Adult disabled children often receive government assistance that is based on need. An example of two common programs are: (1) Supplemental Security Income (SSI) and (2) Medicaid. To qualify for SSI the recipient must be disabled (as defined by the Social Security Administration) or age 65 or older and meet certain strict income and asset guidelines. A person on SSI will automatically qualify for Medicaid. If the person is not on SSI, he or she must again meet certain income and asset guidelines in order to qualify for the government assistance. As a general rule, the recipient cannot have more than $2,000 in countable assets[i] to qualify for either of these programs.
Many disabled individuals rely on SSI for income as well as eligibility for Medicaid. If they lose their SSI benefits, not only do they lose their income, they also lose their health care (in the form of Medicaid), which is typically more devastating than the financial loss. For this reason, it is imperative for many disabled individuals to preserve their SSI benefits.
The receipt of an inheritance will often disqualify a disabled person from SSI and Medicaid benefits. For this reason, some parents “disinherit” their special needs child and have a family agreement that the other children will take care of the disabled child. While this strategy sometimes works, there are numerous examples of why this planning strategy is not the best strategy under most circumstances. Among the reasons are possible misappropriation of the funds by the “trusted child,” or the bankruptcy, divorce, death, or disability of the “trusted child.” In other instances the “trusted child” has his or her assets seized (including the funds intended to care for the disabled child) by the Internal Revenue Service or another creditor of the “trusted child” or his or her spouse.
A better strategy is to include a special needs trust in the estate plan of the parents. A special needs trust allows the trustee of the special needs trust[ii] to hold the inheritance of the special needs child in a trust that is segregated from the trustee’s own assets. As such, the trust assets are not subject to the creditors of the trustee. The trustee can use the special needs trust income and assets to provide for the needs of the disabled beneficiary that would not cause a loss in government assistance. In this way, the SSI and Medicaid benefits received by the special needs child are maintained after the death of the parent.
Disabled children of a parent retired with a military pension are eligible to receive Survivor Benefit Plans. A Survivor Benefit Plan can pay the disabled child up to 55% of the pension that was being received by the veteran parent. However, prior to end of 2014, the Survivor Benefit Plan had to be paid directly to the disabled adult child. This could cause the disabled beneficiary to lose any other government assistance he or she may have had, such as SSI and Medicaid. On December 15, 2014, Congress passed The Disabled Military Child Protection Act. This Act provides that the military pension received by the disabled child can be assigned to a qualified special needs trust. By doing so, the income received by the trust would not affect the disabled child’s other needs-based government assistance.
A qualified special needs trust under the Disabled Military Child Protection Act is a certain type of special needs trust often referred to as a “first-party trust” or “self-settled trust.” It is called a first-party or self-settled trust because it is funded with the income or assets of the disabled child and not with the parents’ or some other third-party’s assets. This type of trust is also referred to as a (d)(4)(A) Trust, Payback Trust, or OBRA 93 Trust. A first-party trust must be created by a parent, grandparent, guardian, or the court and it can only be created for disabled individuals who are 65 years old or younger. The reason that the trust is sometimes referred to as a Payback Trust is that one of its requirements is that any money remaining in the trust upon the death of the death of the disabled beneficiary must first be used to reimburse the state for any Medicaid benefits paid for the disabled child before being paid to any other beneficiary. While this is often viewed as a negative to establishing such trusts, proper planning and financial management would assure all of the Survivor Benefits would be spent during the disabled child’s lifetime and therefore there would be little or nothing remaining with which to reimburse the state.
It is anticipated that the regulations relating to the Disabled Military Child Protection Act will be finalized by the end of 2015 or early in 2016. It appears that the designation of the trust can be made by the military member anytime during his or her lifetime, but also assignable by the disabled child if or when the benefit is received. Retirees cannot make the assignment now but hopefully will be able to do so by early 2016.
Our law firm focuses on estate planning and administration of trusts, including special needs trusts. As a member of the American Academy of Estate Planning Attorneys, our firm is kept up-to-date with information relating to persons with special needs. You can get more information about a complimentary review of your clients’ existing estate plans and our planning and administration services by calling our office.
[i]. Certain assets, like a personal residence, one car, and household furniture and furnishings are exempt assets and not counted toward the $2,000 limit.
[ii]. The disabled child or his or her spouse should not be named as the trustee of the special needs trust. The trustee should be either a trusted family member or friend or a professional trustee such as a private fiduciary, bank, trust company, attorney, or CPA.
( By appointment only )