Irrevocable Trust Worksheet

WHAT IS A REVOCABLE TRUST? (MCL 700.7103(h))

700.7103 Definitions.

As used in this article:

(h) "Revocable", as applied to a trust, means revocable by the settlor without the consent of the trustee or a person holding an adverse interest. A trust's characterization as revocable is not affected by the settlor's lack of capacity to exercise the power of revocation, regardless of whether an agent of the settlor under a durable power of attorney, a conservator of the settlor, or a plenary guardian of the settlor is serving.

WHAT IS AN IRREVOCABLE TRUST? (MCL 700.7602(1))

700.7602 Revocation or amendment of revocable trust.

(1) Unless the terms of a trust expressly provide that the trust is irrevocable, the settlor may revoke or amend the trust.

EPIC Reporter’s Comment

Section 7602 closely follows UTC §602. There was no comparable provision in EPIC before the enactment of this section.

Subsection (1) changes Michigan law. However, because settlors routinely and most commonly establish trusts as will substitutes, the drafters of the MTC changed the default rule so that trusts are presumed to be revocable, just as wills are. Therefore, after April 1, 2010, a trust will be irrevocable only if the trust instrument states that it is irrevocable.

HOW CAN AN IRREVOCABLE TRUST BE TERMINATED OR MODIFIED? (MCL 700.7411)

700.7411 Modification or termination of noncharitable trust; consent; "settlor's representative" defined.

(1)  A noncharitable irrevocable trust may be modified or terminated in any of the following ways:

(a) By the court on the consent of the trustee and the qualified trust beneficiaries, if the court concludes that the modification or termination of the trust is consistent with the material purposes of the trust or that continuance of the trust is not necessary to achieve any material purpose of the trust.

(b) On the consent of the qualified trust beneficiaries and a person or committee that is given the power under the terms of the trust to grant, veto, or withhold approval of termination or modification of the trust.

(c) By a trustee or other person or committee that is given a power by the terms of the trust to direct the termination or modification of the trust.

(2)  Subsection (1) only applies to trusts created after April 1, 2010...

(3)  Notice of any proceeding to terminate or modify a trust must be given to...

(4)  On termination of a trust under subsection (1), the trustee shall distribute the trust property as agreed by the qualified trust beneficiaries.

(5)  If the trustee fails or refuses to consent, or fewer than all of the qualified trust beneficiaries consent, to a proposed modification or termination of the trust under subsection (1), the modification or termination may be approved by the court if the court is satisfied that both of the following apply:

(a) If the trustee and all of the qualified trust beneficiaries had consented, the trust could have been modified or terminated under this section.

(b) The interests of a qualified trust beneficiary who does not consent will be adequately protected.

EPIC Reporter’s Comment

Paragraphs 7411(1)(b) and (c) do not include the requirement found in §7411(1)(a) that termination or modification be consistent with the material purposes of the trust or that continuance of the trust not be necessary to achieve any material purposes of the trust.

Subsection (4) provides for distribution of property on termination under §7411(1) as the qualified trust beneficiaries agree. This may be varied by the settlor in the terms of the trust. If neither the trust provides for distribution nor the qualified trust beneficiaries can agree, the determination would be made by the court.

NOTE:  A trust may allow payment of the trust assets to the qualified trust beneficiaries before the trust actually terminates. If so, subject to any other restrictions, a trust may be effectively terminated by paying the entire principle to the qualified trust beneficiaries.  

HOW ARE CREDITOR'S CLAIMS AGAINST THE SETTLOR PAID FROM AN IRREVOCABLE TRUST? (MCL 700.7506)

700.7103 Definitions

(i) "Settlor" means a person, including a testator or a trustee, who creates a trust. If more than 1 person creates a trust, each person is a settlor of the portion of the trust property attributable to that person's contribution. The lapse, release, or waiver of a power of appointment does not cause the holder of a power of appointment to be treated as a settlor of the trust.

700.7506 Creditor's claim against settlor; "settlor" explained.

(1) Whether or not the terms of a trust contain a spendthrift provision, the following rules apply:

(a) During the lifetime of the settlor, the property of a revocable trust is subject to claims of the settlor's creditors.

(b) After the death of a settlor, and subject to the settlor's right to direct the source from which liabilities will be paid, the property of a trust that at the settlor's death was revocable by the settlor, either alone or in conjunction with another person, is subject to expenses, claims, and allowances as provided in section 7605.

(c) With respect to an irrevocable trust, a creditor or assignee of the settlor may reach no more than the lesser of the following:

(i) The claim of the creditor or assignee.

(ii) The maximum amount that can be distributed to or for the settlor's benefit exclusive of sums to pay the settlor's taxes during the settlor's lifetime.

(2) If a trust has more than 1 settlor, the amount a creditor or assignee of a particular settlor may reach under subsection (1)(c) must not exceed the settlor's interest in the portion of the trust attributable to that settlor's contribution.

(3) A trust beneficiary is not considered a settlor merely because of a lapse, waiver, or release of a power of withdrawal over the trust property.

(4) An individual who creates a trust is not considered a settlor with regard to the individual's retained beneficial interest in the trust that follows the termination of the individual's spouse's prior beneficial interest in the trust if all of the following apply:

(a) During the lifetime of the individual's spouse, the only distributees or permissible distributees of the trust income or principal are either of the following:

(i) The individual's spouse.

(ii) The individual's spouse and either of the following:

(A) The individual's issue.

(B) The issue of the individual's spouse.

(b) The individual retains a beneficial interest in the trust income, trust principal, or both, which beneficial interest follows the termination of the individual's spouse's prior beneficial interest in the trust.

(5) An individual is not considered a settlor of a trust for the benefit of the individual:

(a) If the settlor is the individual's spouse, regardless of whether or when the individual was the settlor of a trust for the benefit of that spouse.

(b) To the extent that the property of trust was subject to a general power of appointment in another individual.

HOW ARE CREDITOR'S CLAIMS AGAINST A BENEFICIARY PAID FROM AN IRREVOCABLE TRUST? (EPIC 7502-7505)

Common-Law General Rule

The common-law rule is that creditors of beneficiaries of trusts may reach assets of a trust in satisfaction of amounts owed to the creditor by the beneficiary.

Exceptions to General Rule

There are three statutory exceptions to the common law rule:  Spendthrift Trust; Support Trust; and Discretionary Trust. 

I. Spendthrift Trust

Definition (EPIC 7103)

“Spendthrift provision” means a term of a trust that restrains either the voluntary or involuntary transfer of a trust beneficiary’s interest.

Effect of Spendthrift Trust (EPIC 7502)

(1) A spendthrift provision is valid and enforceable.

(2) A term of a trust providing that the interest of a trust beneficiary is held subject to a “spendthrift trust,” or words of similar import, restrains both voluntary and involuntary transfer of the trust beneficiary’s interest.

(3) Except as provided in sections 7504, 7506, and 7507, the trust beneficiary’s interest in a trust may not be transferred in violation of a valid spendthrift provision and trust property is not subject to enforcement of a judgment until distributed directly to the trust beneficiary.

II. Support Trust

Support Trust Definition (EPIC 7103)

“Support provision” means a provision in a trust that provides the trustee shall distribute income or principal or both for the health, education, support, or maintenance of a trust beneficiary, or language of similar import. A provision in a trust that provides a trustee has discretion whether to distribute income or principal or both for these purposes or to select from among a class of beneficiaries to receive distributions under the trust provision is not a support provision, but rather is a discretionary trust provision.

Effect of Support Trust (EPIC 7503)

(1) The interest of a trust beneficiary that is subject to a support provision may not be transferred and the trust property is not subject to the enforcement of a judgment until income or principal, or both, is distributed directly to the trust beneficiary. After a distribution to a trust beneficiary whose interest is subject to a support provision, the income and principal distributed are subject to the enforcement of a judgment only to the extent that the income or principal, or both, is not necessary for the health, education, support, or maintenance of the trust beneficiary.

(2) The use or enjoyment of trust property by a trust beneficiary whose interest is subject to a support provision may not be transferred and is not subject to the enforcement of a judgment against the trust beneficiary.

III. Discretionary Trust

Discretionary Trust Definition (EPIC 7103)

“Discretionary trust provision” means a provision in a trust, regardless of whether the terms of the trust provide a standard for the exercise of the trustee’s discretion and regardless of whether the trust contains a spendthrift provision, that provides that the trustee has discretion, or words of similar import, to determine 1 or more of the following:

(i) Whether to distribute to or for the benefit of an individual or a class of beneficiaries the income or principal or both of the trust.

(ii) The amount, if any, of the income or principal or both of the trust to distribute to or for the benefit of an individual or a class of beneficiaries.

(iii) Who, if any, among a class of beneficiaries will receive income or principal or both of the trust.

(iv) Whether the distribution of trust property is from income or principal or both of the trust.

(v) When to pay income or principal, except that a power to determine when to distribute income or principal within or with respect to a calendar or taxable year of the trust is not a discretionary trust provision if the distribution must be made.

Effect of Discretionary Trust (EPIC 7505)

The transferee or creditor of the beneficiary of a discretionary trust provision does not have a right to any amount of trust income or principal that may be distributed only in the exercise of the trustee's discretion, and trust property is not subject to the enforcement of a judgment until income or principal, or both, is distributed directly to the trust beneficiary.

IV.  Exceptions (to the Exceptions)

Sec. 7504.  Spendthift Provision or Support Provision.

(1) The interest of a trust beneficiary that is subject to a spendthrift provision, a support provision, or both may be reached in satisfaction of an enforceable claim against the trust beneficiary by any of the following:

(a) A trust beneficiary’s child or former spouse who has a judgment or court order against the trust beneficiary for support or maintenance.

(b) A judgment creditor who has provided services that enhance, preserve, or protect a trust beneficiary’s interest in the trust.

(c) This state or the United States.

(2) The court shall order the trustee to satisfy all or part of a judgment described in subsection (1) only out of all or part of distributions of income or principal as they become due.

(3) Notwithstanding that the terms of the trust include a spendthrift provision, this section does not apply to the interest of a trust beneficiary that is subject to a discretionary trust provision.

(4) As used in this section, “child” includes any person for whom an order or judgment for child support has been entered in this or another state.

Sec. 7507.  Overdue or Mandatory Distribution. 

(1) Whether or not a trust contains a spendthrift provision, a creditor or assignee of a trust beneficiary may reach a mandatory distribution of income or principal, including a distribution upon termination of the trust, if the trustee has not made the distribution to the trust beneficiary within a reasonable time after the designated distribution date.

(2) As used in this section, “mandatory distribution” means a distribution of income or principal that the trustee is required to make to a trust beneficiary under the terms of the trust, including a distribution upon termination of the trust. Mandatory distribution does not include a distribution subject to the exercise of the trustee’s discretion even if either of the following applies:

(a) The direction is expressed in the form of a standard of distribution.

(b) The terms of the trust authorizing a distribution use language of discretion and language of direction.

WHO IS A "RELATED OR SUBORDINATE PARTY" WITH RESPECT TO A GRANTOR TRUST? (IRC 672)

Definition (IRC 672)

(a)  Adverse party.  For purposes of this subpart, the term “adverse party” means any person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust. A person having a general power of appointment over the trust property shall be deemed to have a beneficial interest in the trust.

(b)  Nonadverse party.  For purposes of this subpart, the term “nonadverse party” means any person who is not an adverse party.

(c)  Related or subordinate party. For purposes of this subpart, the term “related or subordinate party” means any nonadverse party who is—

(1)  the grantor’s spouse if living with the grantor;

(2)  any one of the following: The grantor’s father, mother, issue, brother or sister; an employee of the grantor; a corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are significant from the viewpoint of voting control; a subordinate employee of a corporation in which the grantor is an executive.

For purposes of subsection (f) and sections 674 and 675, a related or subordinate party shall be presumed to be subservient to the grantor in respect of the exercise or nonexercise of the powers conferred on him unless such party is shown not to be subservient by a preponderance of the evidence.

(d)  Rule where power is subject to condition precedent.  A person shall be considered to have a power described in this subpart even though the exercise of the power is subject to a precedent giving of notice or takes effect only on the expiration of a certain period after the exercise of the power.

(e)  Grantor treated as holding any power or interest of grantor’s spouse.  

(1)  In general

For purposes of this subpart, a grantor shall be treated as holding any power or interest held by—

(A) any individual who was the spouse of the grantor at the time of the creation of such power or interest, or

(B) any individual who became the spouse of the grantor after the creation of such power or interest, but only with respect to periods after such individual became the spouse of the grantor.

(2)  Marital status

For purposes of paragraph (1)(A), an individual legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as married.

Application of IRC 672

 STEP 1: Does the party have "substantial interest" in the trust?

If No, the party is NON-ADVERSE. Go to Step 3. 

If Yes, go to Step 2.  

STEP 2:  Will the party's interest be "adversely affected" by exercise or non-exercise of a power which the party possesses over the trust?

If No, the party is NON-ADVERSE. Go to Step 3. 

If Yes, the party is ADVERSE. The party is not "related or subordinate" to the settlor. 

STEP 3:  Are the party and the grantor (settlor) related in any of the following ways? -- 

1. the grantor’s spouse if living with the grantor;
2. father;
3. mother;
4. issue;
5. brother or sister;
6. employee of the grantor;
7. corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are significant from the viewpoint of voting control; or
8. subordinate employee of a corporation in which the grantor is an executive.

If No, the party is NOT related or subordinate to the grantor. 

If Yes, the party is related or subordinate to the grantor. 

WHAT IS A "GRANTOR TRUST"? (IRC 671-679)

"Grantor trust" is a term used in the Internal Revenue Code to describe any trust over which the grantor or other owner retains the power to control or direct the trust's income or assets. If a grantor retains certain powers over or benefits in a trust, the income of the trust will be taxed to the grantor, rather than to the trust. (Examples, the power to decide who receives income, the power to vote or to direct the vote of the stock held by the trust or to control the investment of the trust funds, the power to revoke the trust, etc.) All "revocable trusts" are by definition grantor trusts. An "irrevocable trust" can be treated as a grantor trust if any of the grantor trust definitions contained in Internal Code 671, 673, 674, 675, 676, or 677 are met. If a trust is a grantor trust, then the grantor is treated as the owner of the assets, the trust is disregarded as a separate tax entity, and all income is taxed to the grantor.

IRC Section 671: Items of Income Attributable to the Grantor:   Where the grantor or another person is treated as the owner of any portion of a trust, those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust shall be included in computing the taxable income and credits of the grantor or the other person. 

IRC Section 672: Definitions (see previous section). 

IRC Section 673: Reversionary Interests: The grantor is treated as the owner if they have a reversionary interest in the trust (meaning the trust property may return to them or their estate) that exceeds 5% of the value of that portion of the trust, as of its inception.

IRC Section 674: Power to Control Beneficial Enjoyment: The grantor (or a nonadverse party) has the power to determine who receives the income or principal from the trust. There are many exceptions to this rule for certain powers that are generally considered acceptable or limited (e.g., power to allocate income among charitable beneficiaries, power to distribute corpus to beneficiaries within a defined standard).

IRC Section 675: Administrative Powers: The grantor (or a nonadverse party) retains certain administrative powers that allow them to benefit from the trust or control its administration in a non-fiduciary capacity, including -- 

• The power to borrow trust funds without adequate interest or security.
• The power to control trust investments in a non-fiduciary capacity.
• The power to reacquire trust property by substituting other property of equivalent value (often called a "swap power" or "power of substitution").

IRC Section 676: Power to Revoke: The grantor (or a nonadverse party) has the power to revoke the trust and take back the trust assets. This is the most common reason a trust is a grantor trust. All revocable living trusts are, by definition, grantor trusts under this section.

IRC Section 677: Income for the Benefit of the Grantor:  The grantor is treated as the owner of a trust (regardless of any powers retained under IRC 674) when trust income --

• is distributed to the grantor or the grantor's spouse without approval of an adverse party; or,
• may be distributed to the grantor or the grantor's spouse in the discretion of the grantor or a non-adverse party; or,  
• may be held for future distribution to the grantor or the grantor's spouse; or,
• may be applied to premiums on policies of life insurance on the life of the grantor or grantor's spouse.

IRC Section 678: Person Other Than Grantor Treated as Substantial Owner: This section deals with situations where someone other than the grantor is treated as the owner of the trust (e.g., a beneficiary with a power to withdraw trust assets).

IRC Section 679: Foreign Trusts Having U.S. Beneficiaries: Special rules apply to foreign trusts with U.S. beneficiaries, often causing them to be treated as grantor trusts for U.S. tax purposes.

DO I NEED AN EIN FOR AN IRREVOCABLE GRANTOR TRUST?

EIN Optional

An EIN is optional for an irrevocable trust when it elects to use IRS Optional Method 1. (26 CFR 1.671-4).

See also Instructions for Form SS-4 at page 5:  "Don't file this form for certain grantor-type trusts. The trustee of a grantor-type trust doesn't need an EIN for the trust if the trustee furnishes the name and TIN of the grantor/owner and the address of the trust to all payers. However, grantor trusts that don't file using Optional Method 1 must have an EIN." 

EIN Required

An Employer Identification Number (EIN) for an irrevocable grantor trust is required when:

• When a revocable trust transitions to an irrevocable trust upon the death of the grantor.
• When the irrevocable trust is established as a non-grantor trust (it is treated as a separate taxable entity).
• When the trust has a beneficiary who is a nonresident alien.

Practical Application

As a practical matter, it is advisable to obtain an EIN for an irrevocable trust as soon as it is established, even if not strictly mandated by IRS. This approach offers significant advantages:

• Streamlined Administration:  May simplify asset management and transactions. 
• Avoiding Future Complications: The trust may need an EIN in the future if new accounts are opened or financial institutations are changed. 
• Enhanced Identity Protection:  An EIN reduces exposure of a personal SSN in financial dealings. 
• Meeting Industry Standards:  Many financial institutions have internal policies that mandate an EIN for irrevocable trust accounts, regardless of specific IRS rules. 
• Mitigating Trustee Personal Liability:  Failure to obtain an EIN may lead to an inability to manage assets or file taxes,  thus exposing the trustee to personal liability. 

The ease and speed of obtaining an EIN online (typically within minutes) far outweigh the potential complexities, delays, and penalties associated with not having one when needed.

HOW ARE INCOME TAXES PAID ON AN IRREVOCABLE GRANTOR TRUST?

For federal income tax purposes, a grantor trust is generally "disregarded" during the grantor's lifetime. This means the trust's income, deductions, and credits are typically treated as belonging to the grantor and are reported on the grantor's personal Form 1040.  However, the specific reporting method chosen by the trustee dictates whether the trust itself needs to file a separate Form 1041.

HOW ARE TAX RETURNS FILED FOR AN IRREVOCABLE GRANTOR TRUST?

During the grantor's lifetime, the trustee of an irrevocable grantor trust has several optional methods for reporting income:  

Optional Method 1 (No Form 1041 or EIN Generally Required)

• May be used by a grantor trust treated as wholly owned by one grantor (or a married couple filing jointly).
• Trustee must provides the grantor's name and SSN and the trust's address to all payers of income during the tax year.
• Grantor is responsible for reporting all income, deductions, and credits of the trust directly on their personal Form 1040.   
• The trust generally does not need its own Employer Identification Number (EIN) or file a separate Form 1041.
• If the grantor is not the trustee or a co-trustee, the trustee must provide the grantor with a statement showing all trust income, deductions, and credits, identifying the payer of each income item, and explaining how the grantor should account for these items on their tax return. The grantor must also provide the trustee with a signed Form W-9.

Optional Method 2 (EIN Required, Form 1041 May Be Filed for Information)

• Trustee obtains an EIN for the trust and provides the trust's name, address, and EIN to all income payers.
• The trustee issues Form 1099s (and files then with the IRS) for income classes and provides the grantor with a detailed statement of the trust's income, deductions, and credits.
• The grantor reports all income, deductions and credits on their personal Form 1040.    
• The trust files a Form 1041 as an information return, including only the entity information and attaching a statement with the dollar amounts attributable to the grantor.

Optional Method 3 (EIN Required, Form 1041 Filed for Information)

• This method is used for trusts with multiple grantors.
• The trustee must obtain an EIN for the trust and provide the trust's name, address, and EIN to all income payers.
  The trustee issues detailed Form 1099s and statements to each grantor, who then report their respective shares of income, deductions, and credits on their individual Form 1040s.
• The trust will file a Form 1041 as an information return.    

"Traditional Method" (EIN Required, Form 1041 Filed for Information)

If a wholly owned grantor trust chooses to file a Form 1041, it uses this method and an EIN is required. Only the entity information on Form 1041 is completed, and dollar amounts are shown on an attachment which indicates that the income is taxable to the grantor. 

In summary, an irrevocable grantor trust can avoid filing a separate Form 1041 during the grantor's lifetime by using Optional Method 1.

WHAT IS AN "ATTACHMENT" TO FORM 1041?

If the entire trust is a grantor trust, fill in only the entity information of Form 1041. Don't show any dollar amounts on the form itself; show dollar amounts only on an attachment to the form. Don't use Schedule K-1 as the attachment. 

Attachment to Form 1041

On the attachment, show: 

• The name, identifying number, and address of the person(s) to whom the income is taxable; 
• The income of the trust that is taxable to the grantor or another person under IRC sections 671 through 678; and 
• Any deductions, credits, or elections that apply to this income.

Report the income, deductions and credits in the same detail as it would be reported on the grantor's return had it been received directly by the grantor. The income, deductions, and credits must be reported by that person on their own income tax return.

Instructions for Form 1041

WHAT IRREVOCABLE TRUST ASSETS ARE INCLUDED IN THE GROSS ESTATE AT DEATH? (IRC 2031 TO 2042)

IRC Section 2031: Definition of Gross Estate.  The value of the gross estate of the decedent shall be determined by including, to the extent provided in this part, the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated. This broad language is then elaborated upon by subsequent sections.

IRC Section 2033: Property in Which the Decedent Had an Interest. This section generally includes the value of all property to the extent of the interest therein of the decedent at the time of his death. This covers anything the decedent owned outright, such as:

• Real estate (homes, land) 
• Bank accounts (checking, savings)
• Stocks and bonds 
• Personal property (furniture, jewelry, art, vehicles) 
• Business interests (partnership, corporation, LLC) 

IRC Section 2035: Adjustments for Gifts Made Within 3 Years of Death.  While many gifts made more than three years before death are not included, this section can pull back certain transferred property into the gross estate if the decedent transferred it within three years of death, especially if the transfer was related to other "string provisions" (like those mentioned below) where the decedent retained some control or benefit.

IRC Section 2036: Transfers with Retained Life Estate.  This is a crucial "string provision." It includes the value of property transferred during life if the decedent retained the right to the income from, or the enjoyment of, the transferred property, or the right to designate who would possess or enjoy the property or its income. For example, if someone gifts their house but continues to live in it rent-free until their death, the house's value might be included in their gross estate.

IRC Section 2037: Transfers Taking Effect at Death. This section includes property transferred by the decedent where the possession or enjoyment of the property could only be obtained by surviving the decedent, and the decedent retained a "reversionary interest" (a possibility of the property returning to them or their estate) that exceeded 5% of the property's value immediately before death.

IRC Section 2038: Revocable Transfers.  This section includes the value of property transferred by the decedent where they retained the power to alter, amend, revoke, or terminate the transfer. A common example is property held in a revocable living trust; since the grantor retains the right to revoke the trust and take back the assets, the trust assets are included in their gross estate.

IRC Section 2039: Annuities. The value of certain annuities or other payments receivable by a beneficiary by reason of surviving the decedent are included in the gross estate, to the extent the decedent contributed to the purchase price of the annuity.

IRC Section 2040: Joint Interests. This section deals with jointly owned property.

• For property held as joint tenants with right of survivorship by spouses, generally 50% of the value is included in the gross estate of the first spouse to die, regardless of who provided the funds. 
• For joint interests with non-spouses, the entire value is included in the deceased joint owner's estate, unless the surviving owner can prove their contribution to the acquisition of the property.

IRC Section 2041: Powers of Appointment.  This section includes the value of property over which the decedent possessed a general power of appointment at the time of death, or which the decedent released during their lifetime under certain circumstances. A general power of appointment gives the holder the ability to appoint the property to themselves, their estate, their creditors, or the creditors of their estate.

IRC Section 2042: Proceeds of Life Insurance. The proceeds of life insurance policies on the decedent's life are included in the gross estate if:

• The proceeds are payable directly or indirectly to the decedent's estate, or
• The decedent possessed any "incidents of ownership" in the policy at the time of death (e.g., the right to change the beneficiary, surrender or cancel the policy, assign the policy, or borrow against its cash value).

GLOSSARY OF MEDICAID TERMS (BPG)

Adjoining Property:  Land and buildings located on the land, which touches the land the homestead is on if not separated from the homestead by other persons' property. It includes land separated only by roads, public rights-of-way, streams, etc. 

Asset Limit:  The maximum amount of countable assets the asset group is allowed. 

Assets:  Cash, any other personal property and real property. 

Available Income:  Income that is actually received or that can be reasonably anticipated. Reasonably anticipated means that the amount can be estimated and the date of receipt is known. It includes amounts deducted for such things as taxes and garnishments. 

Baseline Date:  

BEM:  Bridges Eligibility Manual. 

Beneficiaries of a Trust:  Any person(s) designated in a trust instrument as benefiting in some way from the trust, excluding the trustee or any other person whose benefit consists only of reasonable fees or payments for managing or administering the trust. The beneficiary can be the grantor himself, another person(s), or a combination of any of these persons. 

Client:  A person(s) applying for, currently receiving program benefits, inquiring about benefits or is part of a base group. 

Community Spouse:  L/H or waiver patient's spouse when the spouse: 1) Has not been, and is not expected to be, in a hospital and/or Long-Term Care (LTC) facility for 30 or more consecutive days, and 2) For waiver patients only, the spouse is not also approved for the waiver. 

Countable Income:  Available income remaining after applying the policies in the BEM 500 series. 

Future Month:  Any calendar month for which MA eligibility is being determined that is after the processing month.

Grantor:  Any person who creates a trust. It includes anyone who furnishes real or personal property for the creation of the trust.

Homestead:  The shelter that a person owns (or is buying) where they usually live and which is their principal place of residence. The homestead includes the shelter, the land on which the shelter is located, and related building on such land, but does not include other shelters on the property. 

Income:  Benefits or payments measured in money. 

Income Month:  The calendar month determined by policy, from which income information is used in determining eligibility for or level of program benefits. 

Initial Application:  The most recent application used to establish eligibility at the time any currently active assistance program was opened. 

Initial Asset Assessment:  A determination of the total amount of countable assets owned by a client and/or his spouse as of the day of the first continuous period of care that began on or after 9-30-89. 

Irrevocable Trust:  A trust that cannot, in any way, be revoked by the grantor, court, trustee, or any other person or entity.

Lady Bird Deed:  Also called an Enhanced Life Estate Deed or a Transfer on Death Deed. Allows a property to transfer on death without probate. The owner/grantor still owns the property and can sell, rent or make other changes to the property without restriction until their death. Because they still have unrestricted interest in the property a Lady Bird deed is not considered a divestment when an applicant is in a divestment penalty situation.

L/H Patient:  The Medicaid client who was in the hospital and/or long-term care facility (LTC) in a hospital and/or long-term care facility (L/H) month. 

L/H Month:  A calendar month containing: 1) At least one day that is part of a period in which a person was (or is expected to be) in an LTC facility and/or hospital for at least 30 consecutive days, and 2) No day that the person was a waiver patient.

Limited Liability Company:  A limited liability company is an entity formed under state law by filing articles of organization. Generally, for income tax purposes, a single-member LLC is regarded as an entity separate from its owner and reports its income and deductions on its owner's federal income tax return.

Long Term Care (LTC):  LTC means being in any of the following: • A nursing home that provides nursing care. • A county medical care facility that provides nursing care. • A hospital long-term care unit. • A MDHHS facility that provides active psychiatric treatment. • A special MR nursing home. • A MDHHS facility for individuals with intellectual disability that provides ICF/ID nursing care. A person may receive hospice care in one of these facilities. He is still considered in LTC.

Look-Back Period:  The look back period is 60 months prior to the baseline date. Transfers that occur on or after a client’s baseline date must be considered for divestment. In addition, transfers that occurred within the 60-month look-back period must be considered for divestment. 

MAGI:  Modified Adjusted Gross Income. A methodology used to determine financial eligibility for Medicaid. It is based on Internal Revenue Service rules and relies on federal tax information. 

Patient Pay Amount (PPA):  The monthly amount of a person's income which Medicaid considers available for meeting the cost of hospital or LTC services. Medicaid reduces its payment to the hospital/LTC facility by the patient-pay amount. There are different types of PPAs: hospital, and post-eligibility. Hospital PPAs are used to establish income eligibility; see BEM 545. A post-eligibility PPA is determined only after MA eligibility is established; see BEM 546. A person can have only one type of PPA for any given calendar month. 

Personal Care Services:  Assistance that is provided to a person who needs help in performing his own personal daily activities (for example, eating, grooming, medication, shopping, laundry, cooking).

Principal:  The assets in a trust. The assets may be real property or personal property.

Processing Date:  The date the specialist determines eligibility. 

Processing Month:  The calendar month during which the specialist determines MA eligibility.

Redetermination:  The periodic, thorough re-evaluation of all eligibility factors to determine if the group continues to be eligible for program benefits. Referred to as a renewal for Medicaid and Healthy Michigan Plan. A passive renewal does not require any action from the beneficiary.

Resources:  Resource means all the client’s and the spouse’s assets and income. That is, all cash and any other personal property, as well as any real property, that an individual (or the spouse): owns, has the right or power to convert to cash, and is not legally restricted from using for the individual’s support and maintenance. An asset does not stop being a resource just because it has no current market value.

Retro MA:  The first, second, or third calendar month prior to the most recent application for MA or FIP. 

Revocable Trust:  A trust that can, under state law, be revoked or modified by the grantor, court, the trustee, or any other person or entity. This includes a trust that allows for revocation or modification only when a change occurs, such as the grantor leaves the LTC facility or the client becomes competent.

Shelter Expense:  The amount of money that must be paid for the home for rent or for a mortgage or land contract or for condominium or cooperative housing fees, property taxes, home insurance and special assessments. 

Trust:  Any arrangement in which a grantor transfers property to a trustee with the intention that it be held, managed, or administered by the trustee for the benefit of the grantor or certain designated persons. The trust must be valid under state law and manifested by a valid trust instrument or agreement. This includes any legal instrument or devise that is similar to a trust.

Waiver:  Home and Community based waiver; see BEM 106, MIChoice Waiver.

HOW IS MEDICAID ASSET ELIGIBILITY CALCULATED? (BEM 402)

The formula for asset eligibility is:

1. ADD the value of the couple's (applicant, spouse, joint) countable assets for the month being tested.
2. SUBTRACT the protected spousal amount (in this item).
3. EQUALS the client’s countable assets.

Countable assets must not exceed the limit for one person in BEM 400 for the category being tested.

Exception: The client is asset eligible when the countable assets exceed the asset limit, if denying MA would cause undue hardship; see undue hardship in this item. Assume that denying MA will not cause undue hardship unless there is evidence to the contrary.

Countable Asset Limits (BEM 400)

For an asset group of one:

• $9,950 effective Jan1 2026
• $9,660 effective January 1, 2025.
• $9,430 effective January 1, 2024.

Protected Spousal Amount (BEM 402)

The protected spousal amount is the amount of the couple's assets protected for use by the community spouse. It is the greatest of the amounts in 1-4 below.

1.  Minimum Resource Standard:

• $32,532 effective January 1, 2026
• $31,584 effective January 1, 2025.
• $30,828 effective January 1, 2024.

2.  One-half the initial asset assessment amount (see initial asset assessment in this item), but not more than:

• $162,660 effective January 1, 2026
• $157,920 effective January 1, 2025.
• $154,140 effective January 1, 2024.

3. The value determined in a hearing per BAM 600.

4. The amount (value) of assets transferred to the community spouse by the client pursuant to a court order requiring the client to:

• Pay support to the community spouse, and
• Transfer assets to the community spouse for the support of the community spouse or a family member. 

Presumed Asset Eligibile Period (BEM 402)

Applicants eligible for the processing month and recipient's eligible for the first future month are automatically asset eligible for up to 12 calendar months regardless of: 

• Changes in the community spouse's assets, or
• The number of MA applications or eligibility determinations that occur during the period.

The 12-month period begins with the month following the processing month and is called the presumed asset eligible period.

Exception: The 12-month period ends sooner if any of the following becomes true:

• The continuous period of care ends.
• The client’s spouse no longer meets the definition of a community spouse when the spouse enters L/H, a waiver, or PACE.
• The client’s spouse dies or the couple divorces.

When the presumed asset eligible period ends, use BEM 400 to determine the client’s asset eligibility. Count only the client’s assets, not the spouse's assets, to determine continued eligibility. Verify all assets which are still owned by the individual, by the spouse, and jointly owned.

MDHHS Note: Because only the client’s assets are counted after the presumed asset eligible period, the client may have to transfer some assets to his spouse to make sure that he owns no more than the asset limit for one person at the end of the presumed asset eligible period; see asset transfer information in this item.  

WHAT IS A MEDICAID TRUST? (BEM 401)

Revocable Trust:  A trust which can be revoked or modified by the grantor, a court, the trustee, any other person or entity. Modify means changing the beneficiaries or the availability of principal or income (Page 5).

Irrevocable Trust:  A trust which is not a revocable trust (Page 4).

Medicaid Trust:  A revocable or irrevocable trust which meets the following criteria:

1.  The person, or their spouse, whose resources were transferred to the trust is a person whose assets or income must be counted to determine Medicaid eligibility;

2.  The trust was created by any of the following: the person; the person's spouse; someone with legal authority to act in place of or on behalf of the person or the person's spouse; an attorney; an adult child; someone acting at the direction or upon request of the person or the person's spouse; or an attorney ordered by the court. 

3.  The trust was created after August 11, 1993.

4.  The trust was not created by will.

The only exceptions are a first party special needs trust or a pooled trust (Page 7-8).

WHAT ARE COUNTABLE MEDICAID TRUST ASSETS, INCOME, AND TRANSFERS? (BEM 401)

Countable Medicaid Trust Assets

Revocable Trust:  Count as the person's countable asset the value of the countable assets and countable income in the principal of a revocable trust.  The look-back period does not apply (Page 13).

Irrevocable Trust:  Count as the person's countable asset the value of the countable assets in the trust principal if there is any condition under which the principal could be paid to or on behalf of the person.  The look-back period is 60 months (Page 13).

Countable Medicaid Trust Income

All income paid to the settlor, or their legal representative, is countable income (Page 14). Likewise, a payment of trust income to someone other than the settlor is construed as a countable divestment (Page 15).

Countable Medicaid Trust Transfers

Revocable Medicaid Trust:  Count payments from a revocable Medicaid trust to or on behalf of someone other than the person (Page 15). 

Irrevocable Medicaid Trust:  Count payments to or from an irrevocable Medicaid trust as follows:

1.  Payments to an irrevocable Medicaid trust - count any portion of a trust's principal or income that is countable assets or countable income which cannot be paid to or on behalf of the person as transferred for less than fair market value for purposes of BEM 405.

2.  Payments from an irrevocable Medicaid trust - count payments to or on behalf of someone other than the person (Page 15). 

The look-back period for such transfers is 60 months; see BEM 405.

WHAT IS MEDICAID "DIVESTMENT"? (BEM 405)

Divestment Defined (Page 1)

Divestment means the transfer of a resource (see resource defined in this item and in glossary) by a client or his spouse that are all the following:

• Is within a specified time; see look back period in this item.
• Is a transfer for less than fair market value; see definition in glossary.
• Is not listed under transfers that are not divestment in this item.

During the penalty period, MA will not pay the client’s cost for:

• Long Term Care (LTC) services.
• Home and community-based waiver services (such as MIChoice Waiver and PACE).
• Home help.
• Home health. MA will pay for other MA-covered services.

Do not apply a divestment penalty period when it creates an undue hardship; see undue hardship in this item.

WHAT IS THE MEDICAID DIVESTMENT LOOK-BACK PERIOD? (BEM 405)

Look-Back Period Defined (Page 5)

The look back period is 60 months prior to the baseline date.  Transfers that occur on or after a client’s baseline date must be considered for divestment.  In addition, transfers that occurred within the 60-month look-back period must be considered for divestment. 

Baseline Date Defined (Page 6)

A person’s baseline date is the first date that the client was eligible for Medicaid and one of the following:

• In LTC.

• Approved for MIChoice waiver; see BEM 106.

• Approved for the PACE program; see BEM 167.

• Eligible for Home Health services.

• Eligible for Home Help services.

WHAT IS THE MEDICAID DIVESTMENT PENALTY? (BEM 405)

Computing the Divestment Penalty Period (Page 13)

1. Compute the penalty period on the total Uncompensated Value of all resources divested.
2. Determine the Uncompensated Value for each resource transferred and combine into a total Uncompensated Value.
3. Divide the total Uncompensated Value by the average monthly private LTC Cost in Michigan for the client’s Baseline Date.
   This gives the number of full months for the penalty period.
4. 2025 average monthly private LTC cost = $11,843 (Page 14)
5. Multiply the fraction remaining by 30 to determine the number of days for the penalty period in the remaining partial month.
6. Apply the total penalty months and days.
7. Apply a penalty even if the total amount of the penalty is for only a partial month.
8. Apply the penalty to the months (or days) an individual is eligible for Medicaid and actually in LTC, PACE, Home Health, Home Help, the MIChoice Waiver.

Do not apply the divestment penalty to a period when the individual is not eligible for Medicaid for any reason (that is the case closes for any reason or is eligible for Medicaid but is not in LTC, Home Help, Home Health, MIChoice Waiver, PACE program. Restart the penalty when the individual is again eligible for Medicaid and in LTC, Home Help, Home Health, the MIChoice Waiver, PACE program.  When a medical provider is paid by the individual, or by a third party on behalf of the individual, for medical services received, that month is not a penalty month. Do not count that month as part of the penalty period. This does not include payments made by commercial insurance or Medicare; see Resources Returned in this item. 

WHAT IS NOT MEDICAID DIVESTMENT? (BEM 405)

Transfers That Are Not Divesment (Page 9)

It is not divestment to transfer resources from the client to:

• The client’s spouse.
• Another SOLELY FOR THE BENEFIT OF the client’s spouse. 
• The client’s blind or disabled (see BEM 260) child, regardless of the child’s age or marital status, are not divestment. This includes transfers to a trust established SOLELY FOR THE BENEFIT OF the child. 
• Transfer of ownership in life insurance or a similar device designated for funeral expenses.
• A trust established SOLELY FOR THE BENEFIT OF a disabled (see BEM 260) person under age 65 are not divestment.  
• Purchase an irrevocable prepaid funeral contract.
• Convert an asset from one form to another of equal value is not divestment even if the new asset is exempt. Most purchases are conversions.
• Pay expenses such as one's own taxes or utility bills is also not divestment.
• Transfer a homestead to the following family members:
  • Spouse
  • Blind or disabled child
  • Child under 21
  • Child over 21 who lived in the homestead for at least 2 years before client's admission to LTC
  • Brother or sister who is part owner of homestead and lived there for at least 1 year prior to clients admission to LTC
• Pay professional trustee fees

Transfers from the client’s spouse to another SOLELY FOR THE BENEFIT OF the client’s spouse are not divestment (Page 10).

WHAT IS AN "SBO" TRUST? (BEM 405)

Transfers from the client’s spouse to another SOLELY FOR THE BENEFIT OF the client’s spouse are not divestment (Page 10).

"Solely For the Benefit of" (Page 12)

All the following conditions must be met for a transfer or for a trust to be solely for the benefit of a person:

• The arrangement must be in writing and legally binding on the parties.

• The arrangement must ensure that none of the resources can be used for someone else during the person's lifetime, except for trustee fees.

• The arrangement must require that the resources be spent for the person on an actuarially sound basis**. This means that spending must be at a rate that will use up all the resources during the person's lifetime. Life expectancies are in Exhibit I in this item.

**The trustee may "spend" the trust assets or return them to the settlor. The trustee may spend more than the minimum required by this rule. The word "spend" is not defined by BEM.

WHAT IS THE BENEFIT OF AN "SBO" TRUST?

Principal in the Trust: The principal of the trust is generally not considered an available resource for the institutionalized spouse for Medicaid eligibility. The transfer itself is not treated as a divestment.

Distributions to the Community Spouse: The distributions from the SBO trust to the community spouse are considered income to the community spouse. This income is then subject to the rules regarding the Community Spouse Monthly Income Allowance (CSMIA) if the institutionalized spouse has a patient pay amount. However, this income belongs to the community spouse and does not impact the institutionalized spouse's eligibility as a countable resource.

Return of Principal to the Settlor (Community Spouse):  The distributions from the trust are a return of both income and principal over time to the community spouse as part of the annuitized payout. This is the mechanism by which the previously countable asset (the principal in the trust) is "spent down" over the community spouse's lifetime, but in a protected manner that does not create a penalty for the institutionalized spouse. 

HOW IS THE PRINCIPAL AND INCOME DISTRIBUTED FROM AN SBO TRUST?

STEP 1:  Fund the Trust. 

The trust must be funded immediately BEFORE the Medicaid application is filed (funding an SBO Trust is not a divestment). However, the trustee must NOT distribute a payment to the settlor until AFTER the Medicaid application is approved. This ensures that the first distribution is not a countable resource on the Medicaid application.

STEP 2:  Identify the Community Spouse's Life Expectancy.

Determine the life expectancy of the community spouse by using the table found in BEM 405. Use the most current table at the time the trust is funded or the Medicaid application is filed.

STEP 3:  Calculate the Annual Distribution Amount.

The total amount of assets placed into the SBO trust is divided by that life expectancy (in years). 

Formula:

Annual Distribution =  Total Assets in Trust / Community Spouse’s Life Expectancy (in years)

Example:

In 2025, a 70-year-old female community spouse has a life expectancy of 16.57 years according to the table in BEM 405. If $300,000 is placed into the SBO Spousal Trust:

Annual Distribution = $300,000​ / 16.57 = $18,105 per year

In this example, the trustee must distribute at least $18,105 to the community spouse each year. This stream of payments converts a countable lump sum into an income stream for the settlor's life.

STEP 4: Distribute Trust Assets.

Year 1:   The trust provides that the first distribution may occur anytime within one year after the trust is funded. However, the trustee must wait until the application is approved to make a distribution.  

Year 2 and after:  The trustee must distribute the amount calculated in Step 2, plus income earned on trust principal, if any, to the settlor each year. 

STEP 5:  MDHHS Review.

MDHHS may review the CSMIA to determine whether the couple is still eligible for Medicaid, and whether the CSMIA and PPA should be adjusted.  Therefore, it is important to complete the distributions from the SBO every year. 

WHAT IF A TRANSFER FAILS AS A "QUALIFIED DISPOSITION"?

 How may probate court determine that a transfer is not a qualified disposition?

• Trustee is not "qualified"
• Advisor is related or subordinate to settlor
• Settlor holds impermissible powers under the trust
• Property not subject to a "trust instrument" 
• Settlor was behind in child support at time of transfer

What happens if a transfer is not a qualified disposition?

• Protections of QDTA do not apply (limitation of actions, liens for trustee fees, shortened SOL, etc.).
• Protections of UVTA do not apply (cause of action, burden of proof, statute of limitation).
• General irrevocable trust rules apply with respect to creditor claims.
• No divorce protection.

WHAT ARE THE RELEVANT DEFINITIONS FOUND IN THE QDTA?

Link to full statute (html)

Link to table of contents

Qualified Disposition (Section 2)

"Qualified disposition" means, subject to subparagraphs (iii) and (iv), a disposition after which both subparagraphs (i) and (ii) apply to the subject property:

(i) The subject property is owned by 1 or more trustees at least 1 of whom is a qualified trustee.

(ii) The subject property is governed by a trust instrument including, but not limited to, a trust instrument as modified by an election described in section 5(6), under which the transferor only has rights, powers, and interests that are permitted by section 4(2).

(iii) A disposition is not a qualified disposition to the extent that, at the time of the disposition, the transferor is in arrears on a child support obligation by more than 30 days.

(iv) A disposition is not a qualified disposition if a transferor or any person that is related or subordinate to the transferor within the meaning of section 672(c) of the internal revenue code of 1986, 26 USC 672(c), may act as an advisor. For the purposes of this subparagraph, act as an advisor does not include the power to direct the investment decisions of the trust, the power to veto a distribution from the trust, or the right to remove a trustee or advisor and to appoint a new trustee or advisor. 

 Advisor (Section 2)

"Advisor" means a person who is given authority by the terms of a trust instrument to remove, appoint, or both, 1 or more trustees or to direct, consent to, approve, or veto a trustee's actual or proposed investment or distribution decisions. A person is considered an advisor even if the person is denominated by another title, such as trust protector. Any person may serve as an advisor.

Disposition (Section 2)

"Disposition" means a transfer of property that either creates a new fiduciary relation between at least 1 trustee and a trust beneficiary or newly subjects property to a preexisting fiduciary relation between at least 1 trustee and a trust beneficiary. The transfer may be by conveyance or assignment, by exercise of a power of appointment, including a power to substitute 1 trustee for another or to add 1 or more new trustees, or a power of revocation or amendment or, except as provided in this subdivision, by disclaimer, release, or relinquishment. 

Qualified Trustee (Section 2)

"Qualified trustee" means a person, other than the transferor, who meets all of the following conditions:

(i) For an individual, the individual is a resident of this state or, in all other cases, is authorized by the law of this state to act as a trustee and whose activities are subject to supervision by DIFS, FDIC, Comptroller of the Currency, or the Office of Thrift Supervision.

(ii) The person maintains or arranges for custody in this state of some or all of the property that is the subject of the qualified disposition and administers all or part of the trust in this state.

(iii) The person's usual place of business where some of the records pertaining to the trust are kept is located in this state or, if the person does not have such a place of business, the person's residence is in this state. For a corporate trustee, the usual place of business is the business location of the primary trust officer.

Trust Instrument (Section 2)

"Trust instrument" means an instrument appointing a qualified trustee or qualified trustees for the property that is the subject of a disposition to which all of the following apply:

(i) The instrument expressly incorporates the law of this state to govern the validity, construction, and administration of the trust.

(ii) The instrument is irrevocable.

(iii) The instrument provides that the interest of the transferor or other trust beneficiary in trust property may not be transferred, assigned, pledged, or mortgaged, whether voluntarily or involuntarily, before the qualified trustee or qualified trustees actually distribute trust property to the trust beneficiary, and that provision of the trust instrument is considered a restriction on the transfer of the transferor's beneficial interest in the trust that is enforceable under applicable nonbankruptcy law within the meaning of section 541(c)(2) of the bankruptcy code 11 USC 541(c)(2).

Qualified Affidavit (Section 6)

(1) Except as provided in subsection (6), for purposes of this section, a "qualified affidavit" means an affidavit in which the transferor states that at the time of the transfer of the property to the trust all of the following apply:

(a) The transferor has full right, title, and authority to transfer the property to the trust.

(b) The transfer of the property to the trust will not render the transferor insolvent.

(c) The transferor does not intend to defraud a creditor by transferring the property to the trust.

(d) The transferor does not know of or have reason to know of any pending or threatened court actions against the transferor, except for those court actions identified by the transferor on an attachment to the affidavit.

(e) The transferor is not involved in any administrative proceedings, except for those administrative proceedings identified on an attachment to the affidavit.

(f) The transferor is not currently in arrears on a child support obligation by more than 30 days.

(g) The transferor does not contemplate filing for relief under the bankruptcy code, 11 USC 101 to 1532.

(h) The property being transferred to the trust was not derived from unlawful activities.

(2) The transferor shall sign a qualified affidavit before a qualified disposition is made.

(5) If a qualified affidavit is required by this section, and a transferor fails to timely sign a qualified affidavit or signs a defective affidavit, the failure or defect may be considered as evidence in an action described in section 5(2) to the extent permitted by the Michigan rules of evidence, but the validity of the qualified disposition is not affected in any other way because of the failure or defect.

HOW MAY CREDITORS CHALLENGE A TRANSFER TO AN IRREVOCABLE TRUST UNDER THE UVTA?

566.34 Transfer with intent to defraud.

(1) Except as otherwise provided in subsection (4), a transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation in either of the following circumstances:

(a) With actual intent to hinder, delay, or defraud any creditor of the debtor.

(b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor did either of the following:

(i) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction.

(ii) Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due.

(2) In determining actual intent under subsection (1)(a) or (4), consideration may be given, among other factors, to whether 1 or more of the following occurred:

(a) The transfer or obligation was to an insider.

(b) The debtor retained possession or control of the property transferred after the transfer.

(c) The transfer or obligation was disclosed or concealed.

(d) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.

(e) The transfer was of substantially all of the debtor's assets.

(f) The debtor absconded.

(g) The debtor removed or concealed assets.

(h) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.

(i) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.

(j) The transfer occurred shortly before or shortly after a substantial debt was incurred.

(k) The debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor.

(3) Except as otherwise provided in subsection (4), a creditor that makes a claim for relief under subsection (1) has the burden of proving the elements of the claim for relief by a preponderance of the evidence.

(4) A qualified disposition is fraudulent as to the creditor whose claim arose after the qualified disposition only if the qualified disposition was made with actual intent to hinder, delay, or defraud any creditor of the debtor. With respect to a qualified disposition, a creditor has the burden of proving the elements of the claim for relief by clear and convincing evidence.

566.35 Transfer by debtor as voidable.

(1) A transfer made or obligation incurred by a debtor is voidable as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.

(2) A transfer made by a debtor is voidable as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.

(3) Except as provided in subsection (4) and subject to section 2(2), a creditor that makes a claim for relief under subsection (1) or (2) has the burden of proving the elements of the claim for relief by a preponderance of the evidence.

(4) With respect to a qualified disposition, a creditor has the burden of proving the elements of the claim for relief by clear and convincing evidence.

566.39 Claim for relief; extinguishment.

A claim for relief with respect to a transfer or obligation under this act is extinguished unless action is brought within 1 or more of the following time periods:

(a) Except as otherwise provided in subdivision (c), if the claim for relief is under section 4(1)(a) or (b) or 5(1), within the time provided in section 5813 or 5855 of the revised judicature act of 1961, 1961 PA 236, MCL 600.5813 and 600.5855.

(b) Except as otherwise provided in subdivision (c), if the claim for relief is under section 5(2), within 1 year after the transfer was made or the obligation was incurred.

(c) If the claim for relief is under section 4 or 5, with respect to a qualified disposition, the time provided in section 5 of the qualified dispositions in trust act.

WHEN IS A GIFT COMPLETED UNDER MICHIGAN LAW?

For a gift to be valid and binding in Michigan, three elements must exist:

(i) the donor must possess the intent to transfer title to the property gratuitously to the donee;

(ii) there must be actual or constructive delivery of the subject matter to the donee, unless the donee is already in possession of the property; and

(iii) the donee must accept the property.

Davidson v. Bugbee, 227 Mich App. 264 (1997)

In re Casey Estate, 306 Mich. App. 252 (2014)

WHEN IS A GIFT COMPLETED UNDER FEDERAL LAW? (26 CFR 25.2511-2)

(b) As to any property, or part thereof or interest therein, of which the donor has so parted with dominion and control as to leave in him no power to change its disposition, whether for his own benefit or for the benefit of another, the gift is complete.

(c) A gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title to the property in himself. A gift is also incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed or ascertainable standard. Thus, if an estate for life is transferred but, by an exercise of a power, the estate may be terminated or cut down by the donor to one of less value, and without restriction upon the extent to which the estate may be so cut down, the transfer constitutes an incomplete gift. If in this example the power was confined to the right to cut down the estate for life to one for a term of five years, the certainty of an estate for not less than that term results in a gift to that extent complete.

The settlor of a Medicaid Trust is usually the person whose funds are "countable" for Medicaid eligibility. Any person may be the settlor as long as the assets of the prospective nursing home patient are used to fund the trust. 

The settlor may be a person who contributed assets to the trust or some other person. Ideally, the settlor will be a person who is not a beneficiary of the trust so that the income and principal will be protected from creditors. Upon termination, the trust assets should be returned to the persons who funded the trust in the same ratio as their contributions.  

The settlor of a SBO Trust must be the community spouse of a nursing home patient. 

The settlor of a Family Asset Protection Trust is usually the person transferring assets to the trust. For effective asset protection, those assets cannot be distributed from the trust to the settlor. 

The settlor of a Domestic Asset Protection Trust is usually the person whose assets the trust is intended to protect (i.e. the "transferor").

The following terms of a Medicaid Trust may be modified by the Trustee:

• Appointment of trustee
• Non-dispositive terms (to fulfill the settlor's intent or to correct errors)

The following terms of a Gift Trust may be modified by the Trustee: 

• Appointment of trustee
• Non-dispositive terms (to fulfill the settlor's intent or to correct errors)

The following terms of an SBO Trust may be modified by the Trustee:  

• Appointment of trustee
• Non-dispositive terms (to fulfill the settlor's intent or to correct errors)

The following terms of a Family Asset Protection Trust may be modified by the Trustee:

• Appointment of trustees
• Non-dispositive terms (to fulfill the settlor's intent or to correct errors)

The following terms of Domestic Asset Protection Trust may be modified by the Trustee:

• Appointment of trustee
• Non-dispositive terms of the trust (to fulfill the settlor's intent or to correct errors)

A Medicaid Trust should only terminate upon the death of the settlor. This provision cannot be modified.  

An SBO Trust should only terminate upon the death of the settlor. This provisions cannot be modified. 

The trustee of a Medicaid Trust may be the person whose assets are being used to fund the trust, or some other person. 

The trustee of a Third Party Gift Trust may be the settlor or some other person. 

The trustee of an SBO Trust must not be the settlor. Any other person may serve, including an adult child.

The trustee of a Family Asset Protection Trust may be the settlor or some other person. Asset protection is not based on the status of the trustee.

The trustee of a Domestic Asset Protection Trust:

• Must NOT be the settlor. 
• Must be --  
  • an individual who is a resident of Michigan, or
  • a business entity that -- 
    • has its usual place of business in Michigan; and
    • is authorized under Michigan law to act as a trustee; and,
    • is subject to supervision by DIFS, FDIC, COC, or OTS.
• Must not be authorized to make "distribution decisions" if they are related or subordinate to the settlor. 

The Qualified Dispositions in Trust Act (QDTA) provides additional asset protection for "qualified dispositions".  A qualified dispositon is a transfer of property to an irrevocable trust which meets all of the requirements of the QDTA. 

In general, a qualified disposition must meet the the following requirements:

1. The trustee must be a "qualified trustee"; 
2. The trust instrument must limit the transferor's rights to obtain the trust property;
3. Distributions from the trust must be made by a qualified "trust advisor"; and
4. Transfers to the trust must be accompanied by an affidavit.  

If the specific requirements of the QDTA are met, a creditor's ability to reach the trust assets is severly limited. 

A qualified trustee must be a resident of Michigan or maintain its usual place of business in Michigan. 

A qualified trustee must maintain some trust property in Michigan. 

"Advisor" means a person who is given authority in the trust to direct, consent to, approve, or veto a trustee's  distribution decisions.  An advisor must NOT be related or subordinate to the transferor. 

A "distribution decision" means a decision regarding the distribution of trust property to or for the benefit of a trust beneficiary.

How to determine if the trustee is "related or subordinate" to the transferor-settlor (IRC 672)

 STEP 1: Does the party have "substantial interest" in the trust?

If No, the party is NON-ADVERSE. Go to Step 3. 

If Yes, go to Step 2.  

STEP 2:  Will the party's interest be "adversely affected" by exercise or non-exercise of a power which the party possesses over the trust?

If No, the party is NON-ADVERSE. Go to Step 3. 

If Yes, the party is ADVERSE. The party is not "related or subordinate" to the settlor. 

STEP 3:  Are the party and the grantor (settlor) related in any of the following ways? -- 

1. the grantor’s spouse if living with the grantor;
2. father;
3. mother;
4. issue;
5. brother or sister;
6. employee of the grantor;
7. corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are significant from the viewpoint of voting control; or
8. subordinate employee of a corporation in which the grantor is an executive.

If No, the party is NOT related or subordinate to the grantor. 

If Yes, the party is related or subordinate to the grantor. 

The trustee cannot act as the trust advisor if the trustee is "related or subordinate" to the settlor.

How to determine if the trustee is "related or subordinate" to the settlor-transferor (IRC 672)

 STEP 1: Does the party have "substantial interest" in the trust?

If No, the party is NON-ADVERSE. Go to Step 3. 

If Yes, go to Step 2.  

STEP 2:  Will the party's interest be "adversely affected" by exercise or non-exercise of a power which the party possesses over the trust?

If No, the party is NON-ADVERSE. Go to Step 3. 

If Yes, the party is ADVERSE. The party is not "related or subordinate" to the settlor. 

STEP 3:  Are the party and the grantor (settlor) related in any of the following ways? -- 

1. the grantor’s spouse if living with the grantor;
2. father;
3. mother;
4. issue;
5. brother or sister;
6. employee of the grantor;
7. corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are significant from the viewpoint of voting control; or
8. subordinate employee of a corporation in which the grantor is an executive.

If No, the party is NOT related or subordinate to the grantor. 

If Yes, the party is related or subordinate to the grantor. 

The trust advisor cannot be "related or subordinate" to the settlor.

A transfer is not a "qualified disposition" if the transferor is behind in child support.

All qualified dispositions must be accompanied by an affidavit which states that the transfer will not render the transferor "insolvent" in accordance with the Uniform Voidable Transactions Act (UVTA).  Section 2 of the UVTA defines insolvency as follows:

566.32 Insolvency. 

(1) A debtor is insolvent if, at a fair valuation, the sum of the debtor's debts is greater than the sum of the debtor's assets.

(2) A debtor that is generally not paying the debtor's debts as they become due other than as a result of a bona fide dispute is presumed to be insolvent. The presumption imposes on the party against which the presumption is directed the burden of proving that the nonexistence of insolvency is more probable than its existence.

(3) As used in this section:

(a) Assets do not include property that has been transferred, concealed, or removed with intent to hinder, delay, or defraud creditors or that has been transferred in a manner making the transfer voidable under this act.

(b) Debts do not include an obligation to the extent it is secured by a valid lien on property of the debtor not included as an asset.

All qualified dispositions must be accompanied by an affidavit which states that the transfer is not being made with "intent to defraud a creditor" as defined by the Uniform Voidable Transactions Act (UVTA). Section 4 of the UVTA defines "intent to defraud" as follows:

566.34 Transfer with intent to defraud.

(1) A transfer is voidable if the transfer was made:

(a) With actual intent to hinder, delay, or defraud any creditor of the debtor. 

(2) In determining actual intent to defraud under 1(a), consideration may be given to the following:

(a) The transfer or obligation was to an insider.

(b) The debtor retained possession or control of the property transferred after the transfer.

(c) The transfer or obligation was disclosed or concealed.

(d) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.

(e) The transfer was of substantially all of the debtor's assets.

(f) The debtor absconded.

(g) The debtor removed or concealed assets.

(h) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.

(i) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.

(j) The transfer occurred shortly before or shortly after a substantial debt was incurred.

(k) The debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor.

All income from a Medicaid Trust must be paid to the settlor. This provision cannot be modified. 

Income from a Third Party Gift Trust should be paid to the person who originally gifted the trust assets to the settlors for that person's health, education, maintenance and support (HEMS). Other beneficiaries may be added. Any portion of income payable to the settlors is not protected from their creditors. 

All income from an SBO Trust must be paid to the settlor (i.e. spouse of a nursing home patient). This provision cannot be modified

Income from a Family Asset Protection Trust should not be distributable to the settlor for asset protection purposes. Enter income beneficiaries in the space below. To maximize asset protection for beneficiaries, distributions should be subject to a HEMS standard. 

Income from a Domestic Asset Protection Trust may be distributed to the settlor or other persons. Distributions may be mandatory or subject to a discretionary or HEMS standard. Enter the income beneficiaries in the space below. 

 

Standard	Trust Term	Creditor Claims	Reference
Mandatory	Income must be distributed to  beneficiaries at least anually	Creditors may attach upon distribution or within a reasonable time after mandatory distribution date.	EPIC 7507
Discretionary	Income may be distributed at the sole discretion of the trustee	Creditors may attach only when trust income is distributed directly to the trust beneficiary.	EPIC 7505
HEMS	Income must be distributed for the health, education, maintenance, and support (HEMS) of the beneficiaries, but only if other resources are not available to the beneficiary	Creditors may attach only when income is distributed directly to the trust beneficiary, and only to the extent that income is not necessary for the HEMS of the beneficiary.	EPIC 7503

 

Principal from a Medicaid Trust that is paid to someone other than the "person" whose assets were used to fund the trust is a countable divestment (BEM 401, Page 15). Such distributions are permissible but should be avoided if possible. Trust principal may NOT be distributed to the person or the person's spouse. Enter other principal beneficiaries in the space below. All distributions of principal are discretionary. 

Principal from a Third Party Gift Trust should be distributed to the person who originally gifted the trust assets to the settlors for that person's health, education, maintenance, and support (HEMS). Other beneficiaries may be added. Any portion of principal payable to the settlors is not protected from their creditors.

Principal from an SBO Trust must be distributed solely to the settlor (i.e. spouse of a nursing home patient) on an actuarily sound basis during his or her lifetime. All distributions of principal are mandatory. This provision cannot be modified. 

Principal from a Family Asset Protection Trust should not be distributable to the settlor for asset protection purposes. Enter other principal beneficiaries in the space below. To maximize asset protection for beneficiaries, distributions of principal should be subject to a HEMS standard. 

Principal from a Domestic Asset Protection Trust may be distributed to the settlor or other persons by the trustee (subject to a decision by the "trust advisor"). Enter the income beneficiaries in the space below. Distributions of principal should be subject to a discretionary or HEMS standard. 

 

Standard	Trust Term	Creditor Claims	Reference
Mandatory	Principal must be distributed to  beneficiaries at specified milestones (e.g. age, years, education, employment, marriage, etc.)	Creditors may attach upon distribution or within a reasonable time after mandatory distribution date.	EPIC 7507
Discretionary	Principal may be distributed at the sole discretion of the trustee	Creditors may attach only when trust principal is distributed directly to the trust beneficiary.	EPIC 7505
HEMS	Principal must be distributed for the health, education, maintenance, and support (HEMS) of the beneficiaries, but only if other resources are not available to the beneficiary	Creditors may attach only when principal is distributed directly to the trust beneficiary, and only to the extent that income is not necessary for the HEMS of the beneficiary.	EPIC 7503
None	The trustee may not distribute principal during the term of the trust. Only income will be distributed.	None	EPIC 7507

 

Cash Gift 1

Cash Gift 2

Cash Gift 3

Cash Gift 4

The residuary trust estate should be distributed to the settlors who funded the trust assets. This will prevent a completed gift by the settlors to any other person during their lifetimes. Other beneficiaries may be added.  

First Share For First Beneficiaries

Second Share For First Beneficiaries

Third Share For First Beneficiaries

Fourth Share For First Beneficiaries

First Share for Second Beneficiaries

Second Share for Second Beneficiaries

Third Share for Second Beneficiaries

Fourth Share for Second Beneficiaries

First Share for Third Beneficiaries

Second Share for Third Beneficiaries

Third Share for Third Beneficiaries

Fourth Share for Third Beneficiaries

A Medicaid Trust is a "grantor trust" because the settlor has retained the right to receive income without approval of an adverse party (IRC 677).

A Third Party Gift Trust is a "grantor trust" because the settlor has retained the right to dispose of income or corpus without approval of an adverse party (IRC 674).

A SBO Trust is a "grantor trust" because trust income must be paid to the settlor (IRC 677).

A Family Asset Protection Trust is a "grantor trust" because trust income may be paid used to pay premiums on life insurance policies for the benefit of the settlor or the settlor's spouse (IRC 677).

A Domestic Asset Protection Trust is a "grantor trust" because trust income may be used to pay premiums on life insurance policies for the benefit of the settlor or the settlor's spouse (IRC 677).

If any of the following powers are retained by the settlor, the trust will be construed as a "grantor trust":

• Reversionary interest greater than 5% of trust property (IRC 673)
• Power to dispose income or corpus without approval of an adverse party (IRC 674)
• Power to dispose income or corpus for less than adequate consideration (IRC 675)
• Power to borrow trust funds without adequate interest or security (IRC 675)
• Power to control trust investments in a non-fiduciary capacity (IRC 675)
• Power to reacquire trust property by substituting other property of equivalent value (IRC 675)
• Power to revoke the trust and revest title to trust property in the grantor (IRC 676)
• Trust income may be distributed to the grantor or the grantor's spouse without approval of an adverse party (IRC 677)
• Trust income may be accumulated for future distribution to the grantor or spouse (IRC 677)
• Trust income may be used to pay premiums on life insurance policies on the life of the grantor or spouse (IRC 677)