by: Begley Law Group

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

This is the first article in a two-part series that will discuss the various tools for planning for children with disabilities in a Family Law setting. (Here is a link to Part Two)

Besides the obvious issue of custody, there are other considerations in planning for a child with disabilities in a Family Law setting.  Consideration should be given as to the standard of living that the divorcing parents want for their disabled child.  This would include the development of a Life Plan and a Budget.  The Budget would include the cost of housing, transportation, and personal needs.  This would establish the child’s standard of living.  Next, an examination should be made of the sources of funding.  If the child has received a Disability Determination Letter from the Social Security Administration, the income received from Social Security could pay a portion of these expenses.  Do the parents have sufficient assets to make up the balance?  If not, a second to die life insurance policy may be obtained to bridge the gap.  Term life insurance is not suitable for this purpose, because the need never goes away.  It is likely that the child will always be disabled.  There are a number of tools that can be utilized to assist the divorcing parents in meeting their goal for their child with disabilities.  These include the following:

  • Self-Settled Special Needs Trust. One of the primary issues in many divorces is child support.  If a child on SSI is under the age of eighteen, Social Security regulations provide that two-thirds of the child support payment is “countable income,” which causes a dollar-for-dollar reduction in the SSI benefit.  If the child support payment is large enough, the SSI benefit could be completely lost, and the Medicaid linked to SSI would be lost as well.  If the child is age 18 or older, 100% minus $20 of the child support counts as a reduction against SSI.  The solution is to direct the child support payment into a Self-Settled Special Needs Trust.

There are a number of requirements for Self-Settled Special Needs Trusts.  These include the following:

  • Assets of the individual. Since the child support belongs to the child, this test is met.
  • Age. The individual must be under age 65 at the time the trust is funded. However, if the child support is irrevocably assigned to a Self-Settled Special Needs Trust prior to the child attaining age 65, payments can continue into the trust after the child attains age 65.
  • Disability. The individual must be disabled as defined in the Social Security Act.
  • Benefit. Trust must be for the benefit of the individual with disabilities.
  • Establishment. Trust must be established by the beneficiary, a parent, grandparent, guardian, or the court.
  • Payback. The State Medicaid Agency must be reimbursed on the death of the person with disabilities.  In addition, the trust must be irrevocable, and it must give the trustee discretionary authority to make distributions.

If the child has additional assets titled in his/her name, these assets may prevent the child from receiving SSI, Medicaid, and other means-tested public benefits.  Those assets could be transferred to the Self-Settled Special Needs Trust since they are assets of the “individual,” the disabled child.  The transfer could bring the child down to assets of less than $2,000 to qualify the child for SSI and Medicaid, as well as other means-tested public benefits.

  • Outright Transfers. If a child is disabled and has a Disability Determination Letter from the Social Security Administration, an outright transfer to that child may be possible.  However, if the child is receiving means-tested public benefits, including but not being limited to SSI or Medicaid, the transfer to a child would terminate those benefits.
  • Disability Annuity Trust. Funds could be placed into a Disability Annuity Trust (DAT) for a child with disabilities.  These trusts can be used for the benefit of the disabled child or other disabled individuals.  They are typically used in crisis planning where a divorcing spouse needs Medicaid quickly. The trust must be for the sole benefit of the disabled child or other disabled individual.  The assets in the trust must be paid out to the beneficiary on an actuarially sound basis using the actuarial tables contained in HCFA Transmittal 64.  In New Jersey, a payback is required on the death of the disabled beneficiary.  The transfer to the trust is not subject to the Medicaid transfer penalty rules.   The problem with these trusts is that they are considered available to the beneficiary.  Therefore, if the disabled child is receiving SSI, Medicaid or other means-tested public benefits, the trust would be inappropriate.
  • Disability Annuity Special Needs Trust. The concept is the same as the Disability Annuity Trust, except that the DAT is wrapped inside a Special Needs Trust and protects SSI, Medicaid, and other means-tested public benefits if the beneficiary is receiving them.
  • Guardianship. If the child with disabilities lacks capacity for decision making, a guardian should be considered when the child reaches age 18.

TaxThe Self-Settled Special Needs Trust is designed as a Grantor Trust.  This means that the trust vehicle is ignored for income tax purposes.  The tax, if any, on the income produced by the trust is paid by the beneficiary at the beneficiary’s lower tax rates rather than the trust’s compressed tax rates.  Assets in the trust after the Medicaid payback would be considered assets of the beneficiary’s estate.  The New Jersey estate tax has been repealed, and the federal estate tax exemption is so high that this is seldom an issue.  There would be no gift tax, because the disabled child is transferring assets to a Grantor Trust for his/her own benefit.