Leave denied in drawn-out dispute over Medicaid benefits

The Michigan Supreme Court has denied leave to appeal in a protracted dispute over Medicaid benefits.

The Michigan Court of Appeals held in a 2023 published decision that an administrative law judge and a trial court erred by not reviewing the terms of a second trust document when determining whether an individual was entitled to Medicaid benefits.

In Hegadorn v. Livingston County Dept. of Health and Human Services , Judge Noah P. Hood said the circuit court correctly concluded that the administrative law judge, or ALJ, erred when deciding that the estate’s entitlement to benefits under the first trust known as the Hegadorn SBO Trust constituted a situation where the individual might benefit from it, but further proceedings are needed.

But the lower court “nonetheless erred when it concluded that the Hegadorn SBO Trust funding the Supplemental Care Trust did not constitute a circumstance under which a payment was made for the benefit of Mary Ann Hegadorn,” Hood explained. “To make this determination the reviewing tribunal would need to review the terms of the Supplemental Care Trust, which is not part of this record.”

Two trusts, multiple court decisions

Mary Ann Hegadorn, an “institutionalized spouse” under the Medicaid program, began receiving long-term care at a nursing home in Howell in December 2013.

To meet the asset threshold for Medicaid long-term care benefits, Ralph Hegadorn, a “community spouse,” established and funded the Hegadorn SBO Trust. Ralph was the trust beneficiary; neither he nor Mary Ann were trustee or successor trustee.

The trust directed the trustee to distribute the trust resources at a rate calculated to use up all of the resources during Ralph’s expected lifetime with a suggested distribution schedule that was based on the Livingston County Department of Health and Human Services’, or MDHHS, policies.

In addition, the Hegadorn SBO Trust listed another trust as a possible residual beneficiary. In the event Mary Ann survived Ralph, the trustee was directed to distribute the remaining trust property into a new trust, the Supplemental Care Trust.

Mary Ann applied for Medicaid benefits in April 2014. MDHHS denied her application, determining that the assets in the Hegadorn SBO Trust were countable assets and exceeded the applicable financial eligibility limit.

Mary Ann appealed. An ALJ upheld the decision, but the Livingston County Circuit Court reversed.

On the matter’s first visit to the Court of Appeals in 2017 which was consolidated with two other cases the court sided with MDHHS.

In 2019, the Michigan Supreme Court reversed, finding that both the ALJ and the Court of Appeals misread the operative statute.

On remand, the ALJ again affirmed the denial of Mary Ann’s Medicaid application; the circuit court again reversed the ALJ and ordered MDHHS to approve the application for benefits.

The circuit court denied MDHHS’s motion for reconsideration. The case returned to the Court of Appeals for a second time.

Remand for third review

The Michigan Supreme Court held that the principal of an irrevocable trust formed solely for the benefit of a community spouse like the Hegadorn SBO Trust “is not per se a ‘resource available’ to an institutionalized spouse under 42 U.S.C. 1396r-5(c)(2) for the purpose of determining an institutionalized spouse’s eligibility for Medicaid benefits.”

To reach this conclusion, the Supreme Court summarized two computations required under the statutory provision: the total joint resources during the first continuous period of institutionalization and the resources available to the institutionalized spouse on the date of the application for Medicaid benefits.

“In other words, the trust principal counts if (1) the institutionalized spouse’s assets form the principal, (2) the institutionalized spouse (or their spouse or an entity listed in 42 U.S.C. 1396p(d)(2)(A)(i) through (iv)) created the trust through means other than a will, and (3) there are any circumstances under which payment from the trust could be made for the benefit of the institutionalized spouse,” Hood summarized. “To make this determination, the Court explained, the agency, ALJ, or court, must examine the language of the trust documents.”

The Supreme Court remanded because it found that the third prong described as the “any-circumstances rule” relied on a misreading of the federal statutes.

On remand, however, neither the ALJ nor the circuit court included the Supplemental Care Trust in its analysis.

“Despite this case’s extensive history, our review of the record indicates that a document critical to the ALJ’s analysis is not part of the record,” Hood wrote. “[T]he Hegadorn SBO Trust contains a contingency if Mr. Hegadorn predeceased Mrs. Hegadorn. The trust assets, through the function of Mr. Hegadorn’s will, would fund the Supplemental Care Trust. Although this instrument is referenced throughout the record, the document itself and its terms are not part of the record.”

The ALJ made two errors. First, the ALJ treated the Hegadorns as alter egos to reach the conclusion that a payment from the Hegadorn SBO Trust to Ralph was essentially for Mary Ann’s benefit.

“This reflected a failure to appreciate that spouses retain avenues for obtaining and maintaining separate property, and that the law related to Medicaid eligibility, and estate planning, might and does reflect that,” Hood said. “Our Supreme Court explicitly rejected this analysis.”

The ALJ therefore erred in concluding that a payment from the Hegadorn SBO Trust to Ralph was effectively for Mary Ann’s benefit.

Second, the ALJ treated as dispositive the fact that the Hegadorn SBO Trust was not in effect until after the initial assessment, which ended the analysis.

“Instead, the ALJ should have addressed the separate calculation regarding resources available as of the day the institutionalized spouse applied for Medicaid benefits,” Hood noted.

As for the circuit court, it correctly decided that the ALJ erred in applying the law from the Supreme Court’s decision, but made the wrong call when it concluded that the Supplemental Care Trust couldn’t satisfy the “any circumstances” test because it was created by a will.

“Application of the any-circumstances rule requires a court or administrator to ‘consider not only obvious circumstances, but also those that are hypothetical or even unlikely,’” Hood wrote. “The fact that the Hegadorn SBO Trust assets might one day fund the Supplemental Care Trust, which is for Mary Hegadorn’s benefit, very well may satisfy the any-circumstances test depending on the terms of the Supplemental Care Trust.”

The circuit court avoided addressing this issue by relying on the fact that the Supplemental Care Trust was created by a will, which it said was excluded from the any-circumstances test a misreading of the statute, Hood said.

“The question is not whether there was any circumstance under which the Supplemental Care Trust would make payment for [Mary Ann’s] benefit,” he explained. “Rather, the question is whether the Supplemental Care Trust, through its creation, funding, and terms, amounted to a circumstance under which the Hegadorn SBO Trust is making a payment for her benefit.”

And this error revealed the broader problem the terms of the Supplemental Care Trust are unknown, Hood said.

“We now remand to the ALJ a third time, with an even more limited mandate: to review the terms of the Supplemental Care Trust, determine whether under its terms its assets would have been countable in determining Mary Ann Hegadorn’s Medicaid eligibility, and to apply the any-circumstances test and calculations described in [the Supreme Court’s decision],” Hood concluded.

Judges Michael J. Kelly and Thomas C. Cameron joined Hood’s decision.

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