Seed of Hegadorn Targets SBO Planning

By Doug Chalgian on October 21, 2023

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The Michigan Court of Appeals has issued a published decision in the matter of Hegadorn v DHHS (click on the name to read the case).  Yes, you’ve heard the name before.  This case is like a bad horror movie series – the sequels just keep coming.  Happy Halloween.

Ten Years

Mary Ann Hegadorn entered a nursing home and applied for Medicaid benefits nearly ten years ago (December 2013).  Her spouse, Ralph, had created a “solely for the benefit” trust.  Back then, SBO Trusts had been commonly and reliably used in Medicaid planning for more than 20 years to shelter assets in excess of the protected spouse amount. But, while Ms. Hegadorn’s application was being processed, the Department of Health and Human Services (“DHHS”) changed their interpretation of the law and decided that going forward, assets in SBO Trusts would be considered available resources. Accordingly, the Hegadorn application was denied and this litigation began.

In June 2017, the first Hegadorn decision was issued by the Michigan Court of Appeals.  That opinion held in favor of the DHHS, concluding that they correctly denied the Hegadorn application and beginning what might be called the first dark age for SBO Trusts in Medicaid planning.

The case was taken up by the Michigan Supreme Court.  And two years later, in May 2019, the MSC reversed the COA decision and found that assets in an SBO Trust were not available resources… but … their decision was not fully favorable to planners.  Rather than instructing DHHS to approve the Hegadorn application, they remanded the matter to the administrative process so that the administrative law judge (“ALJ”) could incorporate their holdings while exploring other possible theories that might have been missed in the first analysis.

As I posted at that time, the MSC decision was greeted with “cautious” optimism.   Click here to read that post. And yet, the decision was supportive enough to allow most planners to start using SBO Trusts again, bringing an end to the first dark age.   In these intervening four years, SBO Trusts have been commonly used and routinely approved.

Now This 

In those four years since the case was remanded, it has been proceeding through the administrative process and a subsequent Circuit Court appeal.  Essentially, the ALJ found new grounds to hold in favor of the DHHS denial, and the Circuit Court reversed.  Now the COA, in another published decision, has reversed the Circuit Court and remanded the matter to the ALJ with some disconcerting instructions and logic.

Importantly, the provision of SBO Trust that is the focus of this case is unusual.  The Hegadorns apparently provided that if the community spouse (SBO Settlor) dies before all the trust property was distributed (on an actuarially sound basis) the residue would be paid over to a testamentary trust – as opposed to simply distributed to the children or other beneficiaries.  It is this passing of the residue through yet another trust that provided grounds for the ALJ decision.  The COA says that in order for the ALJ to determine whether or not the assets of the SBO Trust are available, it must also review the testamentary trust expressed in the will of the community spouse, which receives any SBO Trust resources that may remain undistributed at the death of the community spouse.  The theory of the opinion is that the testamentary trust is really just a continuation of the SBO Trust and therefore is subject to the same analysis vis a vis whether there are “any circumstances” under which the trust resources would be available to the nursing home spouse.

Seems Like a Stretch

The COA expressly rejects the long-relied upon proposition that the Federal exception to Trusts established in a Will (aka “testamentary trusts”) applies in this situation.

Maybe they’re right.

But even if they are, one has to wonder:  How can the terms of a Will which remains subject to alternation during the life of the community spouse/testator, and which has no legal effect until admitted to probate, form the basis of a decision about availability?

These questions and others will have to be fleshed out.  One day into having read this 14-page decision, my head is still swimming with all the possible future twists and turns that this decision invites.

Practically Speaking

Most SBO Trusts should be unaffected by this case as it seems to be limited to facts that are unique to the SBO Trust that the Hegadorns used.

In terms of litigation, the case will either be decided through another round of administrative hearings and circuit court appeals, winding its way back up to the COA … or it could be taken up again by the MSC … or both.

In the meantime, planners should consider whether they need to make any changes to the way they draft their SBO Trusts in light of this decision.  For planners using a traditional – pay out at death – SBO Trust, there would be no obvious need.

 

 

 

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mm By: Doug Chalgian
Doug Chalgian

2 thoughts on “Seed of Hegadorn Targets SBO Planning

  1. My view is that this COA opinion only affects those SBO trusts in which a community spouse names a testamentary trust for the benefit of a nursing home spouse as the remainder beneficiary of her or his SBO trust. Based on the facts of this case I think MDHHS will have difficulty demonstrating that any circumstance existed under which the trustee of the SBO trust could make a payment directly to the nursing home spouse or for her benefit.

    That said, I agree that this opinion gives oxygen to MDHHS’s continuing efforts to find ways to undermine SBO trusts as an effective Medicaid planning technique.

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