WHEN IS A SPECIAL NEEDS TRUST REQUIRED IN A MATRIMONIAL ACTION?

by Thomas D. Begley, Jr., Esquire, CELA

           Studies show that having a child with a disability dramatically increases the likelihood that the parents will divorce.  The divorce rate for this cohort is as high as 86%.  When either a spouse or a child is disabled and is receiving public benefits, a Special Needs Trust should be considered.  Benefits such as SSI, Medicaid, Federally Assisted Housing, SNAP (Food Stamps), Energy Assistance (LIHEAP), and any other public benefits are means-tested. There are limits on both income and assets for these programs.  In New Jersey, an SSI recipient is automatically entitled to Medicaid.  However, the asset test is $2,000 for these programs.  There are also income limits.  There are a number of issues that should be considered in actions for equitable distributions, alimony and child support.

Equitable Distribution

            In matrimonial cases where the spouse entitled to equitable distribution is disabled, the transfer of assets to the disabled spouse via equitable distribution will result in the disabled spouse having assets in excess of the $2,000 maximum.  The solution is to establish a Self-Settled Special Needs Trust (“SSSNT”) and transfer the assets subject to the equitable distribution claim directly into the trust.  Assets in the SSSNT are not countable for SSI and Medicaid eligibility purposes.  The trust can be established by the spouse with a disability or by a parent, grandparent, guardian or court.  Frequently, a Qualified Domestic Relations Order (“QDRO”) divides a pension or other retirement account so that the spouse with a disability receives a portion of that account as part of equitable distribution.  The best strategy in negotiating the matrimonial settlement involving a disabled spouse is to transfer exempt assets, such as a home or car, to the disabled spouse rather than the QDRO.  It is difficult to assign a retirement account to an SSSNT, although a pension can be assigned to an SSSNT.  If the home is being transferred subject to a mortgage, cash could be distributed to pay down or pay off the mortgage.  The same would be true of car loans.  Neither a home occupied by the disabled spouse nor one car are considered countable assets by the Social Security Administration or Medicaid.

Alimony

            Alimony and spousal support are unearned income, which would reduce the SSI payment dollar-for-dollar, and if SSI is eliminated the Medicaid linked to SSI would also be lost.  However, if alimony is irrevocably assigned to an SSSNT by court order, it is not countable income and SSI and Medicaid will be retained.

Child Support

            Child support is considered unearned income to the child and reduces the SSI payment dollar-for-dollar.  Again, if the SSI payment is eliminated the Medicaid linked to SSI would also be lost.  Until the child becomes 18 years of age, one-third of the amount of child support payment to or for an eligible child by an absent parent is excluded in determining the child’s SSI benefit amount.  One-third of the amount of child support that is received in the form of food or shelter is excluded from income.  The remaining two-thirds is considered in-kind support and maintenance (“ISM”) and would cause a loss of one-third of the SSI payment.  For 2022, the federal benefit is $841, so the loss of one-third would be $280 per month.  The solution is to have the court direct the child support payment directly to an SSSNT to be established for the benefit of the child.  The trust could be established by the court as a part of the court order awarding child support, or it could be established by the parent, grandparent, guardian or the adult child receiving child support.

            If the payment of the child support is made to an ABLE account for the benefit of the child, the Social Security Administration treats the payments as unearned income.  This could cause a reduction or loss of SSI, and if SSI is lost then SSI-linked Medicaid is also lost.

Types of Trusts

            There are two types of Special Needs Trusts:  Third Party Special Needs Trust (“TPSNT”) and SSSNT.  A TPSNT is funded with assets of someone other than the beneficiary.  In this context the beneficiary would be the spouse with a disability or the child with a disability.  Since the equitable distribution, alimony or child support would belong to the beneficiary of the trust, those assets cannot be used to fund a TPSNT.  The SSSNT is funded with assets of the beneficiary.  Therefore, an SSSNT should always be used in matrimonial actions involving equitable distribution, alimony or child support.

Who Should Serve as Trustee?

            There are two possibilities for selecting a trustee:

1. Professional Trustee. A professional trustee, either a bank or disability organization, is always preferable because public benefit laws are complex and individual trustees almost never have the required knowledge to serve adequately.  The problem is that banks have large asset requirements, usually $500,000 to $1,000,000 or more.  Disability organizations have more modest requirements, perhaps $25,000 of assets or more.
2. Family Member. In cases involving modest alimony or child support, the payments usually are received by the trustee and then distributed almost immediately for the expenses of the disabled spouse or disabled child.  This means there is never much in the way of assets in the trust.  In those cases, family members are often the only option to serve as trustee.  The beneficiary of the trust can never serve as trustee.  The guardian of the beneficiary of the trust can never serve as trustee either.  The guardianship issue frequently arises in the context of child support payments.  The parent is the guardian and wants to serve as trustee of the SSSNT.  However, the guardian stands in the shoes of the beneficiary, so in effect the beneficiary would be his or her own trustee, which would make the trust invalid.