Enhancing The Quality of Life for the Spouse or Child with a Disability: A New Use For the Special Needs Trust
John and Mary are going through a divorce in California. They have no children. Mary 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 $943.72 /month in Supplemental Security Income (“SSI”) in the year 2021. 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 $943.72 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 any SSI eligibility, entirely, as there would be a dollar-for-dollar reduction in her SSI. But what if there were a way to receive both support from John AND the SSI benefit payment from the government? Is it possible for the parties to structure their divorce in a way to permit Mary to do that?
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, her ongoing public benefit. It is a creature of both federal and state public benefits law and enjoys the “blessings”– as it were — of both. By merging the public benefit 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 linked medical coverage under the California Medi-Cal program (known as Medicaid in states outside of California).
Court Order Is Required
To make this work, the SNT would have to be set up properly. This would most likely require a court order as part of their divorce, wherein the court would order or require the creation of a SNT and order the support payments irrevocably assigned to the SNT. Even though the court would assign the support to the SNT, the court could still retain the power to modify, terminate and 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 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, this should not be a problem.
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. In this regard, there are two categories of creditors that the trustee might pay: (1) those who will furnish to Mary products or services other than food or housing, or (2) those who will furnish Mary food or housing.
Payments For Items That Are Not Food Or Housing Are Not Restricted
With respect to the first category (items that are NOT food or housing), the trustee of the SNT could pay to Mary’s providers out any amount that the trustee deemed appropriate. Provided that such payments were paid directly to the providers of goods and services for Mary’s benefit, and not to Mary, herself, the SNT could pay out ANY amount and there would be no reduction 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.
Payments For Food Or Housing Will Result In Only Limited Reduction In Mary’s SSI
With respect to the second category (food or housing), SSI treats these expenditures differently. Since SSI is designed to cover a beneficiary’s food and housing, payments made by the SNT to supplement these items will partially reduce Mary’s SSI benefit, but not beyond a maximum amount each month no matter how much is paid out. This category of payments is called “In Kind Support and Maintenance” or “ISM” for short. These payments will reduce Mary’s SSI, but only partially: In 2021, the maximum reduction in Mary’s SSI each month, no matter how much is paid to her creditors for food and housing that month, will be only $284.66 per month (in year 2021). This “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 $284.66 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 $284.66 per month.
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 could 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 creating 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 so as to permit the child to also retain his or her SSI benefits and linked Medi-Cal.
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 Note: SNT’s May Not Work for Some “Medi-Cal Only” Recipients: the ‘MAGI’ Population. For those persons under age 65, but without a disability and who are not on SSI, but who qualify for Medi-Cal–only under expansion provisions of the Affordable Care Act based only upon having modest incomes (and regardless of the value of their assets), sometimes called the “Medi-Cal Expansion” or “MAGI Populations” (where MAGI is an acronym for Modified Adjusted Gross Income), the use of the SNT may not work, although there are exceptions.
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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 divorces (called ‘Dissolution of Marriage’ in California) 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.
The appropriate use of a Special Needs Trust in divorce proceedings can greatly enhance the standard of living for the spouse or child with a disability and, by that use, help promote a greater measure of self-sufficiency. Those looking out for the best interests of the spouse or child who would so qualify would do well to consider its use in the proper circumstances.
Updated as of 03/20/2021.