Major Rule Change Affects Use of Sole-Benefit Trusts

Nation's Leading Medicaid Compliant Annuity Provider Offers Valuable Alternative to Practitioners

De Pere, Wisconsin – Krause Financial Services is offering its support to Michigan elder law attorneys in the wake of a rule change on sole-benefit (SBO) trusts issued by the state’s Department of Health and Human Services (DHHS).

The change, which will take effect March 1, 2021, may impose divestment penalties against a Medicaid applicant or their spouse for making transfers to a trust established for the benefit of the applicant’s spouse. Prior to the rule change, Michigan exempted these transactions. While elder law attorneys may fear losing SBO trusts as a planning tool, the Medicaid Compliant Annuity (MCA) is a viable and valuable alternative for couples looking to preserve their hard-earned assets. Unlike other states, the Michigan DHHS provides the community spouse an opportunity to purchase an MCA without naming the state Medicaid agency as a beneficiary. While the state does have to be named as a beneficiary if the MCA is purchased by an institutionalized person, thorough planning with an elder law attorney can help ensure financial stability and successful asset preservation for couples.

“By having a community spouse purchases a Medicaid Compliant Annuity, attorneys can convert a couple’s excess assets into an income stream with no cash value, without the fear of reclaim from the state Medicaid agency in the event of an early death,” said Attorney Dale Krause, CEO of Krause Financial Services an emeritus member of the State Bar of Michigan. “It’s truly a win-win situation for attorneys and their clients.”

The rule change comes in the wake of the Hegadorn v. DHS case. In Hegadorn, the Michigan Supreme Court held that the Michigan DHHS incorrectly applied a transfer penalty to an SBO trust for the community spouse given the rules provided by the state’s Medicaid manual, the Bridges Eligibility Manual (BEM). In response, DHHS took a hardline approach by proposing a change that would clearly identify these SBO trusts as an improper transfer of assets.

The MCA differs significantly from SBO trusts. An MCA irrevocably converts an asset into an income stream, with payment depending on the annuitant’s life expectancy and the specific structure suggested by the elder law attorney involved. Subject to the federal and state Medicaid requirements, the purchase of an MCA will not count as a divestment resulting in a period of ineligibility and, depending on the strategy utilized, can result in prompt Medicaid eligibility with proper planning.

While many elder law and estate planning attorneys like to use trusts as the trustee will be given latitude to invest the trust property for a return, MCAs are a beneficial tool in that they are contractual in nature and are paid out by an insurance company. Krause, the leading provider of MCAs, works directly with insurance companies to bring the best products and support to attorneys so they can focus on their primary goal – protecting clients.

“Medicaid Compliant Annuities accelerate your client’s eligibility for much-needed care, while preventing their spouse from being forced into poverty. From both a practical standpoint and a public policy perspective, it’s the right choice for your elder law practice,” said Dale Krause.