Special Needs Trusts In The Context of Divorce

Many divorce attorneys are clueless about the impact on a client’s SSI and Medicaid eligibility of a marital property settlement, spousal support payments or child support payments. The incidence of divorce in families where a spouse or child has a disabling condition is almost twice that of families without such disabilities. Thus, it is imperative that we reach out to our Family Law brethren to advise them of Special Needs Trust planning in the context of divorce – well in advance of the negotiations that will yield the divorce settlement.

For purposes of SSI and Medicaid eligibility, direct receipt by the person with a disability of the following items constitutes “unearned income” which will reduce his SSI payment:

(i) non-exempt marital assets set aside as part of a property division;
(ii) spousal alimony or support payment in cash;
(iii) child support payments in cash.

In general, unearned income reduces the recipient’s SSI payment dollar for dollar after the first $20. In the case of a minor child, cash support payments by an “absent parent” (i.e. one not living in the same household as the minor child) are subject to a special rule: one-third of such payments are excluded from the calculation of the child’s unearned income. Similarly, one-third of any non-cash child support for a minor child’s food or shelter provided by an absent parent will be disregarded for purposes of calculating the child’s unearned income. The other two-thirds will still count as “In-Kind Support and Maintenance” (“ISM”) subject to the “Presumed Maximum Valuation Rule” (“PMV”), i.e. a reduction in the child’s SSI payment of no more than one-third of the maximum federal SSI benefit (in 2013, $234, which is one-third of $710). Child support payments for an adult child do not qualify for the one-third disregard available for child support for a minor child, regardless of whether the parent payor lives with that adult child.

Use of a first-party SNT can mitigate the adverse impact on the SSI benefits of a client who is entitled to receive Court-ordered spousal support or child support. There is no SSA restriction on the assignability of such payments. See POMS SI 01120.201J.1.c and 01120.201G.1.d. However, such payments must be irrevocably assigned and paid to the first-party SNT, preferably pursuant to the express terms of the court order dissolving the marriage and reciting the award of support. Furthermore, the court order should ideally direct and require the establishment of the first-party SNT to which the support payments are irrevocably assigned.

While the payment of the support to the SNT must be irrevocable, the court order should not preclude a future modification of the amount or timing of the payments (unless that is a negotiated element of the parties’ settlement). The usual statutory rules regarding the establishment of a first-party SNT will still apply, as set forth in 42 U.S.C. Section 1396p(d)(4)(A) and numerous POMS provisions interpreting same, including limitations on the identity of the Settlor and the age of the SNT beneficiary at the time the SNT is established and funded. If the SNT beneficiary is a minor or an incapacitated adult, a conservator may need to be appointed as a procedural first step in the process of establishing and funding the first-party SNT with the stream of support payments and any non-exempt assets set aside for the beneficiary as part of the settlement.

While a first-party SNT must be used as the receptacle for any court-ordered support payments or non-exempt assets awarded as a property settlement, a third-party SNT may also play a role in securing the future of a divorced client (or a child of the dissolved marriage). If the parties agree on “voluntary” payments by one of the ex-spouses for the benefit of a former spouse or a child of the marriage, a third-party SNT can be the receptacle. Such voluntary payments should be completely separate and apart from any court-ordered payments irrevocably assigned and paid to a first-party SNT. Caution is advised, however, in relying too heavily on this approach. Since the payments are purely voluntary, there is no legal remedy if the payor decides to discontinue such payments to the detriment of the SNT beneficiary.

Kristen M. Lewis, Esq., Member of the Special Needs Alliance and Fellow of the American Academy of Trust and Estate Counsel.