USING PUBLIC BENEFITS TO PAY FOR MATRIMONIAL SETTLEMENTS – Begley Report
by: Begley Law Group
By: Thomas D. Begley, Jr., Esquire, CELA
CASE STUDY 1: DISABLED SPOUSE—NO PUBLIC BENEFITS
Bill and Linda are in their mid-30s. Linda has been diagnosed with Multiple Sclerosis and is unable to work. Bill and Linda have decided to divorce, and Linda wants alimony and an equitable distribution. Linda’s attorney succeeds in having Bill pay Linda a $500,000 lump sum as equitable distribution, and he proposes $2,500 per month in alimony. Linda requires a home health aide for approximately 20 hours per week at a cost of $1,540 per month, and her other medical bills are approximately $3,000 per month. She will soon lose her medical coverage under Bill’s policy. Linda is concerned that her medical bills will consume her share of the equitable distribution. Linda demands $7,000 per month alimony. The case drags on at increasing cost and bitterness for both sides.
CASE STUDY 2: DISABLED SPOUSE—PUBLIC BENEFITS
Harry and Sally are in their mid-30s. Sally has been diagnosed with Multiple Sclerosis and is unable to work. Harry and Sally have decided to divorce. Sally wants alimony and equitable distribution. Sally’s attorney succeeds in having Harry pay Sally a $500,000 lump sum as equitable distribution, and Harry’s attorney proposes $2,500 per month in alimony. Sally requires approximately 20 hours per week of home care at a cost of $1,540 per month, and her other medical bills are approximately $3,000 per month. She will soon lose her medical coverage under Harry’s policy.
Harry’s attorney, consulting with a Special Needs attorney, arranges for the equitable distribution and alimony to be paid into a Special Needs Trust (SNT). The lawyer drafting the trust was an expert on SNTs. As a result of establishing the SNT, Sally became eligible for SSI payments of approximately $600 per month and Medicaid coverage of all of her medical bills as well as a home health aide for 20 hours per week. The trustee of the SNT uses the alimony to pay for living expenses that exceed the amount of Sally’s SSI payment. The trustee makes payments directly to the providers of goods and services rather than to Sally. The equitable distribution does not have to be used for Sally’s medical bills.
Because the equitable distribution was paid directly to the trustee of the Self-Settled Special Needs Trust (SSSNT), the assets in the trust were not countable to the disabled spouse for purposes of determining public benefits eligibility. Similarly, because the alimony was paid into the SSSNT, it was not considered income to the disabled spouse for purposes of determining public benefits eligibility.
If you have matrimonial cases in which one spouse is disabled and eligible for means-tested public benefits, it is important to understand how SSSNTs can allow for public benefits to be employed in the matrimonial settlement.
WHEN IS A SELF-SETTLED SPECIAL NEEDS TRUST REQUIRED?
An SSSNT is required if a person with disabilities currently receives (or is likely to receive in the future) SSI, Medicaid, Section 8 housing, certain types of state disability benefits or benefits under any other means-tested program, and is about to receive a settlement or other monies that will bring the person’s countable assets to more than $2,000.
IN WHAT TYPE OF MATRIMONIAL SETTLEMENT SITUATIONS SHOULD A SPECIAL NEEDS TRUST BE UTILIZED?
SNTs should be utilized in matrimonial settlements when one spouse is disabled and eligible for public benefits. Because the establishment of an SNT can enable the disabled spouse to qualify for public benefits, 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:
- For 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.
- For Alimony. 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.
- For 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, 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.
Another issue is whether assets in the SSSNT of a person with disabilities can be reached to enforce a child support order. Assets in the SSSNT must be for the sole benefit of the person with disabilities. Generally, except in states having Domestic Asset Protection Trust legislation, assets in an SSSNT are not protected from claims of creditors notwithstanding any spendthrift provisions in the instrument.
A third issue arising in situations where there is an SSSNT used for child support is whether the trust assets are available for the support of the child when determining the parent’s obligation of support. A Court in Pennsylvania has concluded that in the case of a father, who had a child support obligation and was also the beneficiary of an SSSNT, the distributions from the SNT for the benefit of the father were considered the father’s income for purposes of calculating his child support obligation.[1] A mother in an Ohio case, who had an obligation to pay child support and who was the beneficiary of an SSSNT, had a similar obligation.[2]
WHAT ARE THE REQUIREMENTS OF A SELF-SETTLED SPEICAL NEEDS TRUST?
Assets of the Individual. The trust must be funded with assets owned by the individual, such as litigation proceeds.
Age. The individual must be under 65 years of age at the time the trust is funded.
Disability. The individual must be disabled as defined in the Social Security Act.
Benefit. The trust must be for the sole benefit of the individual with disabilities.
Establishment. The trust must be established by a parent, grandparent, guardian, or the court.
Payback. The State Medicaid Agency must be reimbursed upon the death of the person with disabilities.
WHAT ARE THE REQUIREMENTS OF A SELF-SETTLED SPEICAL NEEDS TRUST?
The purpose of an SNT is to preserve public benefits programs for the person with disabilities. Typically these benefits include:
- A monthly income.
- A medical payment program.
- Section 8 Housing. A low-income housing program.
- State Disability Programs. These include group homes and vocational training.
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, federal and state taxes, funeral expenses, and legal fees. Payments for 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 IS A STRUCTURED SETTLEMENT USED IN A MATRIMONIAL SITUATION?
Utilizing a structured settlement in a divorce situation is a creative method that often leads to an excellent result. There are several features of structured settlements that should be understood:
- Present Value. The divorcing spouse purchasing a structured settlement annuity for the benefit of the disabled spouse pays for the
annuity based on its present value. The insurance company is responsible for investing the money and making future payments.
- Rated Age. Many individuals with disabilities have a rated age. This means that an insurance company believes that, as a result of disability, the person is physically much older than his or her actual age and has a shorter life expectancy. Consequently, a lifetime annuity can be purchased based on a shorter life expectancy, thereby significantly increasing the monthly payment. Because of the rated age, the cost to purchase the annuity is much lower than it would be for a lump sum for equitable distribution. It also is much less expensive to purchase the structure with a lump sum rather than with alimony. Again, the payment would be based on the rated age rather than the actual age and the insurance company assumes the risk that the person with disabilities will outlive the life expectancy based on the rated age.
- The average divorce settlement, like the average lottery winning, lasts five years.What the disabled spouse usually needs most is an income and medical benefits. By having the non-disabled spouse buy a structured settlement for the disabled spouse with payments directed to the SSSNT, the disabled spouse is able to maintain public benefits and often increase monthly income. The structured settlement guarantees the plaintiff a monthly income for life with a fixed period guaranteed even if he or she dies prematurely. There are several situations in which a structured settlement makes sense:
- Equitable Distribution. If the disabled spouse has a rated age, and the non-disabled spouse funds the obligation of equitable distribution in whole or in part with a structured settlement, the non-disabled spouse saves money, while the disabled spouse has a guarantee that the money will last his or her lifetime.
- A structured settlement is perfect for alimony payments.Again, the person paying the alimony saves money by purchasing a structured annuity, especially if the disabled spouse has a rated age, while the person with disabilities is guaranteed a steady stream of income for life paid directly from an insurance company rather than a resentful ex-spouse. In fact, the person with disabilities may receive a larger monthly payment under the structure at no additional cost to the spouse paying the alimony.
- Child Support. Typically, the obligation for child support ends at 18. However, when the child is disabled, it may be possible to have the court extend the order for the life of the child. In some situations, life insurance is used to fund the needs of the disabled child after the parent’s death. A structured settlement may provide a better option because it can fund the child’s needs during both the parent’s lifetime and after death. Again, the rated age may result in a discounted cost.
WHAT FEATURES SHOULD BE CONSIDERED IN A STRUCTURE?
Cost of Living. Over time, cost-of-living increases reduce the purchasing power of a dollar. Structures can be designed to include a cost-of-living adjustment (COLA) feature. Since, historically, the cost of living has increased 3% a year, a structure with a 3% COLA, compounded, is typically effective.
POPs. It is usually possible to anticipate that certain events will occur during the lifetime of the person with disabilities which will require lump sums of money. The structured settlement contract can be designed to take these into consideration. POPs establish that additional lump sums will be paid out at certain stages of the disabled person’s life. For example, if the individual is likely to go to college, a significant lump sum could be paid to cover college tuition when he or she turns 18.
Commutation Rider. If a settlement is large, there may be federal and/or state estate tax due after the person with disabilities dies. A commutation rider in the structure ensures that monies will be available to pay these taxes, if necessary.
HOW IS THE TRUST ESTABLISHED AND FUNDED?
Federal law requires that the trust be established by a parent, grandparent, guardian, or the court. The trust cannot be established by the person with disabilities. The trust is funded by having the court order the non-disabled spouse to pay the lump sum by check directly to the trustee of the SSSNT. If a structured settlement is involved, the court also must order that the monthly payments from the structure be paid by check directly to the trustee of the SSSNT. Payments made to the matrimonial attorney constitute “constructive receipt.” This means that public benefits agencies will consider the money in the attorney’s trust account to be available to the person with disabilities, disqualifying him or her from those benefits.
HOW SHOULD THE MONEY BE INVESTED?
Any money placed in the SSSNT, other than the structure, 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 CAN A COUNSELING SESSION ACCOMPLISH?
When establishing an SSSNT, it is wise to have a counseling session with the Special Needs attorney, the disabled person, the trustee and other interested family members. The person with disabilities and/or his or her family should prepare a budget. The family and the trustee should then agree on which budget items will be paid by the trustee, which will be paid by the disabled person, and which items, if any, can be purchased through use of a credit card that will ultimately be paid by the trustee.
It is also important to run a “Monte Carlo Simulation.” This is a type of financial calculation that can be used to show how long the trust will last assuming varying conditions, such as different levels of expenses and investment returns. Once it is understood that the trust should last the lifetime of the person with disabilities, and a Monte Carlo Simulation has shown how long the trust is likely to last under various scenarios, the disabled person and family may agree to reduce expenditures to a more appropriate level.
Finally, the counseling session is an opportunity for the Special Needs attorney to review with the trustee, the family, and the person with disabilities, the state law requirements pertaining to the administration of an SSSNT. At the end of the session, everyone should understand the rules, and a game plan should be adopted which will enable the person with disabilities to receive maximum benefits from the trust during his or her lifetime.
WHAT AGENCY APROVALS ARE REQUIRED?
SSA. If the person with disabilities is receiving SSI, the SSSNT should be filed with the SSA.
Medicaid. If the person with disabilities is receiving Medicaid, the trust should be filed with the State Medicaid Agency.
Filing. It is very important to file notices and copies of the trust document with the SSA and/or State Medicaid Agency. The Special Needs attorney is generally responsible for this. It is also is important to submit a separate cover letter that shows SSA and the State Medicaid Agency exactly how the trust document complies with their requirements. The agencies seldom respond with specific approval of the trust, but if they do not approve, they will respond with specific reasons.
WHAT ESTATE PLANNING DOCUMENTS DOES THE PERSON WITH DISABILITIES NEED?
If the disabled person is a competent adult and has such non-countable assets as a home, a vehicle, or personal effects, he or she should execute a will. The individual should also execute an advance medical directive/living will and a durable power of attorney. Advance medical directives/living wills are important to avoid a Terri Schiavo-type situation, in which an individual who has no hope of recovery may be kept alive longer than he or she wishes. A durable power of attorney is extremely helpful in the event that an individual becomes incapacitated and is no longer able to take certain actions on his or her own behalf.
WHAT ESTATE PLANNING DOCUMENTS DO FAMILY MEMBERS NEED?
If the family members of an individual with disabilities intend to leave money to him or her (or for his or her benefit) they should execute a will, an advance medical directive/living will, a durable power of attorney, and a Third-Party Special Needs Trust (TPSNT) (sometimes called a Supplemental Needs Trust). Leaving money directly to a person with disabilities will jeopardize public benefits, while leaving it to an SSSNT will trigger a Medicaid payback requirement. Placing the funds in a TPSNT can allow a family to supplement the lifestyle of the person with disabilities without the loss of public benefits. TPSNTs operate in much the same way as SSSNTs, except that there is no Medicaid payback and no Medicaid accounting requirements.
Families who wish to establish TPSNTs should consult with a Special Needs attorney. It is also important that the family’s beneficiary designations be reviewed to ensure that the TPSNT is the beneficiary of any funds intended for the individual with disabilities.
[1] Mencer v. Ruch, 2007 Pa. Super. 182 (June 14, 2007).
[2] Myers v. Devore, 2006-Ohio-5360, 2006 WL 2925353 (6th Dist. Ct. App., Wood Cty. 2006).