 application. (The court did not specifically note the fact, but MDCH, the agency then administering the Medicaid program, required reapplication every year in order to continue Medicaid coverage. The notice was contained in the reapplication form beginning in 2012, it appears.) 

Last month, the Michigan Supreme Court denied leave to appeal, leaving this decision as established law in Michigan. 

In In re Estate of Gorney, ____ Mich App ____ (2016), issued as a published opinion by the Court of Appeals on February 4, 2016, the court addressed the question of whether the Department of Health and Human Services (which has been administering the Medicaid program since last year's reorganization) could properly assert estate recovery retroactive to July 2010. Gorney was the first named plaintiff in a consolidated appeal involving four different estates opened in four different counties. 

In Gorney, each of the four decedents began receiving Medicaid benefits to pay for long-term care after the estate recovery statute was enacted in 2007. Each of them received, in 2012, an application form for requalification for benefits which included the mandated notice language. In each case, after the death of the beneficiary, the Department sought to pursue estate recovery for benefits paid on and after July 1, 2010. (It is not stated in the opinion why the Department chose that date.) 

As in Keyes, each personal representative sought to invalidate the estate recovery claim based on the failure to provide the required notice when the beneficiary first qualified for Medicaid. The court ruled that Keyes had resolved that issue and rejected the appeals on that point. 

The personal representatives also argued that it was a violation of due process for the state to include benefits paid from July 2010. The evidence showed that the Department had sought Federal approval for its estate recovery program, as required under the Federal Medicaid laws and under the 2007 estate recovery statute, and that that approval was granted in May 2011. On July 1, 2011, the Department "implemented" the program for the first time by instructing its personnel to begin operating the program. 

The court partially agreed with the personal representatives on due process grounds. It found that the estate recovery program could go back to benefits paid from and after July 1, 2011, but could not do so for the one additional year going back to July 1, 2010. 

Thus, we now know that the estate recovery program can seek reimbursement from the estate of a decedent for benefits paid for long-term care services after July 2011, but not before. 

As with Keyes, look for the estates to seek leave to appeal to the Supreme Court. 

Michigan estate recovery

The estate recovery program allows the State of Michigan, in some cases, to seek repayment of Medicaid benefits for nursing home care and home health care after the recipient has died.  Mandated by Federal law, estate recovery is essentially a tradeoff for the fact that the recipient's home is not included as a "countable asset" (if its value is under $500,000) when calculations are done to verify that the recipient has assets below the maximum allowed to qualify for Medicaid coverage.

In the majority of cases, for a couple of reasons, the only asset for which the estate recovery claim is asserted is the recipient's home.

Michigan's estate recovery statute, found at MCL 400.112g and 112h, allows for recovery only against "probate assets," that is, property owned by the decedent in his sole name which does not pass to others by operation of law, and for which it is necessary to open an estate in probate court. Property which passes under joint tenancy, for example, is not subject to estate recovery in Michigan. A home owned by husband and wife as tenants by the entirety is likewise not subject to estate recovery. (In other states, such as Wisconsin, jointly-held assets are also subject to the estate recovery laws.)

When the family home is included in the probate estate, there are several exemptions and limitations that are important. The first and most significant is that the home may not be subject to estate recovery if the surviving spouse is residing there. Further, there is a monetary limitation when that exemption does not apply. The home is subject to estate recovery only to the extent to which the price that it can be sold for by the personal representative exceeds

• "50% of the average price of a home" in the county, plus
• the costs of estate administration, funeral costs, etc., and
• all applicable statutory exemptions

The exemptions that are allowed under statute include the homestead allowance, the family allowance, and exempt property. If all three apply, when the decedent leaves a surviving spouse, the total amount can be as high as $64,000, given the current applicable figures.

An unpublished decision of the Michigan Court of Appeals issued in 2015 ruled that the person seeking to apply the 50% average price limitation must take steps to apply for it, and must do so within the time that the department specifies. It will not be automatically available.

Today, eight years after estate recovery was enacted, and five years after it went into effect, there is still some uncertainty as to how "the average price of a home" in a given county can be calculated. There are a couple of online sources that can provide assistance on this issue.

If you have received an estate recovery notice, be sure to consult with an experienced attorney to ensure that the needed steps can be taken.

The legal basis of the "no asset test" rule

We noted in our March 2 post that CMS's web-published materials announce that asset limits will not apply to disqualify persons newly eligible for Medicaid on the basis of their Modified Annual Gross Income - i.e., the "Obamacare" Medicaid expansion applicable in many but not all states. Michigan is included.

The legal basis for this position is the new 42 USC 1396a-e-14, added by the Affordable Care Act and effective January 2014, which includes as its subparagraph C:

(C) No assets test.—A State shall not apply any assets or resources test for purposes of determining eligibility for medical assistance under the State plan or under a waiver of the plan. 

The statute goes on to make exceptions under subparagraph D, however, for those who were previously eligible on other bases. Just to be clear, it also specifically exempts anyone over the age of 65. Thus, we will still have resource limits for those who wish to qualify for Medicaid coverage for nursing home care for the elderly.

(D) Exceptions.—
    (i) Individuals eligible because of other aid or assistance, elderly individuals, medically needy individuals, and individuals eligible for medicare cost-sharing.— 

Subparagraphs (A), (B), and (C) shall not apply to the determination of eligibility under the State plan or under a waiver for medical assistance for the following:
       (I) Individuals who are eligible for medical assistance under the State plan or under a waiver of the plan on a basis that does not require a determination of income by the State agency administering the State plan or waiver, including as a result of eligibility for, or receipt of, other Federal or State aid or assistance, individuals who are eligible on the basis of receiving (or being treated as if receiving) supplemental security income benefits under subchapter XVI, and individuals who are eligible as a result of being or being deemed to be a child in foster care under the responsibility of the State.
       (II) Individuals who have attained age 65.

CMS addresses issues for newly eligible Medicaid beneficiaries

If you have been following the Affordable Care Act, you know that Michigan is one of the states which elected to expand its Medicaid program, effective April 1, 2014. Previously, Medicaid coverage was available only to those who were poor enough to qualify and who met certain category requirements, the most prominent being pregnant women, children, the elderly and the disabled. A person between 18 and 55, not disabled, but just poor, did not qualify.

The ACA introduced a new concept of eligibility based on what it defines as the person's "Modified Annual Gross Income" or MAGI. If your household MAGI is under a specified level, essentially 138% of the current year's Federal Poverty Level, you can be eligible for Medicaid coverage. Importantly, the "MAGI individuals," as the Centers for Medicare and Medicaid Services (CMS) calls people newly eligible under these rules, are not subject to asset or resource limits. Formerly, a poor person who was in one of the permitted categories would be eligible only if he had less than $2,000 in countable assets. Under the MAGI criterion, a person can have thousands of dollars in the bank and still qualify for Medicaid as long as his MAGI is under the limit.

On February 21, 2014, Cindy Mann, Director of CMS, issued a letter to all of the state Medicaid agencies (PDF) addressing several questions that have arisen under this new program, as it concerns persons receiving Long-Term Supports and Services (LTSS) such as nursing home care. Few people will be eligible for LTSS under the MAGI criteria. The letter observes that "The vast majority of people in need of Medicaid-covered LTSS will qualify under eligibility categories related to age or disability." But for those who will become newly-eligible, some of the MAGI rules will be different from those that apply to persons eligible based on age and disability.

We can paraphrase the letter's conclusions as follows:

Estate recovery - States will not be able to assert claims for estate recovery for medical assistance paid to persons eligible only under MAGI, since they are regarded as exempt under the new law. States may continue to assert claims for estate recovery for those over the age of 55 for nursing home care, home-based community services, and some other benefits, as previously.

CMS has announced that it "intends" to eliminate or limit estate recovery for any benefits other than LTSS; just how it plans to put that intent into practice is not clear.

Asset transfers during a 5-year lookback period - will apply to MAGI individuals.

Annuities, promissory notes, life estate interests - will apply to MAGI individuals.

Special needs trusts - At least as they concern self-settled trusts, CMS considers that the current rules will apply to MAGI individuals. The letter is silent as to third party trusts.

Home equity limitations - As with other beneficiaries, MAGI individuals will only be able to exempt the first $543,000 to $810,000 of the value of the home. (Why CMS has arrived at this conclusion is unknown; it does not seem to be consistent with the "no asset test" stance of the new law.)

Post-eligibility income - CMS has determined that its regulations "as currently written" cannot be applied to MAGI individuals, but it is considering new regulations on this topic. It does believe that it has the authority to do so under the Medicaid statute.

For additional information:

• UC Berkeley's Labor Center's explanation of MAGI under the ACA (PDF)
• The eligibility levels publications at Medicaid.gov