Divorce and Special Needs Planning

Divorce is never easy, but if a child or spouse with special needs is involved, there are special considerations. At the same time, family law attorneys aren’t always familiar with how to best protect a spouse or child with special needs during a divorce. Elder law attorneys can provide information to family law attorneys who may not understand the special needs planning vehicles that are available and the issues special issues families should take into consideration.

Because no two cases are alike, it is important to look at each case individually to ensure that a divorce does not leave the individual with special needs in an even worse position. For example, if a court awards a spouse with special needs alimony, the income may affect the spouse’s ability to get Medicaid. Similarly, when a divorce involves a child with special needs, the first thing to look at is whether the child is under or over age 18. If the custodial parent of a child with special needs receives alimony, the child who is under 18 may not be eligible for Social Security Income (SSI) or Medicaid because the parent’s alimony is considered monthly cash income. Once the child reaches 18, alimony paid to a parent will not affect SSI.

As an alternative to paying alimony in cases where it could affect eligibility for benefits, the divorce agreement could be structured so that the non-custodial parent or the spouse without special needs pays for a non-cash alternative, such as the mortgage, childcare, special services, or a care attendant. Another option is to consider the family’s natural support system. A settlement agreement could include payments to grandparents or siblings who are caring for the individual with special needs.

But such in-kind payments can only be done if the divorcing parties are non-adversarial because this type of payment is difficult to enforce. There also is a tax issue with this solution because alimony is tax deductible for the paying spouse, while in-kind donations are not deductible. This means the spouse receiving the alimony may have to accept a lower amount to make up for the lack of a tax deduction for the paying spouse.

If the divorcing parties are adversarial and the paying spouse cannot be trusted to make payments without a court order, then the court may have to award alimony or child support in the form of cash. Cash payments are easier to enforce because the court can order the paying spouse’s paychecks docked. In this circumstance, one way to preserve benefits is to put the support payments into a first-person special needs trust.

Even if the parties are not adversarial, a third-party special needs trust can be a good option in some circumstances. For example, if there is an asset that the non-custodial parent is required to leave to his or her children, the parent can leave it to the child with special needs in a third-party special needs trust, with the remainder going to the other children.

Not every individual with special needs will qualify for a special needs trust. For example, a spouse’s condition may not have deteriorated enough to qualify for a trust, but his or her condition could worsen. In this situation, placing alimony in a discretionary support trust that has a trigger clause to put the assets into a special needs trust when the spouse becomes disabled.

Because there are so many unknowns when dealing with an individual with special needs, settlement agreements should be as flexible as possible so the parties can go back to court if need be. Spouses will likely want to revisit a settlement agreement when their child with special needs is about to turn 18, so the settlement agreement should preserve the rights of the parents to do that.

Many states, including New Jersey, have laws that recognize the obligation of parents to provide support for an adult disabled child. If a court orders support paid under one of these laws, this can jeopardize the child’s right to receive SSI or Medicaid. For the amount of support paid, SSI will make a dollar-for-dollar reduction in benefits. Instead of being paid directly to the child, the funds should be put into a special needs trust. The court could also order the parent to pay for social services or recreational activities instead of paying cash.

(This blog post was adapted from an article first published on the ElderLawAnswers website. I am a member of ElderLawAnswers. )