A well-intentioned – but ill-informed – attorney could cost a special-needs child his or her government benefits. Here is how to avoid some potential pitfalls when it comes to child support, trusts, and benefits.
By Kim Martin, Estate Lawyer, and Wayne Morrison, Family Lawyer
The divorce rate among couples with a special-needs child is significantly higher than the divorce rate in the general population. Special-needs children frequently require assistance beyond the age of majority as well as beyond their parents’ lives; divorce attorneys should understand the benefits available to help care for such children, and how a well-intentioned – but ill-informed – attorney can do more harm than good. For example, post-majority child support can lead to the loss of government benefits. However, a special needs trust (SNT) can hold assets that would otherwise disqualify a child from receiving benefits.
There are two main categories of special-needs trusts: third-party trusts (which hold assets belonging to anyone other than the beneficiary), and first-party trusts (which hold assets belonging to the beneficiary, including child-support payments). Any assets remaining in a first-party trust after the beneficiary’s death must be used to repay Medicaid for expenditures made on the child’s behalf.
The attorney in a special-needs case needs to know if the child is receiving means-tested benefits or is likely to do so in the future. Means-tested benefits are paid only if the child has assets totaling less than $2,000. The two most common types of means-tested benefits are Supplemental Security Income (SSI) and Medicaid. SSI pays up to $750 per month (for 2018). A quick way to determine whether a social security payment is SSI (which is means-tested) or Social Security Disability Insurance (or SSDI, which is not means-tested) is to check the amount. If the payment exceeds $750, the recipient is receiving SSDI.
Support for a Special-Needs Child: Potential Hazards
When determining if a special-needs child qualifies for government benefits, child-support payments are frequently attributed to the child. Unfortunately, this can reduce or eliminate the child’s benefits. It is critically important that a payee not lose SSI: if a recipient’s SSI benefit is reduced to zero, that recipient will also lose Medicaid coverage. The following is a summary of some potential hazards. (Except where noted, the child does not live with the payor-parent the majority of the time.)
- A parent pays child support for a child who receives SSI; even though payment is made to the parent, SSI characterizes the payment as the child’s unearned income. SSI excludes 1/3 of that unearned income, but the other 2/3 reduces the child’s monthly SSI benefit dollar for dollar. If a child receives child-support payments from a parent who lives the majority of the time with the child, the entire payment is counted directly against the child’s SSI.
- If child support is paid on behalf of an adult child (a person who is over age 18, or over age 22 if regularly attending school or training designed to prepare the child for a job, who is married, or who is the head of a household), SSI disregards$20 of that payment. The rest of the payment is considered unearned income and 100% of it reduces the child’s SSI dollar for dollar. If SSI is reduced to zero, the child automatically loses Medicaid. Additionally, the child loses the ability to apply for waiver programs that pay for community living support, transportation, job coaching, etc.
- If a parent pays directly for food or shelter for a child who receives SSI, the payments are considered In-kind Support and Maintenance (ISM). ISM reduces SSI benefits dollar for dollar up to 1/3 of the SSI benefit (with an additional disregard of $20 under some circumstances).
- If the settlement agreement provides that a parent will pay directly for things other than food or shelter, the child’s SSI benefit is undiminished by the payments. Payments made directly for school tuition, unreimbursed medical expenses, clothing, entertainment, etc., have no effect on SSI.
Trusts for Special-Needs Children
Child-support payments are viewed as the child’s property, so those assets cannot be placed into a third-party SNT. Instead, consider payments to a first-party trust. In such instances:
- Provided that trust funds are used for the child’s sole benefit and no distributions are made for food or shelter, trust expenditures will not reduce SSI.
- Any asset that belongs to the child can be held by the trustee – including child-support payments, unspent SSI payments, damages awarded pursuant to a personal injury claim, and gifts or bequests made directly to the child.
The divorce decree should direct the payor-parent to pay child support to the first-party trust. If the final decree does not include this requirement, the custodial parent can irrevocably assign child-support payments to the trust. However, Medicaid payback provisions apply to a first-party trust, making them ill-suited to hold large sums of money. If a settlement agreement or decree is worded properly, it is possible to direct funds into a third-party trust, which is not subject to Medicaid payback rules.
If a trust is needed, terms and how to fund the trust should be addressed in settlement negotiations or mediation. If an agreement cannot be reached, a practitioner should be prepared to present the issue at trial. This may involve asking the court to order assets and or payments to a parent to fund an SNT.
In many jurisdictions, the court considers the expense associated with a parent supporting a dependent adult child when determining alimony. In Kosikowski v. Kosikowski, 240 Ga. 381(1977), the Supreme Court expressly held that where a parent has assumed the responsibility of providing necessary care for a needy adult child, that circumstance is relevant to the issue of alimony.
Where there are insufficient assets to fund a third-party SNT, consider naming the trust as the beneficiary of a life insurance policy or an annuity. Support for this can be found in Hawkins v. Hawkins, 268 Ga. 637 (1997) (trial court may enter an order requiring a former spouse be named as a beneficiary of a life insurance policy ensuring alimony payments) and Simmons v. Simmons, 288 Ga. 670 (2011) (trial court may require a party to maintain life insurance for the benefit of their child(ren) additionally requiring the establishment of a trust in which to place any proceeds).
When preparing an agreement or drafting a proposed order, remember that funds being paid into a third-party SNT cannot take the place of child-support payments. It is of paramount importance not to characterize assets in a third-party SNT as being for the support of the child.
Kim Martin is an attorney at Nadler Biernath. Her practice focuses on trusts and estates, with a specialization in estate planning for families with a special-needs family member. Kim is a member of the Academy of Special Needs Planners. www.nadlerbier-nath.com
Wayne Morrison is Of Counsel with Kessler & Solomiany. He represents clients in all aspects of family law, and he has a Martindale-Hubbell AV Preeminent rating. Before becoming a lawyer, he worked as a financial analyst preparing, analyzing, and auditing financial statements. www.ksfamilylaw.com
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