(Recently, I was the featured speaker at a meeting of the New Jersey Association of Professional Mediators. The subject was special needs planning for disabled spouses and/or disabled children in the context of divorce. The brief introduction to the subject given by the moderator follows, which is followed by a portion of the paper I presented at the meeting.)
The emotional and financial toll special needs families bear is staggering. The issue of special needs planning is becoming more and more important due to the tremendous rise in autism in children (not to mention the rise in divorces in general). A well-informed mediator can help the divorcing couples create more options, inform them about the variable costs and scenarios and help them plan for them by creating an effective Memorandum of Understanding.
Keeping this in view, the participants at the meeting tonight will be educated on the purpose of a special needs trust, the three different types of special needs trusts and when they are used, the legal requirements in establishing a special needs trust and the relationship of a special needs trust in regards to divorce, child support and alimony.
Special Needs Planning During and After Marriage; Special Needs Trusts.
I. What is a Special (Supplemental) Needs Trust?
A special (supplemental) needs trust is a trust designed to supplement, and not to supplant, impair or diminish, public benefits a beneficiary receives, or may in the future be receiving. It is designed to (1) protect the trust corpus, in the event that the trust beneficiary is, or becomes, eligible for public benefits based on need (such as Medicaid and SSI) and (2) protect the beneficiary’s eligibility for benefits, which might otherwise be in jeopardy by an outright distribution of the trust corpus.
II. Divorce and Child Support
The treatment of child support payments by the Supplemental Security Income (“SSI”) program is outlined in Social Security POMS § SI 00830.420. According to that POMS section, child support payments made on behalf of an SSI child are unearned income to the child, with a one-third income disregard for an eligible child by an absent (non-custodial) parent.Current child support that is received for an adult child is income to the adult child, and is not subject to the one-third income disregard.
However, the Social Security POMS recognizes an exception to this rule for the irrevocable assignment of child support payments to a special needs trust:
A legally assignable payment … 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.
POMS § SI 01120.200.G.1.d.
A central issue involved in the assignment of child support payments is whether the special needs trust must be self-settled (with a payback provision) or may be third-party (with no payback provision). If characterized as “child support,” certain protections, such as enforcement of payments through the probation department, are available. However, “child support” payments belong to the child. Because the child has a legal right to receive child support, many practitioners opine that the special needs trust that is created must be a self-settled trust, and payback provisions must be included. Mazart, G. and Spielberg, R., Trusts for the Benefit of Disabled Persons: Understanding the Differences Between Special Needs Trusts and Supplemental Benefits Trusts, New Jersey Lawyer Magazine, No. 256, February 2009.
Indeed, the POMS section addressing self-settled special needs trusts includes the following example:
A disabled SSI recipient over age 18 receives child support which is assigned by court order directly into the trust. Since the child support is the SSI recipient’s income, the recipient is the grantor of the trust and the trust is a resource, unless it meets an exception in SSI 01120.203 [the self-settled special needs trust exception]. If the trust meets an exception and is not a resource, the child support is income, unless it is irrevocably assigned to the trust or trustee, per SI 01120.201J.1.d in this section. In this example, the court ordered the child support to be paid directly into the trust, so we consider it to be irrevocably assigned to the trust. POMS § SI 01120.201.C.2.b.
Nevertheless, some practitioners recommend that, if a divorcing couple agrees to forego protections such as the enforcement rights that come with payments of “child support,” the couple enter into a settlement that does not include “child support,” but instead obligates the parent to make payments to a third-party special needs trust on behalf of the disabled child, as part of a property settlement agreement. Although the parent’s obligation to make these payments would not be the subject of child support enforcement protections, the obligation can be enforced as a contract right under the property settlement agreement.
Other practitioners recommend voluntary payments of income by the parent to a third-party SNT, separate from and in addition to court-ordered child support. Mazart, G. and Spielberg, R., supra.
This is a complex area of law, and choosing between these alternatives requires an examination of various issues, including a parent’s legal duty of support; the emancipation of an adult disabled child; and the child’s receipt of public benefits. By way of example, if a parent has a legal duty to support a disabled child, even beyond the age of majority, then payments in lieu of child support paid to a third-party SNT would violate the parent’s duty of support; accordingly, the possibility exists that these payments to a third-party SNT would jeopardize that child’s eligibility for public benefits.
Indeed, despite the substantial legal authority supporting payments of child support into an SNT, some practitioners have observed that families rarely seek to have a court order the irrevocable assignment of child support or alimony payments into a trust, “because of the complexity of [the] issue… and the lack of sophistication at the local Social Security office” with this approach:
In our experience, families generally handle the child support/emancipation question in one of two ways: They forego formal support at age 18 and get their child enrolled in all the benefit programs that he or she qualifies for, while making an informal arrangement for supplemental support, or they forego public benefits until age 22 when their child is out of school, and they continue child support payments until then.
Hines, A. and Margolis, H., Divorce in Special Needs Planning, The ElderLaw Report, Volume Xxii, Number 5, December 2010.
III. Divorce and Alimony
Alimony payments to a disabled spouse may be irrevocably assigned to a self-settled special needs trust without affecting that spouse’s eligibility for public benefits.
For purposes of SSI, alimony or spousal support is generally categorized as unearned income. Consequently, after a $20 disregard, alimony or spousal support will reduce SSI benefits on a dollar-for-dollar basis.Milender, F., Divorce and the Disabled Spouse, The ElderLaw Report, Volume XXII, Number 5, December 2010 (citing POMS § SI 00830.418).
However, the Social Security POMS expressly permits the irrevocable assignment of alimony payments to a special needs trust:
A legally assignable payment … that is assigned to a trust, is income for SSI purposes unless the assignment is irrevocable. For example, … alimony payments paid directly to a trust 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.
POMS § SI 01120.200.G.1.d. (emphasis supplied).
According to one practitioner,
It is important that the trust be “created” by the court and not just by agreement of the parties in order to meet the requirements of the law and avoid the risk that the Social Security Administration will find that the trust was created by the individual or the spouse [citing POMS § SI 01120.203B.f.]. If the alimony payments are irrevocably assigned to the trust, the payments are not counted as income for SSI purposes, POMS SI 01120.200G…. Support payments or alimony should not be placed in a third-party [special needs] trust. These payments belong to the beneficiary of the trust, therefore placement into a third-party trust would constitute a transfer of assets for Medicaid and SSI purposes and would result in the imposition of a penalty period.
Milender, F., Divorce and the Disabled Spouse, supra.
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