Preserving Public Benefits in a Disso for the Spouse or Adult Child with a Disability: A New Use For the Special Needs Trust
The Problem: What do you do when the supported spouse, or an adult child, in a dissolution has a disability and is receiving SSI and Medi-Cal, where an award of support would reduce or eliminate their public benefits?
Consider the Following Hypothetical Case
John and Mary are going through a divorce in California. They have no children. Mary, age 42, has not worked outside the home during their entire marriage of 10 years. She now suffers from Parkinson’s Disease and is unable to work. Their respective attorneys have jointly determined that, based upon John’s income and Mary’s need, John should pay approximately $1,500 / month in spousal support for Mary. They also agree that – if she were not receiving support from John — Mary’s disability and inability to work outside the home would likely qualify for $1,133.73 per month in Supplemental Security Income (“SSI”) (in 2023). However, they further agree that the $1,500 per month that John has agreed to pay in Spousal Support will not be enough for Mary to pay all of her bills and living expenses. They do agree, however, that if Mary were somehow able to qualify for the full SSI benefit of $1,133.73 per month AND still get the benefit of the $1,500 per month in spousal support from John, that she would be able to do so. Is there a way to accomplish this?
Background: Without Use of a SNT, Support Payments To Mary Will Reduce Her SSI Dollar For Dollar
Without any special planning, if John were to pay spousal support to Mary directly, she would have no chance of qualifying for SSI: the attorneys have advised Mary, correctly, that her receipt of support payments from John in an amount greater than the potential SSI benefit would eliminate her SSI eligibility, entirely, as there would be a dollar-for-dollar reduction in her SSI. If she lost her SSI, she would also lose her associated Medi-Cal health care benefit.
Question: Is there a way to structure their divorce so that Mary receives both support from John AND the SSI benefit payment from the government?
Answer: Yes. Enter the Special Needs Trust (“SNT”)
The SNT is a special kind of trust designed to hold private funds and to disburse them to the public benefits recipient in a manner that preserves, rather than destroys, their public benefits. It is a creature of both federal and state public benefits law and enjoys the “blessings”– as it were — of both. By merging public benefits with private funds, the SNT is designed to enhance the quality of life of the public benefits recipient, who would otherwise find it very difficult to live on the very modest public benefit payment, alone. If set up properly, John could make spousal support payments directly into the SNT, and Mary could still qualify for SSI, as well as her associated medical coverage under the California Medi-Cal program.
Court Order Is Required
To make this work, the SNT would have to be set up properly. This would likely require a court order during their divorce, wherein the court would order the creation of a SNT and then order the support payments irrevocably assigned to the SNT. However, even though the court would irrevocably assign the support to the SNT, it is my view that the court could still retain the power to modify, terminate and/or enforce the support order. Upon such court order, John would then make the support payments directly to the trustee of the SNT, instead of to Mary. The result: Mary’s SNT would receive the amount of her full support from John, AND she would retain both her full SSI benefit and her linked Medi-Cal coverage. The Trustee of the SNT could then use the funds in the SNT to help pay for Mary’s needs by making direct payments to the providers of goods and services to Mary, rather than directly to Mary, herself.
The Trustee Must Be Independent
The SNT would be managed by an independent trustee. The trustee should be someone whom Mary trusts, or perhaps a professional trustee. The trustee must have full discretion as to the amount and nature of payments to be made on Mary’s behalf. However, if discussed ahead of time with the proposed Trustee, this should not be a problem.
Pooled SNT Option
As an alternative to the creation of a private SNT for Mary, alone, Mary could join an existing Pooled SNT, which is a SNT established and professionally managed by a non-profit organization for the benefit of many public benefits recipients. The Trustee of the Pooled SNT would likewise pay Mary’s providers, rather than Mary, herself.
No Payments May Be Made Directly To Mary
None of the payments could be made to Mary, directly, as such cash payments would reduce her SSI on a dollar-for-dollar basis; rather, they would need to be paid, instead, directly to Mary’s creditors and providers of goods and services to her.
The ISM Issue
The Trustee of either the private or Pooled SNT would need to be mindful when paying 3rd parties for Mary’s needs: In this regard, there are two categories of needs that the trustee might pay are: (1) those which are food or housing, and/or (2) those needs which are not food or housing. Since the SSI benefit is intended to cover Mary’s food and housing expense, payments by her Trustee for those items will reduce her SSI. In SSI parlance, the Trustee’s payments for Mary’s food and housing expenses will be considered In Kind Support and Maintenance (“ISM”) to Mary.
But this ISM reduction works in a special way: the payments will reduce her SSI payment dollar for dollar, but only up to a fixed amount, which is called the Presumed Maximum Value (“PMV”). The PMV is capped by law at $324.66 (for year 2023) per month. This means that, no matter how much Mary’s Trustee pays her providers for items that are food or housing in any given month, the reduction in her SSI for that month will never be more than the then current PMV rate.
This PMV “cap” can be used to advantage: Example: If Mary finds an apartment that rents for $1,500 per month, the SNT could pay her full rent of $1,500 per month, but the reduction in her SSI would not exceed $324.66 per month. In effect, she would get the benefit of a nice apartment renting at $1,500 per month for a “cost” to her of only $324.66 per month. I think of this as “PMV Leverage”.
Payments For Items That Are Not Food Or Housing Are Not Restricted
With respect to items that are NOT food or housing, the trustee of the SNT could pay to Mary’s providers any amount that the trustee deems appropriate. Provided that such payments were paid directly to the providers of goods and services for Mary’s benefit, and not to Mary, herself, there would be no reduction at all in Mary’s SSI benefit payment. For example, the SNT could purchase a vehicle for Mary’s use, and also pay for repairs, gas, oil, license fees, and related expenses.
Seeing the potential benefit to Mary, all parties see the wisdom of this approach. To implement this plan, their attorneys may recommend retaining the services of an attorney with special skill in creating Special Needs Trusts. That specialist would be engaged to prepare the SNT, furnish appropriate legal authorities to the court to explain the workings of the SNT, provide appropriate notice of its creation to the Social Security Administration and Medi-Cal, and furnish guidance to the trustee in terms of the kinds of payments that can be made from the trust and their impact, if any, upon Mary’s SSI.
Of course, the court would need to be convinced that this is the right thing to do, as the court’s participation in irrevocably ordering support paid to the SNT would be crucial. To this end, the specialist might serve as a resource to the court in explaining to it the benefits of a SNT to Mary. If set up properly, the SNT could greatly enhance Mary’s quality of life beyond what she could afford from support payments, alone. By the same token, John may likewise feel that he has helped Mary better meet her living expenses, and feel better about his ability to assist her live on her own after the divorce.
SNT May Also Be Created To Receive Child Support
The same principles would apply if the divorcing couple had a child with a disability who was receiving SSI or other public benefits. If set up properly, child support might also be channeled into a SNT for that child in a manner to permit the child to also retain his or her SSI benefits and linked Medi-Cal. In this situation, and assuming the parent to whom the Child Support is paid is not themselves receiving public benefits, that parent could be the trustee of the child’s SNT and would have control of the funds to expend for the child’s needs. This arrangement would work best for an adult child with a disability who is receiving SSI and Medi-Cal.
For a minor child with a disability, SSI qualification is more difficult because SSI deems the custodial parents’ assets and income to the child, according to a formula, and this deeming would likely place the child over the SSI resource and income caps. Thus, for most minor children, the SNT strategy to receive child support, outlined in this article, would not be work. However, this deeming stops when the child reaches age 18, unless he or she is a full time student, in which case the deeming continues until that child either ceases to be a full time student or reaches age 22.
SNT May Also Be Created To Receive Property Division
Likewise, the same principles would apply if Mary receives a division of the couple’s community property which would place her above the limited $2,000 resource ceiling permitted by the SSI program: the excess above that very limited resource ceiling could be transferred into a SNT, and the Trustee could then use those funds to help pay for Mary’s needs over time.
Special Cautionary Note: SNT’s May Not Work for Some “Medi-Cal Only” Recipients: the ‘MAGI’ Population.
The SNT strategy described above would usually not work for those adults not on SSI and who qualify for Medi-Cal (only) as part of the MAGI Population. These are persons under age 65, without a disability, who are not on SSI, and who qualify for “Medi-Cal–only” under the expansion provisions of the Affordable Care Act (“ACA”) wherein eligibility is based only upon having modest incomes (and regardless of the value of their assets). This group is sometimes called the “Medi-Cal Expansion” or “MAGI Populations” (where MAGI is an acronym for Modified Adjusted Gross Income). The reason the SNT strategy would usually not work for this group: even though spousal support were paid to a SNT, that support would still usually still reflect as income on the recipient’s income tax return, and for this MAGI group, taxable income is the determinant to qualifying for Medi-Cal under the ACA. Too much income would be disqualifying.
That said, know that an under-age 65 spouse, or child, who is on SSI would — by definition — not be part of the MAGI population, and for these individuals, the SNT strategy described above would still be viable.
Unfortunately, it is relatively seldom that we see the SNT used in the divorce context. More often, we see the SNT used to shelter large injury settlements for a disabled infant or minor, or sometimes to shelter an inheritance. Attorneys otherwise skilled at handling marital dissolutions are usually not familiar with either public benefits law or the use of SNT’s in the context of divorce, and hence the SNT trust is under utilized. The good news, however, is that the technique is available in the proper setting.
Brief Note About Author: Attorney Gene L. Osofsky has practiced public benefits law for more than 30 years and was, himself, formerly a Certified Family Law Specialist. He is interested in helping family law attorneys and their clients preserve their public benefits.