We will start out by discussing the rules of eligibility for certain types of assistance programs. Next, we will discuss problems and pitfalls in planning for a Special Needs loved one. This will evolve into a discussion about what are believed to be the best options of planning for special loved ones – the Supplemental Needs Trust.
What Benefits Are Available to Special Needs Loved Ones?
Social Security Disability (SSDI) and Medicare: There are different categories of assistance that your Special Needs loved one might qualify for. The first category is called Entitlement Programs. They are called Entitlement Programs because you don’t have to have low income or assets to qualify for them. The two most common Entitlement Programs are Social Security Disability Income (SSDI) and Medicare.
There are different ways to qualify for SSDI, but typically Special Needs persons become eligible under the Childhood Disability Benefits or the Disabled Adult Child Program. To be eligible for this program, the Special Needs person must have first become disabled before age 22. The Special Needs person then qualifies for SSDI, based upon the record or earnings for the Special Needs person’s disabled, deceased or retired parent. Once a Special Needs person has received SSDI for two years, he or she will receive federal Medicare benefits. The Special Needs person does not need to wait until he or she attains age 65, as most of us would have to do. Since SSDI and Medicare eligibility is not based on income or assets, these programs usually do not need to be considered when developing an estate plan for Special Needs beneficiaries.
Means-Tested Programs: Means-tested programs include Supplemental Security Income or SSI, Medicaid, In-Home Supportive Services, Subsidized or Section 8 Housing and Temporary Aid to Needy Families. Since these Means-Tested Programs generally do not allow a person participating in the program to have more than $13,000, the receipt of an inheritance will disqualify a Special Needs loved one until he or she has spent the inheritance down to $13,000.
Medicaid: The loss of Medicaid can be devastating to a Special Needs person because he or she may not be eligible for any other kind of health insurance coverage.
Supplemental Security Income (SSI): Many Special Needs persons obtain their Medicaid eligibility because they also receive SSI. In order to qualify for SSI, a person must be age 65 or older, blind or disabled, a US citizen, not a resident in a public institution, and have no more than $13,000 of countable assets. Exempt assets are those that do not count toward the $13,000 limit. These would include a residence, a car and household goods. An SSI recipient must also meet certain income guidelines.
Once a person is covered under SSI, he or she will receive a monthly benefit. Currently, the monthly benefit for an unmarried New York State recipient is $761, and $1,115 for married New York State recipients. These benefits are designed to assist the SSI recipient in paying for shelter and food. If the SSI recipient receives other income, his or her benefit will be reduced.
Income is defined as any cash payments received, except we exclude the first $20 received every month from the calculation. With regard to earned income, the first $65 is excluded and one-half of earnings over $65 are excluded. Based upon this formula, the maximum earned income an unmarried person can have, and still receive SSI, is $1,587 per month for unmarried persons and $2,295 for married persons.
The reason most minor Special Needs person cannot receive SSI is because of the deemed income rule. This rule causes the income of a parent or spouse to be attributed to the Special Needs person. Parent’s earnings are no longer deemed to a Special Needs person after reaching age 19.
As previously mentioned, SSI benefits are meant to help pay for a Special Needs person’s shelter and food. If someone else pays for their shelter and food, it will reduce the Special Needs person’s benefit amount. This aid is known as an “In-Kind Support and Maintenance” or “ISM.” The first way that ISM is calculated is a one-third reduction in the maximum federal benefit rate. This process is referred to as the “One-Third Reduction Rule” or “VTR,” and it applies to Special Needs persons who live with someone else, who provides for their food and shelter. So, if an adult Special Needs person lives with his or her parents, who provide food and shelter, that person’s SSI benefit would be reduced by one-third.
Where the Special Needs person does not live with the person and only some of the shelter and food are paid for, the “Presumed Maximum Value Rule” or “PMV” applies. As a result, the monthly benefit is reduced by one-third, plus $20. If the actual value of the VTR or PMV received is less than these amounts, then the benefit would only be reduced by the actual value.
Why is all this important? Let’s say that a Special Needs person was able to work, and he or she had earned income of $1,000 per month. This would reduce his or her SSI from $603 down to $145 per month. If the Special Needs person then had ISM valued at more than $144 per month given to him, he or she would lose SSI eligibility, and therefore would be ineligible for Medicaid benefits. This can be a major mistake if the Special Needs person cannot otherwise qualify for health insurance coverage.
Problems and Pitfalls in Planning: So What Are Your Options?
Disinheriting Your Loved One: You could be like some parents, who decide to disinherit their Special Needs child in order to keep her from losing any government assistance. If you disinherit your Special Needs child loved one, you would not need to concern yourself about the loss of her SSI benefits. However, to the extent that the Special Needs child understands he was disinherited, he may perceive that he was not loved, as much as his siblings who received an inheritance. There would also be no funds set aside to care for the needs or wants of the Special Needs child that are not covered by government assistance.
Leave Everything to Your Healthy Children: You could also be like other parents, who decide to leave everything to their healthy children and disinherit their Special Needs child. They know that their healthy children love their Special Needs brother or sister, and they expect their healthy children to use their inheritances to care for Special Needs brother or sister. The good thing is that this strategy would not cause the Special Needs child to lose his or her government assistance. The bad thing is that the inheritance that is supposed to be set aside for the Special Needs child would be subject to the creditors of the healthy children. The inheritance could also be claimed by a divorcing spouse. Moreover, the healthy children could use their entire inheritance for themselves, or mismanage their inheritances. Even if none of these possibilities materialize, there is always the question of what happens if one of the healthy children becomes disabled or predeceases the Special Needs child. Who takes over then, and how does a Special Needs child get any money if that were to occur?
Create a Supplemental Needs Trust: The good news is that parents of Special Needs children have a third option to consider. They can establish a Supplemental Needs Trust. A Supplemental Needs Trust holds the inheritance for the Special Needs person, but it doesn’t result in a loss of benefits. Any benefits paid by Medicaid do not need to be reimbursed at the death of the Special Needs person. The trust assets are not subject to the creditors or divorcing spouses of the Special Needs person, of his or her siblings. A Supplemental Needs Trust also allows for the professional management of the trust assets.
The Supplemental Needs Trust: There are two kinds of Supplemental Needs Trusts. They are known as First Party Trusts and Third Party Trusts.
First Party Trust: One kind of First Party Trust is known as (d)(4)(A) Supplemental Needs Trust. We use this kind of trust in situations where parents have failed to plan, and we now need to try to prevent the Special Needs child from losing his government assistance. These trusts are created to hold inheritances or the proceeds from litigation where a disabled person is compensated for injuries. These kinds of trusts must be created by the parent, grandparent, a guardian of the Special Needs child or by the court. The major disadvantage of a (d)(4)(A) Trust is that Medicaid must be reimbursed from whatever is left in the trust upon the death of the Special Needs child.
Another type of First Party Special Needs Trust is known as a (d)(4)(C) Trust or “Pooled Special Needs Trust.” These trusts are also formed to hold inheritances or litigation proceeds. They are formed by charities that work with disabled people. The charity manages the funds for the benefit of the Special Needs person. When the disabled person dies, the charity gets to keep at least some of what is left in the trust.
Third Party Supplemental Needs Trust: Third Party Special Needs Trusts are created by parents, grandparents or other interested parties, as part of their estate plan. These trusts are not considered available for SSI purposes because they are fully discretionary, meaning that the trustee has the choice of whether or not to use the funds to assist the Special Needs person. Since these trusts are not First Party Trusts, none of the trust remainder needs to be used to repay Medicaid.
A Third Party Trust can be a part of your Will or Revocable Living Trust. It can also be created as a separate “Stand Alone” Trust. Many clients like to have the trust drafted as a “Stand Alone Trust” because then it allows for more than one person to make donations to it, such as parents, grandparents, uncles, aunts, brothers, sisters and others. A “Stand Alone” Trust can be funded during life or at death. If it is to be funded at death, some parents and grandparents use their life insurance or retirement assets as the means of providing for the funding of the Supplemental Needs Trust.
Problems and Pitfalls of Administering Supplemental Needs Trusts
Distributions: As we learned previously, distributions of cash to a Special Needs child can cause him or her to lose government assistance or have the amount of their government assistance reduced. As a result, the trustee of a Supplemental Needs Trust must be aware of what distributions can or cannot be made. Sometimes credit cards can help in the administration of a Supplemental Needs Trust. For example, if the Special Needs person can qualify for a credit card with a $500-$1,000 limit, it may be possible to have the trust payoff the card on a monthly basis. Since the card balance is a debt of the Special Needs person, we don’t have to worry about the ISM penalty, and the Special Needs person doesn’t have to be making requests for distribution to the trustee on a frequent basis.
As mentioned previously, payment of housing expenses and groceries would be considered ISM, and would result in a reduction in the Special Needs person’s SSI benefit and possible disqualification from Medicaid and other benefits. Does this mean that a trustee should never pay for housing costs from a Special Needs Trust? No. There are many circumstances where the payment of housing costs is of greater benefit than the reduction in benefits that result from it.
Selecting Your Trustee: One of the most important decisions in creating a Special Needs Trust is selecting the Trustee: (a) Do you make the Special Needs person’s siblings or other trusted relatives the trustee? (b) Will the trustee have knowledge of these rules or the time and patience to learn them? (c) What happens if they become unavailable to serve as trustee? One consideration when naming family trustees is to name a special Co-Trustee, such as the drafting attorney or other knowledgeable professional to advise these trustees. What about naming an attorney or a CPA, or a financial Planner or other professional to serve as trustee? This can often be a good idea.
However, just because these persons are professionals doesn’t mean they have the special knowledge to manage a Supplemental Needs Trust. And even if they do, who will serve if they are not able to do so? As with family members serving as trustees, it might make sense to name a Special Co-Trustee to serve as an advisor to the professional fiduciary.
A third alternative to serve as trustee is a bank or trust company. These institutions have experience managing money and sometimes have employees experienced in administering Supplemental Needs Trusts. As with the other options, you can always name a Special Co-Trustee to assist the bank or trust company with technical questions.
Mr. Levine received his B.S. degree from New York University and his J.D. degree from St. John’s University School of Law. Mr. Levine was an Editor of the Law Review. Mr. Levine has been a member of the New York Bar since 1973, and is admitted to practice law before the federal courts of the Southern and Eastern Districts of New York. Mr. Levine is a member of the American Academy of Estate Planning Attorneys and the New York City Bar Association.