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When Parent’s Divorce ~ Using a Special Needs Trust for Child Support Payments to Maximize Public Benefits Eligibility

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When Parent’s Divorce

Using a Special Needs Trust for Child Support Payments to Maximize Public Benefits Eligibility

Divorce for families with children is difficult in all situations, but when it involves a child with a significant disability the challenges are often greater. This article is intended to assist families and their advisors in exploring how to continue to provide for a child with a disability and maximize their eligibility for benefits.

Step 1 – Figure out What Child is Receiving Now and Likely to Receive in the Future

Much of this article will focus on preservation of eligibility for SSI which in most families does not occur until the child turns 18 because the custodial parent’s income and assets are deemed or attributed to the child. At age 18 in most cases the parent’s income and resources are no longer deemed or attributed to the child and benefit eligibility is determined solely on the child’s income and resources. In many cases essential government services such as attendant care and residential services will be dependent upon eligibility for Medicaid which has similar rules. It is common that eligibility of the minor child for these programs are based on a Medicaid waiver which essentially ignores the custodial parent’s resources and income, but the income and resources of the child can affect eligibility. A warning to the reader – eligibility rules for these programs can be very confusing and it is best to make sure you have advisors who are familiar with these programs.

Many States Require Child Support Even After Reaching Adulthood

At least twenty-seven states make provision for the support of adult children with special needs. Most of those states require that the disability of the adult child with special needs exist prior to the child becoming an adult. Most states that may require support for an adult child provide that it may be ordered indefinitely, but a few states merely extend the duty to support a short period of time after support would have ended for a child without special needs. The states that recognize a duty to support an adult child with special needs vary significantly in allocating this duty to support.

Reviewing your state law

The next step is to determine the definition of disability in their state and compare it with SSI and Medicaid’s definition of disability .

For instance, as a California practitioner, our definition of being disabled for purposes of support payments in the California Family Code: 3910

3910. (a) The father and mother have an equal responsibility to maintain, to the extent of their ability, a child of whatever age who is incapacitated from earning a living and without sufficient means.

Compare that with Social Security’s definition of disability which is based on whether the benefit recipient is unable to consistently earn more than $1,090.00 a month because of a physical or mental impairment that is likely to last at least a year or end in death. Though not an exact match, both of these rules focus on a functional test and are very similar.

Two Other Important Concepts

Much of the guidance for how SSI treats child support payments is found in the Social Security Administration’s Program Operations Manual System, commonly referred to as the POMS. The POMS provides administrative guidance for Social Security Eligibility Workers to help them determine how to handle specific situations.

The primary rules that concern treatment of child support is found in POMS SI 00830.420 and the One Third Rule Child Support Rule. The basic rule is that one-third of the amount of a child support payment made by an absent parent (a parent not living in the household), is excluded as countable income. However, this exclusion credit only occurs as long as the individual is defined as a “child” under SSI rules. A child is defined as an individual that is neither married nor head of a household and under age 18, or under age 22 and a student regularly attending school or college or training that is designed to prepare the individual for a job.

Example as Child

For example, if child support of $900 per month is paid to the custodial mother by the father for the benefit of their 12-year-old child before counting other income deemed from the mother, the child’s monthly SSI benefit rate is $733. Subtracting the $20 unearned income disregard from two-thirds of the payment, the child’s benefit rate is reduced to $153, or $733 – (600 – 20) = $153. Once the child is defined as an adult, then the benefit would be reduced by the full child support payment less the unearned disregard, or $733– (900 – 20) = $0.

Directing the Payments to a Special Needs Trust

We have found that in many cases the ideal solution is to direct the child support payments to a self-settled special needs trust. Special Needs Trusts can be divided into two categories. If the source of the fund is from someone other than the benefits recipient, the trust is categorized as a Third Party Special Needs Trust. This is typically used when a parent voluntarily leaves their funds for the benefit of their child for estate planning purposes.

If the source of the funds of the Special Needs Trust are from funds the benefits recipient has a right to receive such as child support payments, then the trust is categorized as a Self-Settled or Medicaid Payback Trust. For purposes of this article we will focus on the Self Settled Trust as a recipient of proceeds from child support payments.

It is well settled for public benefit purposes that support payments for are the child’s assets. Federal law allows a disabled individual to protect their own assets and maintain their SSI and Medicaid eligibility in a Self Settled Special Needs Trust which;

    • contains the assets of an individual under age 65 and who is disabled ; and
    • is established for the benefit of such individual by a parent, grandparent, legal guardian or a court; and
    • provides that the State will receive all amounts remaining in the trust upon the death of the individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State Medicaid plan.

SSI follows state law in interpreting judicial orders for lawful division of property and whether or not it is countable. A court order directing income and resources into a SNT for benefit of recipient creates exclusion making the payments countable until distributed. Child support is defined by the SSI program as in kind or cash payments to a child or a child’s legal representative or custodian to meet the child’s needs for food and shelter.

If child support is paid to an SSI eligible parent, it is considered to be the child’s income and is countable to the child as long as the parent and child live in the same household. Child support payments, including arrearage payments, are considered as unearned income.

The Special Needs Trust for Child Support Must be ‘Ordered’

The POMs gives guidance on how to use a a Self Settled Special Needs Trust in POMS SI01120.200 (G)(1)(d) which states;

Must be Court Ordered. POMS SI SI 01120.200 (G)(1)(d)

d. Assignment of income

A legally assignable payment (see SI 01120.200G.1.c. for what is not assignable), that is assigned to a trust/trustee, is income for SSI purposes unless the assignment is irrevocable. For example, child support or alimony payments paid directly to a trust/trustee as a result of a court order, are not income. If the assignment is revocable, the payment is income to the individual legally entitled to receive it.

Therefore, to use a Self-Settled Special Needs Trust as a recipient of child support payments the payments to the trust must be subject to a court order and cannot be done by a mere agreement. In most cases, irrevocably assigning child support payments to a special needs trust will maximize benefits for children receiving needs based benefits such as SSI or Medicaid.

For example, let’s say the child is a minor and the non-custodial parent is ordered to pay $1,500 a month to the custodial parent with the intention that much of these funds would be used for attendant care. If the child is a minor, 2/3 of the payments will be counted as income for purposes of SSI eligibility, and when the child is an adult 100% will be counted. In both these examples the payment would completely eliminate SSI qualification. Even more important in many cases, this would eliminate qualification for Medicaid which typically provides attendant care. If instead the payments are directed by court order to a Self-Settled Special Needs Trust, and in turn the trustee pays the attendant care directly, then the trustee pays the attendant directly, SSI and Medicaid benefits will not be reduced, and the payment by the trust directly to the attendant will not be considered income to the child because the child did not receive cash.

This article covers the basics of preserving eligibility for essential government services but as the reader will no doubt conclude; these rules can be very complex. This is a growing area of focus not only for the special needs trust practitioner, but also the family law practitioner as well. The reader should seek competent advisors experienced in these matters to avoid disruption of services to the child.

Stephen W. Dale

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Support for Children with Special Needs in Divorce” by Keith Maples, AMERICAN ACADEMY OF MATRIMONIAL LAWYERS CLE ANNUAL MEETING, November 6, 2015, Chicago, Illinois

See http://policy.ssa.gov/poms.nsf/lnx/0500830420

Consider that because child support is typically spent on a regular basis after deposit into a SNT and therefore does not tend to accumulate, use of a d4A trust for support may not pose much risk for recovery.

To look up the laws in your state, the National Conference of State Legislatures maintains a maintains a state by state database at http://www.ncsl.org/research/human-services/termination-of-child-support-exception-for-adult.aspx