Intro to Planning for A Child With Special Needs
Lack of planning can jeopardize a special needs child’s eligibility to receive means-tested government disability and health benefits. The federal government provides Supplemental Security Income (SSI) to people who are 65 or older, or who are blind or disabled, who have low incomes and minimal resources. Applicants must meet the Social Security Administration (SSA) definition of disabled2, earn little or no income and have available assets of less than $2,000 to qualify. The agency excludes the value of a primary residence, a vehicle, personal furnishings and other assets (such as a burial plan of less than $1,500 or up to $1,500 of cash surrender value in a permanent life insurance policy) when determining “available assets.”
For 2012, the monthly federal SSI benefit is $698 for an individual, which is meant to be used for food and shelter expenses. This benefit is indexed for inflation and can change each year. Most states provide an additional benefit, which augments the total monthly payment. However, many disabled children under age 18 who meet the government’s requirements may still be disqualified from SSI benefits because of the income earned by family members residing in their households. As a result, many families with the economic means to care for their disabled children may feel that special needs planning is unnecessary. This would be shortsighted.
When the disabled child reaches age 18, the SSA views him as an adult. This is a significant milestone because the agency then excludes the income and resources of family members when determining whether an adult meets the financial limits for SSI eligibility. In 39 states3 [including Georgia] and the District of Columbia, an SSI recipient is automatically eligible for Medicaid, a federal-state health insurance program for low-income adults and their children, as well as for people with certain disabilities. Medicaid offers significant health care cost savings for the disabled individual and his family. Therefore, it is imperative that a disabled person’s SSI benefits not be reduced to zero, because one dollar of SSI benefits in these jurisdictions ensures 100 percent of Medicaid benefits.
First-Party Self-Settled Trusts
What if the special needs child has assets in his name that would make him ineligible to receive means-tested government benefits? Transferring the disqualifying assets to a third party (such as a non-spousal family member) for the sole purpose of qualifying for Medicaid is not advised. To be effective, such transfers must occur 60 months before the disabled individual applies for Medicaid benefits. Otherwise, the transfers will trigger a look-back penalty, delaying the receipt of benefits for a period of time that could be lengthy, depending on the size of the transfers. This strategy is feasible only if the disabled individual will require care for many years and the family or legal guardians want to place a cap on the amount of private-pay health care costs they will incur.
A better option is to transfer the disqualifying assets into a first-party self-settled special needs trust. Two types of these trusts have government approval: an irrevocable “(d)(4)(A) SNT” or “(d)(4)(A) Medicaid Payback Trust” and a “(d)(4)(C) Pooled Account Trust.” These trusts are collectively referred to as “OBRA 1993 Special Needs Trusts” in reference to the Omnibus Budget Reconciliation Act of 1993 that allowed their use to preserve Medicaid eligibility, and subsequently to preserve SSI eligibility. The government does not consider assets within a properly drafted and administered OBRA 1993 Special Needs Trust when determining a disabled individual’s ability to qualify for means-tested benefits. Trust assets must be used solely to pay for permitted supplemental requirements of the special needs beneficiary.
Unlike a third-party special needs trust, an irrevocable (d)(4)(A) Medicaid Payback Trust, upon the death of the disabled beneficiary, must first reimburse the government for medical benefits provided through Medicaid before any assets are distributed to remainder beneficiaries, such as the disabled beneficiary’s siblings. The trust is not required to reimburse the government for SSI benefits. Other than this major difference, the first- and third-party special needs trusts operate similarly.
The Pooled Account Trust is often a good option when the disqualifying assets are limited in size, for which the cost of establishing and administering a (d)(4)(A) special needs trust is not feasible. With a (d)(4)(C) Pooled Account Trust, a nonprofit charitable organization establishes and administers a master trust. A sub-trust account is created within the master trust to hold the disabled person’s disqualifying assets. The nonprofit organization serves as trustee of the sub-trust account. However, family members can advise the organization as to the disabled individual’s needs. Upon the death of the disabled individual, any remaining assets in the sub-trust account can be left to the nonprofit organization, in which case the trust is not required to reimburse the government for Medicaid-covered medical costs. Alternatively, if the remaining assets are to pass to surviving family members, the trust must first repay Medicaid benefits, similar to the (d)(4)(A) trust.