DIVORCE AND PUBLIC BENEFITS

by Thomas D. Begley, Jr., CELA

Many divorces involve families in which a spouse or child has disabilities. Family law attorneys should always ask if this is the situation. In many instances, the individuals with disabilities are receiving public benefits and many other that may be eligible for benefits but are not aware of their eligibility and have not applied.

For many means-tested public benefits, such as Supplemental Security Income (SSI) and Medicaid, there is an asset test of $2,000 in addition to an income test. Assets transferred from a healthy spouse to a spouse with disabilities, through equitable distribution, would be considered assets of the spouse with disabilities. Income transferred from a healthy spouse to a spouse with disabilities, such as alimony, is considered income to the recipient. Income paid to a child with disability, in the form of child support, is considered income to the child. Therefore, equitable distribution, alimony and child support could all adversely affect the right to receive public benefits. The solution is a Self-Settled Special Needs Trust (SSSNT).

 

In What Type Of Matrimonial Settlement Situations Should A Special Needs Trust Be Utilized?

Special Needs Trusts (SNTs) should be utilized in matrimonial settlements when one spouse is disabled and eligible for public benefits, or when there is a child with a disability eligible for public benefits or who may become eligible in the future. The establishment of an SNT can enable the disabled spouse or child to qualify for public benefits. Therefore, the trust can help reduce the amount of money required to be paid from the non-disabled spouse while increasing the benefit to the disabled spouse. When public benefits are used to help fill some of the financial need, cases can be easier to settle. SNTs can be used in the following ways:

• Equitable Distribution. Equitable distribution is a division of the marital assets. If one of the divorcing spouses is disabled, the existence of the equitable distribution will prevent that person from accessing public benefits and will cause a loss of any existing public benefits. The solution is to have the equitable distribution paid into an SSSNT for the benefit of the disabled spouse.
• Payment from a non-disabled spouse to a disabled spouse for maintenance and support during legal separation and/or after the divorce is finalized results in the alimony payments being counted as income to the disabled spouse for SSI eligibility purposes. The alimony will reduce the SSI payment dollar for dollar. If the alimony is large enough to completely eliminate SSI, the individual with disabilities will also lose Medicaid. The solution is to establish an SSSNT and to have the court direct payments to the trustee of the SNT rather than directly to the disabled spouse.
• Child Support. Payment of child support is considered income to the child recipient. For SSI purposes, one-third of the support payment is excluded from the child’s countable income. But the remaining two-thirds of the support payment reduces the child’s SSI payment dollar-for-dollar. If the payment is reduced to $0, the child will lose both SSI and the accompanying Medicaid. When the child support is paid directly to an SSSNT pursuant to a court order, the income is not counted to the child and public benefits can be maintained. The Court Order and the Trust must be reported promptly to the Social Security Administration (SSA) and to the State Medicaid Agency.

 

What Can The Trust Pay For?

The trust can pay for a very broad range of goods and services as long as payment is made directly to the provider, rather than to the person with disabilities. Examples include: personal effects such as furniture, appliances, computers, and automobiles, rent, home improvements, pools, utilities, medical insurance, newspaper subscriptions, services of a care manager, vacations, federal and state taxes, funeral expenses, and legal fees. Payments for food and shelter are likely to reduce the SSI payment by one-third or one-third plus $20, depending on living arrangements.

Trusts can purchase homes and vehicles. While these are non-countable assets, they are considered special assets. If the trust will be used to purchase these items, there are several options that must be considered in consultation with the Special Needs attorney assisting in the case to ensure that the assets are properly titled.

Generally, funds in the SSSNT can only be used for the benefit of the person with disabilities. Other family members or friends benefiting from the trust are usually required to pay a pro rata share for their benefit. As noted previously, trust assets usually are not permitted to be used to discharge a parent’s legal obligation of support.

 

How Should The Money Be Invested?

Any money placed in the SSSNT should be invested in accordance with the Uniform Prudent Investor Act. Because the assets need to last throughout the lifetime of the person with disabilities, they should be invested conservatively, with the objective of preserving principal while providing the growth necessary to outpace inflation and taxes. There should be a written Investment Policy Statement in place that specifies the acceptable level of investment risk to be taken and that outlines the trust’s investment strategy.

 

How Is A Trustee Selected?

Family members often want to serve as trustees of SNTs. However, a professional trustee is usually a better option if the trust has sufficient assets. If the trust is simply for alimony or child support, which is generally distributed in the month received, then a family member is likely the only option. However, if sufficient money will remain in the trust to employ a professional trustee, the outcome is usually better. A trustee must have experience and expertise in the following areas, at a minimum:

• The Uniform Prudent Investor Act;
• The Principal and Income Accounting Act; and
• Public benefits laws.

Since family members rarely have this expertise, a better solution is to select a professional trustee. Family members can remain involved by serving as trust protectors.

 

WHAT AGENCY APROVALS ARE REQUIRED?

• Social Security Administration (SSA). If the person with disabilities is receiving SSI, the SSSNT should be filed with the SSA.
• If the person with disabilities is receiving Medicaid, the trust should be filed with the State Medicaid Agency.