(On December 1, 2016, I moderated the first Advanced Special Needs Trust Symposium, an all-day event held at the New Jersey Law Center. In addition to moderating the panel of speakers, I also presented on the topic of the “Uses of Special Needs Trusts in Divorce.” Due to the length of my paper, I divided it into two parts. The first section, on Alimony and Property Settlement Agreements, is posted below. The second section of my paper, discussing Child Support, will be posted later. It’s a complicated topic, and I hope readers find the paper useful in understanding the topic.)
ALIMONY AND PROPERTY SETTLEMENT AGREEMENTS
Sometimes a divorce is initiated as a tool for public benefits planning, where an ill spouse is facing the prospect of long-term care: not only can divorce be an avenue for the ill spouse to establish eligibility for Medicaid or other public benefits; it will also extinguish the well spouse’s responsibility to pay for the “necessaries” of the ill spouse, including the ill spouse’s nursing home care.
Other times, a more traditional divorce is initiated because of marital discord, but because there is a disabled spouse or child involved, special needs planning is impacted.
In either case, special needs trusts (“SNTs”) may be a critical component of the divorce.
PROPERTY SETTLEMENT AGREEMENTS (“PSAs”) and SPECIAL NEEDS TRUSTS
For divorces that involve long-term care planning for a disabled spouse, it is important to ensure that any Property Settlement Agreement (“PSA”) entered into by the parties is fair, rather than a collusive effort to transfer assets for purposes of establishing the ill spouse’s Medicaid eligibility. Medicaid will not automatically recognize a PSA, even if it has been incorporated into a final judgment of divorce. See H.K. v. DMAHS, 379 N.J. Super. 321 (App. Div. 2005), certif. denied, 185 N.J. 393 (2005); W.T. v. DMAHS, 391 N.J. Super. 25 (App. Div. 2007).
Our courts are demonstrating an increased deference to Medicaid when asked to make a ruling that might be interpreted as binding the Medicaid agency. For example, in In the Matter of A.N., a Minor, 430 N.J. Super. 235 (App. Div. 2013), A.N.’s parents wanted the SNT for her benefit to purchase the family home, and the trustee filed a complaint seeking instructions regarding the trust’s proposed purchase and the “impact on the Trust beneficiary’s Medicaid eligibility.” The Appellate Division held that “the court can … provide advice that the proposed transaction is consistent with [Medicaid] statutes and regulations and is unlikely to adversely affect Medicaid eligibility. [But the ruling] can have no binding effect in the future on DMAHS in rendering a Medicaid eligibility determination, [because] only the designated Medicaid agency is authorized to determine Medicaid eligibility.” I have seen the results of the A.N. decision in my practice. For example, in the past when I have filed Orders to Show Cause to establish or reform an SNT, DMAHS would typically send a form letter stating that it takes no position on the application but reserves the right to conduct a Medicaid eligibility review later. Since the A.N. decision, not only do I receive this form letter from DMAHS; I also see judges include reference to A.N. in their Orders, such as,
The Court is not making a determination as to whether the relief satisfies the Medicaid regulations or any other administrative code, provision, statute or law, and, pursuant to In re A.N., it is DMAHS’s position that it is not bound by the Court’s finding as to the impact the relief is likely to have on eligibility for Medicaid programs.
Particularly in light of our courts’ reluctance to be involved in decisions regarding Medicaid eligibility, it is important to ensure that a matrimonial judge’s findings of fact include an evaluation of the fairness of a PSA; the agreement should carefully consider the equitable distribution criteria set forth in N.J.S.A. 2A:34-23.1.
The manner in which a PSA is structured may have a significant impact on a spouse’s subsequent Medicaid application. For example, when a PSA assigns income from the institutionalized spouse to the community spouse, Medicaid may nevertheless consider that income to be “available” income to the institutionalized spouse. G.E.v. DMAHS, 271 N.J. Super. 229 (App. Div. 1994). In contrast, if the institutionalized spouse’s pension interest is transferred to the community spouse, the resulting reduction of the institutionalized spouse’s income will not be considered “available” by Medicaid. L.M. v. DMAHS, 140 N.J. 480 (1995).
Equitable distribution or alimony that is awarded outright to an ill spouse will be considered by Medicaid to be “available” to the ill spouse, and can render that spouse ineligible for Medicaid. To provide for the ill spouse while protecting that spouse’s Medicaid eligibility, a SNT can be established as a receptacle for the ill spouse’s alimony or equitable distribution award. See J.P. v. DMAHS, 392 N.J. Super. 295 (App. Div. 2007). As discussed below, a properly drafted self-settled SNT may be established by the court in connection with the divorce judgment, and assets or income may be transferred directly to the trust, to protect the ill spouse’s eligibility for Medicaid.
Care must be taken when establishing and funding a special needs trust in this context. For example, practitioners caution against funding an SNT with retirement funds, because of potential tax implications. Goldring, S., “The Use of Trusts in Divorce When Planning for the Disabled Spouse or Child,” New Jersey Lawyer Magazine, No. 265 (Aug. 2010). Some practitioners advise that contributions to a self-settled SNT cannot be made after the trust beneficiary reaches age 65, so any periodic payments to the trust should be “front-loaded” so that the trust is fully funded by the time the beneficiary reaches age 65. In addition, if life insurance is involved, the policy(ies) should be titled so that the trust is both the owner and the beneficiary; otherwise, if the trust is only the beneficiary of the life insurance, and the insured’s death occurs after the trust beneficiary reaches age 65, distribution of the life insurance proceeds into the trust will disqualify the trust. Friedman, L., Safeguarding Disability Benefits Upon Divorce with Special Needs Trusts, Sophisticated Elder Law Concepts XIV, at p. 31 (ICLE 2008). Other practitioners believe that, as long as the SNT is established before the beneficiary reaches age 65, alimony payments can be made to the trust after the beneficiary reaches age 65. Rosner, E., Principles of Matrimonial Law Applied to Medicaid Asset Preservation Planning, NJICLE 2013 Elder Law College (2013).
It is also important to recognize that a spouse may have special needs, but his or her condition may not have deteriorated to the point that a special needs trust would be appropriate. In such a case, a discretionary support trust could include a “trigger clause” so that the assets are transferred into a special needs trust in the event that the spouse becomes disabled.
For purposes of Supplemental Security Income (“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, alimony payments may be irrevocably assigned to a self-settled special needs trust without affecting that spouse’s eligibility for public benefits. 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/trustee, is income for SSI purposes unless the assignment is irrevocable. For example, … 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. (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., Appendix, A-15 to A-24]. 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.
The issue of alimony paid to a special needs trust on behalf of a disabled divorcing spouse was addressed by our Appellate Division in J.P. v. DMAHS, supra. In reaching its conclusion that alimony paid to a SNT pursuant to a divorce does not constitute income to the Medicaid recipient spouse, the J.P. court provided an analysis of the federal and state law governing the issue. It concluded that, although state regulations would ordinarily impose a penalty for the transfer of “assets” (including income) when the individual does not receive those assets because of a court order entered on his/her behalf, that penalty does not apply to assets transferred to a court-ordered SNT.
The J.P. court relied upon the State Medicaid Manual, HCFA Transmittal 64 §3259.7B1, which provides that, “[w]hen the right to income placed in the [SNT] actually belongs to the trust and not to the individual the income does not count under SSI rules as income received by the individual.” The court rejected Medicaid’s assertion that a special needs trust can be used to shelter resources but not to shelter income, and concluded that “Medicaid’s attempt to distinguish between alimony and equitable distribution placed in the trust has no rational or legal basis.”
For additional information concerning New Jersey divorce law, visit: https://vanarellilaw.com/family-law-services/#sdpnj
For additional information concerning special needs trusts and disability planning, visit: https://vanarellilaw.com/special-needs-disability-planning/
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