THE IMPACT OF CROWDFUNDING ON INDIVIDUALS WITH DISABILITIES

by Thomas D. Begley, Jr., CELA and Marianne Johnston, Esquire

 

Introduction

            The Oxford Dictionary defines crowdfunding as the process “of raising money from a large number of people who each contribute a relatively small amount, typically via the Internet.”  The concept of crowdfunding began as a business concept to raise capital as well as offer and sell securities.  Crowdfunding sites include GoFundMe, Kickstarter, Indiegogo, Patreon, Crowdcube, Crowdrise, Wefunder, SeedInvest and RocketHub.  Crowdfunding sites create a platform to make giving easy, but do not evaluate the effects of donations or pass judgment on the costs.  Over the years, crowdfunding was adopted by individuals and groups to support a particular charitable cause.   The personal story of an individual with disabilities can often result in receipt of large sums of money but can unknowingly create problems for those receiving public benefits.

Who is the Recipient of the Funds?

            Typically, the creator of the fund determines who will be the recipient.  For example, on GoFundMe the creator states whether the person to withdraw the funds would be the creator, spouse or someone else.  Depending on the website, the recipient has the ability to withdraw the funds directly to his or her bank account or request a paper check.  The recipient of the funds may or may not be the beneficiary for whom the money was intended.  When the creator of the campaign determines how the funds are distributed, the ultimate beneficiary could be done without the beneficiary’s knowledge or consent.  These websites do not require the recipient’s consent to establish the campaign.

Public Benefits

            Many individuals with disabilities are receiving means-tested public benefits.  These include Supplemental Security Income (SSI), SSI-linked Medicaid, Medicaid Waiver Programs, SNAP (Food Stamps), Federally Assisted Housing, Medicaid under the Affordable Care Act (ACA), or benefits under the Qualified Medicare Beneficiary (QMB), Specified Low-Income Medicare Beneficiary (SLMB), or Qualifying Individual (QI) programs.  Each of these benefits has asset and/or income tests.  Monies received from crowdsourcing are likely to push the beneficiary over income and/or asset limits if a “trust fund” is established at a local bank for the benefit of the intended crowdfunding beneficiary.  The problem is the “trust fund” is usually an available resource because it is not properly restricted to preserve public benefits.  Once an individual receives income from the crowdfunding there is a duty to report it to the appropriate public benefit agency.  Failure to report it within the appropriate time limit can result in not only a loss of public benefits but also a recovery by the public benefit agency.

The Solution

            If a crowdfunding campaign is to be established for the benefit of an individual with disabilities, it is best to consult with a Special Needs attorney prior to the commencement of the crowdfunding campaign.  The Special Needs attorney would determine what public benefits the beneficiary is receiving or is eligible to receive and whether someone unbeknownst to the beneficiary, such as a hospital social worker, has already applied for public benefits, such as Medicaid, so the hospital will be paid.  Determination would be made as to the tax treatment of the funds received through the crowdfunding campaign.  The I.R.S. has issued an Information Letter indicating that gifts made out of a detached generosity and without any “quid pro quo” are not taxable.

Planning Options

            There are essentially five principal options for crowdfunding beneficiaries that should be carefully considered to determine which offers the  greatest advantage.

• Option 1 – Do Nothing. Under this option the beneficiary would either decline, relinquish, or temporarily forego public benefits.  An evaluation should be made as to the cost of loss of each benefit to which the beneficiary is or may be entitled.

• Option 2 – Spend Down. Another option would be for the beneficiary to spend down the money received during the month of receipt.  Typical ways to spend money would include purchasing a home, purchasing a vehicle, making home improvements, paying off debts, buying clothing, purchasing technology assistive devices, or paying for education.  Money cannot be rolled over into the month following the month of receipt.  Timing is critical.

• Option 3 – Transfer Funds. The beneficiary of the crowdfunding campaign could transfer funds to a third party.  However, for almost all means-tested public benefits there is a lookback period and a penalty period.  The lookback varies.  For example, for SSI it is three years and for Medicaid it is five years.  For other benefits it can be even shorter.  This means that if the funds are transferred during the lookback period, a penalty is imposed.  An analysis should be made of the benefit, the length of the lookback period, and the cost of losing benefits during the period of ineligibility.

• Option 4 – Establishment of a Special Needs Trust. If the trust is established at the beginning of the campaign, it could be a Third-Party Special Needs Trust (TPSNT).  The contributions would be payable directly to the TPSNT.  This type of trust is desirable because there is no payback to Medicaid on the death of the beneficiary and the supervision by the Medicaid agency is much less intense.  If the distributions have already been made to the beneficiary, a Self-Settled Special Needs Trust (SSSNT) must be established.  The SSSNT must contain a payback to Medicaid and the supervision by the State Medicaid Agency in many states is very restrictive.  In either event the proceeds could be placed into an existing or newly established TPSNT or SSSNT. If the funds received from the crowdfunding campaign are large, the Special Needs Trust often makes the most sense.  For a Self-Settled Special Needs Trust, the beneficiary must be under age 65 and must be disabled within the meaning of the Social Security Act, and the trust can be established by the individual with disabilities, or a parent, grandparent, guardian, or court.   A variation on the TPSNT or SSSNT would be a Pooled Trust.  These are usually used when the amount involved is smaller.  The Pooled Trust could either be a TPSNT or an SSSNT.

• Option 5 – ABLE Account. Monies received from a crowdfunding campaign could be deposited into an ABLE account, but there are many disadvantages.  The account can only be funded with the amount equal to the annual gift tax exclusion, which for 2024 is $18,000 per year.  If the ABLE account contains more than $100,000, the beneficiary loses his or her SSI.  Customer service with ABLE accounts is often poor.