A self-settled special needs trust is not appropriate in every instance where a person with a disability receives a tort recovery, an inheritance, or equitable distribution. At the initial contact, the special needs trust attorney should make a determination as to whether or not the trust is appropriate and explain to the person with a disability and/or the family the alternatives to the special needs trust.

The four alternatives to establishing an individual self-settled special needs trust are to spend down, by paying bills or purchasing exempt assets, to transfer assets, to simply accept the money, or to utilize a pooled trust

Spend Down

The Program Operations Manual System of the Social Security Administration (POMS) lists a number of transfers for value that will not result in an SSI transfer penalty. These include the following:[1]

• Purchase exempt assets
• Prepayment of room and board
• Prepayment of services
• Lifetime personal service contracts

Under a lifetime personal service contract, the person with a disability would contract with a third party for in-kind support and maintenance for life in exchange for a lump sum payment. SSA would consider that the third party will provide ISM for the life of the eligible individual and use the table in the POMS[2] to determine the total value of the service contract. It would multiply the yearly current market value of the ISM provided by the figure in the “Years of Life Remaining” column, which corresponds to the age (or next lower age) of the eligible individual as of the last birthday at the date the resource was transferred.[3] Prepaying for services would be valued by their frequency and duration under the agreement.

In any event, the cost of establishing and maintaining the trust must be considered against the simple strategy of spending down.

In addition to the strategies outlined specifically in the POMS, spend down may be appropriate.  Typical spend down items include the following:

• Purchase of a home
• Home improvements, repairs, or maintenance
• Tools to perform home improvements
• Installation of burglar alarm or a monitoring/response system
• School tuition, books, and supplies
• Health and life insurance premiums
• Entertainment (including books, magazines, and any vacation travel)
• Handicap van
• Household goods
• Non-refundable airline ticket
• Stereo system
• Television set
• Medical insurance
• Telephone bills
• Newspaper subscriptions
• Furniture
• Services of Care Manager
• Tax payments
• Funeral
• Legal fees
• Transfer to third parties

Transfer of Assets

If the person with a disability is receiving SSI and/or Medicaid transfer penalties apply. The penalty is a period of ineligibility for SSI and/or Medicaid. The SSI penalty is calculated by dividing the amount transferred by the maximum SSI payment. This is usually in the neighborhood of $600. There is a maximum period of ineligibility of three years. A relatively small transfer (i.e., $25,000) will cause the maximum three year period of ineligibility. In addition, if SSI is lost, Medicaid is also lost, unless the beneficiary needs medical card services and not long term care services because there is no transfer penalty for those services.

If assets are transferred by a Medicaid recipient whose Medicaid is not linked to SSI but is based on a waiver program, there will be a transfer penalty only if the person with a disability is receiving an institutional level of care. This could be care in an institution, such as a nursing home or assisted living facility, or home care provided under a waiver program. If the person with a disability is receiving Section 8 Housing, there is no transfer penalty per se, however, HUD will impute interest at the current market rate for a period of two years after the date of the transfer. This may affect the eligibility and rental payment required of the person with a disability. Currently the HUD imputed interest rate is 2%.

Accept the Money

An alternative for a person receiving SSD and Medicare would be to simply accept the money, because it would have no affect on their public benefits. Another alternative would be to accept the funds and transfer them to a third party who would then establish a support trust for the benefit of the person with a disability. SSA does not follow the step transaction rules followed by the IRS and would not object to this strategy. The support trust would be desirable in situations where the person with a disability is not a good candidate to manage money. If the person is receiving They could also gift Medicaid services that are not long term care services, provided that they do not anticipate needing long term care services in the next five years.

Pooled Trust

A final alternative to an individual self-settled special needs trust is a pooled trust. All or a portion of the settlement can be deposited into a pooled trust to protect the beneficiary’s public benefits. 42 U.S.C. §1396a(a)(d)(4)(C).  However, in some states there is a transfer of asset penalty if monies are transferred to a pooled trust by a person age 65 or older.

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[1] POMS SI 01150.005 and 00150.120-127.
[2] POMS SI 001150.005.F.
[3] POMS SI 00835.480.D.