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Administration of a Special Needs Trust

Posted by: Thomas D. Begley, Jr.

1. PRELIMINARY MATTERS

Administration of a Special Needs Trust is complex.  It is critical that distributions be made in such a manner that the beneficiary maintains public benefits.  The trustee must be aware of the rules pertaining to each public benefit program to which the beneficiary is entitled or may become entitled.  These benefits are typically SSI, Medicaid, Food Stamps, Legal Aid, Utility Assistance, Section 8 Housing, In-Home Support Services, and other state benefits, such as Group Homes.  In addition to knowledge of public benefits law, the trustee must understand the Prudent Investor Act, the Principal and Income Act, Trustee’s Duties under state trust law, and must understand the nature of the beneficiary’s disability and the needs of the beneficiary and his family.  Assets in a properly-drafted Special Needs Trust are non-countable as resources.  The issue is whether distributions are considered income to the beneficiary that will reduce or eliminate public benefits. While the trust should not be a “parking lot” for assets, it is also important to consider whether the assets in the trust will last for the lifetime of the disabled beneficiary at a given level of expenditure.

A. Counseling Session

Prior to the trust being funded, a counseling session should take place with the person with a disability, interested family members, the trustee, and the attorney preparing the trust document.  The expectations of the family members should be articulated and limits on the powers of the trustee should be clearly set forth, particularly with respect to what types of distributions are appropriate.  Public benefits laws are complicated and change rapidly.  In order to avoid constant conflict throughout the administration of the trust, it is useful at the outset, to carefully review what can be done by the trustee in relation to the expectations of the family.

(1) All Special Needs Trusts

The disabled beneficiary and family should determine how long the person with disabilities is likely to live and how many years the trust should last.  Once this determination has been made, the family might prepare a proposed budget showing the anticipated expenses for which distributions can be made.  Reference should be made to the life care plan where appropriate.  These items can be specifically reviewed in the counseling session, and a determination can be made as to which distributions are appropriate and which are not.  This exercise begins the process of managing the family’s expectations with respect to distributions.

In reviewing the budget and proposed distributions, begin by identifying any immediate cash needs.  The person with a disability may need a residence, a handicap van, a vacation, furniture, a funeral or funds to repay outstanding debt.  Then, by utilizing the budget form, determine each item of expenditure with a monthly estimate as to cost and determine whether the expenditure will be paid by the trust or by the beneficiary.  A credit card makes the administration of the trust easier for all concerned.

Involving the person with a disability in the preparation of the budget is extremely useful.  If the trustee attempts to impose its will on the budget process, there will be resentment on the part of the person with a disability and administration of the trust will become contentious.  Better practice is to let the person with a disability develop the budget and then show him or her that the funds will not last at the proposed level of expenditure.  Let the person with a disability then revise the budget.  Participation by the person with a disability will achieve “buy-in” and the process of administering the trust will be much less contentious.

(2) Self-Settled Special Needs Trusts

If the Special Needs Trust is a Self-Settled Trust, it must comply with the requirements of the State Medicaid Agency.  The State Medicaid Agency may attempt to impose requirements that are stricter than those of the SSI program.  Typically, there are several requirements that must be understood by the trustee and the family.  Families of persons with disabilities often feel that the trust fund is a family bank account, and distributions to family members may disqualify the person with a disability from public benefits.

  • Sole Benefit Of. Generally, a trust must be for the sole benefit of the person with a disability.  Distributions from the trust must be limited to those that benefit the person with a disability.
  • Pro Rata Share. If a trust makes distributions that incidentally benefit other persons, those persons must contribute a pro rata share.  For example, if the trust buys a home for a disabled adult beneficiary and the parents of the disabled adult beneficiary reside in the home, then they must pay their pro rata share of the expenses of maintaining the home.
  • Legal Obligation of Support. Parents may not be relieved of their duty to support their minor children, if they are capable of doing so.  In many states, a parent’s legal obligation of support extends beyond minority if the child is disabled.  The funds in the trust may not be expended on routine support, unless the parent’s income is insufficient.  In most third-party trust situations, the trust may not be funded until the parent’s death.
  • Accounting. Generally, an accounting is required to the State Medicaid Agency and/on Social Security on an annual basis.  If a distribution is made that would affect benefits, it must be reported within 10 days.
  • Distribution Caps. Some states have caps on expenditures from a Special Needs Trust.  Often, the State Medicaid Agency must be notified in advance of making a distribution in excess of the cap.  These rules violate federal law, specifically the comparability statute at 42 U.S.C. §1396a(r)(2)(A) which requires states to be comparable or more liberal than the related cash assistance program, SSI in this case.  There are no caps on distributions in the SSI program.  The only states that can be more restrictive are the so-called §209(b) states and then only if the restrictions were part of the state’s law prior to 1972 when the SSI program was instituted.
  • Irrevocability. Third party special needs trusts tend to be revocable until the death of the parent or until the trust is funded by a third party.  Self-settled special needs trusts must be irrevocable from the outset.  The family must understand that this means they cannot change or revoke the trust in the future, nor can it be amended except as provided in the trust document.

B. Titling of Trust Assets/Self-Settled Special Needs Trusts

In some states, such as New Jersey, assets purchased with funds from a self-settled special needs trust must be titled in the name of the trust and never in the name of the beneficiary.  In other states, such as Wisconsin, exempt resources need not be titled in the name of the trust.  This is particularly useful where the trust purchases a home, because the Medicaid payback can be avoided.

2. DISTRIBUTIONS

The rules of administration apply to both third party special needs trusts and self-settled special needs trusts.  In order to be effective, a special needs trust needs to be carefully drafted and carefully administered.  Improper administration can cost the beneficiary his public benefits.

If the beneficiary is an SSI recipient, a direct distribution to the beneficiary will reduce the SSI payment dollar-for-dollar.  As long as the beneficiary has $1 of SSI remaining, he will be eligible for Medicaid.  If the SSI payment is completely eliminated, Medicaid will be lost, but in a Medically Needy state the beneficiary may requalify with a medical spend-down.  It is particularly critical to avoid making direct distributions to the beneficiary where he is receiving both SSI and SSD.  An SSD recipient who receives a monthly benefit less than the SSI payment is also eligible for an SSI payment to bring the total monthly amount up to the SSI maximum.  These people are called dual recipients.  For example, the Federal SSI payment for calendar year 2009 is $674 per month.  If a person was entitled to SSD in the amount of $500 per month, they would also be entitled to an SSI payment in the amount of $174 per month.  A direct distribution of $200 per month from the trust would eliminate the SSI payment and cause a loss of Medicaid.  A distribution for ISM could cause a one-third reduction or a one-third plus $20 reduction and, again, would eliminate the SSI payment causing a loss of Medicaid.

A. Examples of Permissible Trust Distributions/SSI Recipients

Examples of permissible trust distributions from a trust established for the benefit of an SSI recipient:

    • Home purchase, with rent paid by occupants
    • Home improvements, repairs, and maintenance by outside source
    • Tools to perform home improvements, repairs, and maintenance by homeowner
    • Installation of burglar alarm or monitoring/response system in home
    • School tuition, books, and supplies
    • Health and life insurance premiums
    • Entertainment purposes, including books and magazines; trips to movies, plays, museums, and sporting events;

audio/video equipment; hobby supplies, etc.

  • Purchase and maintenance of car, or bus passes
  • Household goods and other items of personal property of reasonable value
  • Clothing
  • Payment for items such as cleaning supplies and paper products
  • Telephone expenses
  • Dental care, physical therapy, massages, support services, and other medical costs not covered by any benefit programs
  • Home care services not covered by another program
  • Durable medical equipment, such as wheelchairs
  • Gifts of limited amounts to family members (under certain circumstances)

B. ISM

If a trustee provides in-kind support and maintenance that is food or shelter, then SSI benefits may be reduced.  Depending on the household in which the individual resides, the benefit may either be reduced by the actual value or the presumed maximum value.  A beneficiary can always show that the actual value is less than the presumed market value.  If the actual value exceeds the presumed market value, then the benefit is only reduced by the presumed market value.

While such distributions may have the negative consequence of reducing the trust beneficiary’s SSI payment, there is nothing in the federal statute to preclude the use of trust funds for food or shelter.[1] However, some states, such as Mississippi, consider distributions from a special needs trust for food, shelter and other purposes they consider basic support and not special needs, to be income to the beneficiary, even though the principal remains non-countable.  Other states, such as New Jersey, consider distributions for food and shelter from a Self-Settled Special Needs Trust to be income to the beneficiary for purposes of Medicaid eligibility.[2]

As noted previously, shelter expenses may be paid by the trustee in the Second and Seventh circuits pursuant to a “business arrangement.”  This arrangement is a lease between the trustee and the trust beneficiary.  It cannot be done if the trust owns the house because then the SSI beneficiary has an “equitable ownership” interest in the house and is living in their own household.  If the trustee pays for shelter expenses it would be considered a “rental subsidy.”[3]

If the beneficiary is in public housing, this would also be their own household.[4] If the home is owned by a relative, or if the trustee rents an apartment for the beneficiary and subleases it to them then this is a good way to get around the deduction for ISM.  It is very useful if the beneficiary is not able to pay the one-third reduction amount because the household expenses are too high.  If the business arrangement is used, the beneficiary must pay for his/her food and the amount paid pursuant to the lease is the PMV amount, not the one-third reduction amount which is an additional $20.

C. Specific Types of Distributions

Certain types of distributions are particularly troublesome to trustees.  These include distributions related to housing costs, distributions related to entertainment, distributions related to employment, and distributions related to medical expenses.  The use of credit cards, debit cards and gift cards is also frequently an issue.

(1) Distributions Related to Housing Costs

ISM. Certain housing-related items are considered ISM.  These are limited to:

◦             Mortgage payments

◦             Property insurance

◦             Rent

◦             Gas

◦             Electricity

◦             Heating fuel

◦             Water

◦             Sewer

◦             Garbage collection services

◦             Real property taxes[5]

Non-ISM. Other housing-related items are not considered to be ISM.  These include:

◦             telephone

◦             cable

◦             Internet bills

◦             condo fees

◦             closing costs

◦             purchase or replacement of furniture and equipment

◦             Insurance not required by a mortgage holder

◦             purchase of household supplies other than food

Household Goods, Personal Effects and Clothing. There is now an unlimited exclusion for household goods and personal effects.[6] Any non-cash item, other than food or shelter, is not income if the item would become a partially or totally-excluded, non-liquid resource if retained into the month after the month of receipt.[7]

Services. Services not related to food or shelter received in-kind are not ISM, because they cannot be used to obtain food or shelter.  Examples are medical, social and personal services are specifically excluded.[8]

Living Arrangement. A reduction in the SSI grant can happen based on the person’s living arrangement.  The grant is reduced because of the receipt of ISM.  One type of reduction occurs because the person is “living in the household of another.”  In these cases the reduction is one-third of the federal SSI grant.  The other reduction occurs because the person is receiving ISM because payments are being made by a third party for his/her shelter expenses.  In this later case the person is in their own household.

The one-third reduction amount in 2009 is $224.66.  The PMV reduction amount is that figure plus $20 or $244.66.  Both of these reductions are considered ISM, the amounts are just different depending on the reason for the deduction.

If a person is in the household of another and fails to pay his or her pro rata share of household expenses, the federal SSI payment is reduced by one-third.  If a person is receiving a federal SSI payment of one-third of the maximum or less, he/she will lose federal and state SSI and may lose Medicaid if the Medicaid is linked to SSI.  The person may qualify for Medicaid as medically needy, but will need to reapply through the state or county.

Business Arrangement. Rent is not considered to be subsidized if it is set through a “business arrangement.”[9] So long as the SSI recipient pays at least the PMV in rent, it will be considered to be a “business arrangement.” As noted previously, this arrangement is only if the SSI recipient is in his/her own household and only allowed in the Second and Seventh circuits.

Household of Another. If a person is living in the household of another and is already subject to the one-third reduction in SSI payment, further ISM is not income.  A person can avoid living in the household of another by:

◦             having an ownership interest in the home

◦             having direct rental liability to an outside landlord

◦             paying a flat fee for room and board based on fair market value

◦             buying food separately

◦             paying his or her pro rata share of household expenses.  This means the actual cost of shelter items.[10]

The only costs that a person pays from his or her income counts toward his or her pro rata share.  Payments from a trust for a pro rata share of food or shelter does not help.  Payments from a trust could be made to pay other expenses, such as telephone, cable, clothing, transportation and other services, thereby enabling the beneficiary to use the SSI payment to pay the pro rata share.[11]

If the home is owned by a third party trust, there is an ISM reduction up to the PMV, if the SSI recipient is the only beneficiary of the trust, because the beneficiary would have an ownership interest and is getting a “rental subsidy.”  Therefore, a business arrangement would not be viable where the trust owns the home.[12]

Own Household. If a person is treated as living in his or her own household, SSI counts an in-kind distribution of food or shelter as income and it reduces benefits by the difference between the fair market value of the food and shelter, and what the person paid for it.  The reduction is on a dollar-for-dollar basis, but the maximum is one-third of the federal SSI payment plus $20.[13]

In many cases, because of the cost of shelter the choices are for the beneficiary to obtain Section 8 Housing, live in a group home or simply accept the one-third reduction, unless they can do a business arrangement or afford to pay their pro rata share.  An SSI recipient can’t do either if the recipient is in his/her own household.  In subsidized housing, the SSI recipient is considered to be in his/her own household.

Annual Payments. If shelter expenses are grouped into one month and paid in a lump sum, the payment may be counted as ISM for all of the months to which it applies.[14] Social Security converts all housing bills to monthly amounts, even if these bills are paid less frequently.[15] In other words, it is not possible to pay all shelter expenses for a year in one month to limit the ISM deduction to that one month.

Housing Subsidies. Often, a person with a disability qualifies for Section 8 Housing or some housing subsidy provided by state government.  Where there is a Section 8 Housing subsidy or a state subsidy, the trustee should not make distributions directly to the beneficiary.[16] This would be considered income to the beneficiary.  The trustee should avoid making regular distributions from the trust, because HUD would count these distributions as income to the beneficiary.  Payments should be sporadic and irregular.  Resources, however, are usually not a problem unless they earn income.  However, interest may be imputed on non-earning resources.

Special Needs Trust as Section 8 Landlord. As a general rule, a family member cannot qualify as a Section 8 landlord.  However, there is an exception if the arrangement is needed as a “reasonable accommodation” for the disabled family member.[17] The regulations are unclear as to what constitutes a “reasonable accommodation,” but a duplex occupied by both the parent and the disabled family member needing 24-hour supervision may qualify.

Under the exception of the “reasonable accommodation,” the owner of a Section 8 Housing unit may not be the parent, child, grandparent, grandchild, sister or brother of any family member.  However, there is no prohibition against a Special Needs Trust being the owner of a Section 8 unit.  The trustee could be the landlord, because it is a separate legal entity not subject to the rules prohibiting family landlord-tenant rental arrangements.  In such cases, it may be good practice to have an independent trustee, rather than a family member.

Under this arrangement, the tenant, who would be the disabled beneficiary, obtains a housing subsidy from his/her local Public Housing Authority (PHA).  The landlord agrees to participate in the Section 8 program and enters into a written lease agreement with the person with a disability and the PHA.  The person with a disability pays approximately 30% of his income as rent.  PHA pays the remaining rent to the trustee.  The advantage is that the monthly rent is reduced and the trust benefits from an increased income stream from the PHA.

(2) Distributions Related to Entertainment

Care must be taken when distributions are made for recreational activities, such as vacations or restaurant meals.  Many entertainment activities involve food and shelter.  Meeting friends at a restaurant involves food.  Taking a vacation usually involves both food and shelter.  SSA defines income as something one can use to get food or shelter.  The POMS gives an example of an SSI recipient receiving a refundable airline ticket.  This would be considered in-kind income.[18] Since virtually everything can be converted to cash and used for food and shelter, trustees must scrutinize expenditures.

Companions. Frequently, persons with disabilities require one-on-one assistance from specially-trained staff.  These paid companions are compensated.  These funds cannot be converted to food or shelter, so they tend to pass muster with SSA.

Memberships.Membership in a fitness center or YMCA or any other organization does not cause a problem, since no food or shelter is involved.

Tickets. Movie and concert tickets should pass muster.  They typically do not involve food or shelter.  The trust should purchase the tickets and give the tickets to the recipient, rather than distribute money to the recipient to buy the tickets.

Eating Out. Payment from a trust for restaurant meals is problematic.  There is a $20 monthly disregard, so the trustee could give the beneficiary $20 in cash without affecting the SSI benefit.  In making up the budget, it is usually wise to have the beneficiary pay for restaurant meals out of the SSI payment and have the trust pay for other non-ISM items.

Vacations. An issue often arises as to whether the payment for a hotel room and food on a vacation, or for a state room and food on a cruise constitutes payment for food and shelter.

◦ Vacations Expenses. Under the POMS, ISM the individual receives during a temporary absence is not counted.[19] However, it should be noted that during a temporary absence SSA continues to value ISM as if an individual were physically in his/her permanent living arrangement.  So, if the trust were paying a person with a disability’s rent in an apartment, the rent would be considered ISM while the individual was temporarily absent, but the payment for the food and shelter on the cruise would not be considered ISM.

◦ Incidental Vacation Expenses.  One way for a trust to pay incidental vacation expenses is for the trust to pay the provider directly.  This works very well where the resort is an all inclusive arrangement.  The other way to pay for incidental expenses is to have a co-traveler pay these expenditures and reimburse them from the trust.

(3) Distributions Related to Medical Expenses

One of the most pressing needs for disabled beneficiaries is medical care.

(a) Medical Insurance

It is crucial that the disabled beneficiary obtain some form of medical insurance.[20] Options include the following.

Private Medical Insurance. Typically, the only source of private medical insurance at regular rates is through the parent’s coverage with the parent’s employer. Parents of such child must make every effort not to lose their jobs.

COBRA. The Consolidated Omnibus Budget Reconciliation Act of 1996 (COBRA) allows former employees and their dependents to continue the employer’s coverage for a limited period of time, commonly 18 months. However, if the employee became disabled within two months of the qualifying event causing him to lose medical insurance coverage, COBRA coverage may be extended for 29 months. If the former employee died, divorced, or became entitled to Medicare, then the employee’s dependents are eligible for 36 months of coverage.

State-Mandated High-Risk Pools. Many states have high-risk pools to cover persons who are uninsurable in the private market. This coverage often tends to be very expensive.

Medicare. Medicare is only available to persons under 65 if they are disabled and have 20 quarters of coverage. If they receive SSD, then two years after the determination of disability they are entitled to Medicare. Persons receiving Medicare should obtain a Medicare supplement policy. There is usually a very limited open enrollment period to obtain this coverage after which it becomes impossible to obtain because of pre-existing conditions.

Medicaid. Persons receiving SSI also receive Medicaid. In non-SSI states having a Medically Needy program, persons qualify for Medicaid by spending down their income if income is above a certain amount. Some states have income caps. Other ways of obtaining Medicaid are through state Medicaid waiver programs, including various Kid Care programs available in many states. Eligibility rules vary. A Katie Beckett waiver program is very desirable, because the income and assets of the parent are not deemed to the children. Some states do not call their programs Katie Beckett, which is a specific categorically eligible group of Medicaid recipients, but the effect is the same because those state identify groups of children with disabilities and provide for Medicaid eligibility so the waiver services are available. Slots tend to be extremely limited.

(b) Non-Covered Medical Expenses

Typically, Medicaid pays for 100 percent of covered expenses. However, very often, psychological services, certain types of testing and some special therapies are not covered. It is appropriate for a trustee to pay for these non-covered services. It is also appropriate for a trustee to pay for dental care, prescriptions, and podiatrist care.

(c) Provider Non-Acceptance

Some providers do not accept Medicaid, because of the low reimbursement rate. It is difficult to find a dentist participating in the program. Some persons with disabilities choose physicians who do not accept Medicaid. It is appropriate for a special needs trust to pay for services from those physicians.

(d) Out-of-Pocket

If the person with a disability receives Medicare, rather than Medicaid, there may be copayments, deductibles and payments for services that Medicare does not cover. It is appropriate to pay for those costs from a special needs trust.

(4) Distributions for Caregivers

There are a number of considerations when a trustee hires a caregiver for the beneficiary with disabilities.  Certain rules pertain whether the caregiver is a parent or not.

(a) Insurance Considerations

Whenever a trust employs a caregiver, whether it be a parent or other family member or even a non-family member, insurance is an important consideration.

(i) Worker’s Compensation Insurance

Worker’s compensation insurance should always be considered where a caregiver is being employed.  If the caregiver suffers an injury in the course of employment, the trust will be responsible.  Worker’s compensation insurance makes sense.

(ii) Casualty Insurance

Casualty insurance is usually not an issue.  However, where an outside non-family caregiver is employed, casualty losses from theft may result and appropriate insurance should be obtained.

(iii) Wage and Hour Legislation

Wage and hour laws must be considered in setting payment for caregivers.

(iv) FICA and FUTA

The trustee is responsible for withholding FICA and FUTA taxes, if the caregiver is an employee rather than an independent contractor.  For this reason, many professional trustees prefer to deal with caregivers provided by an agency and the agency performs all of these functions.

(b) Withholding

Trustees often hire caregivers.  The caregiver can be either a family member or a non-family member.  The issue is whether the caregiver is an employee or an independent contractor.  If the caregiver is an employee, there must be withholding for FICA and FUTA.[21] No such withholding is required for an independent contractor.   The trust may consider employing a payroll service to administer payment to the caregiver.

Caregivers often want to be paid “under the table.”  It goes without say that a trustee should always resist these requests.

Significant factors in determining whether the caregiver is an employee or independent contractor include:

  • Instructions. Is the worker required to comply with the other person’s instructions with respect to when, where and how the work is to be performed?
  • Personal Service. Are the services to be performed personally or can they be sub-contracted?
  • Continuing Relationship. Is the relationship between the worker and the person being cared for continuing?
  • Work Hours. Is the worker required to work set hours?
  • Payment. Is the worker paid by the hour, week or month?
  • Realization of Profit or Loss. Can the worker realize a profit or loss on an individual transaction?
  • Right to Discharge. Can the worker be discharged?  If so, he is likely an employee.

(c) Agency

It is almost always good practice for the trust to employ any non-family caregivers through an agency.  It is a little more expensive to use an agency, rather than deal direct with a potential caregiver, but the agency has the responsibility of supervising the caregiver and paying taxes.  The agency will be responsible for withholding and for worker’s compensation insurance.

C. Credit Cards

In appropriate cases, the trust beneficiary should obtain a credit card.  The credit card should have a low limit so that it is not abused.  Credit cards are loans, and loans are not considered income for SSI purposes.[22] If credit cards are used to purchase food or shelter, these are considered ISM and result in a reduction of the SSI benefit.  It is often difficult to obtain a credit card for disabled beneficiaries, because they often have a very poor credit history.  It is also difficult to obtain a credit card in the name of a trust.  The credit card must be designed so that the user cannot obtain cash.

There are companies that issue credit cards to customers with sub-prime credit.  Occasionally, a disabled beneficiary may qualify for such a card.  Another way to obtain a credit card for a disabled beneficiary is to secure the credit card with cash.  For example, the trust could deposit $1,000 in a bank account with the bank issuing the card.  The card might have a maximum of $500.  The terms of the agreement might be that if the trust does not pay the credit card bill within a certain period of time, the credit card issuer could take the funds from the security account.

If the disabled beneficiary or someone acting on his behalf uses a credit card to make a cash withdrawal from an ATM, the amount of the withdrawal would be unearned income to the beneficiary.[23]

D. Gift Cards

Gift cards are cash, and generally trustees should not provide beneficiaries receiving SSI with gift cards. As with any other cash distribution, the delivery of the gift card to the beneficiary reduces the beneficiary’s SSI payment dollar-for-dollar and may ultimately require repayment.

While there is no written guidance, Kenneth A. Brown of the Social Security Administration has opined that gift cards will not be treated as cash if the card is non-transferrable and the card is for a store that does not provide food or shelter.  Cards not meeting these criteria will be treated as cash equivalents.  Thus, a non-transferrable gift card for Circuit City will not be considered cash, but a gift card to Whole Foods would be considered cash.  Some SSA offices have considered a gift card to any store that even sells snacks as cash.

Katherine Barr, an elder law attorney in Alabama, has developed a creative solution. The trustee secures an arrangement with a local service that takes possession of the gift cards and pays for the items the beneficiary needs. They make sure no food is included. The beneficiary goes to the store and selects the items and gets them ready for checkout. The service then comes with the gift cards and pays for the items, and delivers them to the beneficiary’s home. There is a monthly cost to the service that can be paid by the trust. It would seem that the same result could be achieved by simply providing the service with a check or making arrangements with a store to let the beneficiary buy non-food items and the trustee will pay.

3. SPECIAL ASSETS

A. The Home

(1) How to Own the Home

One of the most significant issues facing every trustee of the special needs trust is housing for the trust beneficiary.  The monthly SSI payment is insufficient in almost every part of the country to provide housing, other than Section 8 Housing, to a trust beneficiary.[24]

How can the personal injury settlement, the inheritance, or equitable distribution be used to buy the home?  There are several possibilities:

(a)  Special Needs Trust Purchases Home

An advantage is that the trust has sufficient liquid assets to pay for the home.  Control is one of the primary benefits of the trust owning the home.  Many beneficiaries of special needs trusts do not have the capacity to manage residential real estate.  By having the trust own the home, the asset is protected and from the temptation on the part of the beneficiary to borrow against the home and overspend.  If the beneficiary is married, trust ownership also protects the home in the event of a divorce.

A variation on this strategy is to have the trust own the home and have a housemate move in who will pay rent and/or manage the home.  Ownership by the trust avoids the danger that any profit from rental payments be considered income to the beneficiary.

  • Sole Benefit Of. A disadvantage of a self-settled trust owning the home is that on the beneficiary’s death the home will have to be sold to repay Medicaid for medical assistance rendered to the beneficiary.  Another disadvantage is that where there is a self-settled trust other family members must pay their pro rata share of the operating expenses or some rental because the trust must be “for the sole benefit of” the disabled beneficiary.
  • Pro Rata Share. Because a self-settled trust must be for the sole benefit of the person with a disability, if the parent lives in the home they must pay rent and a pro rata share of the operating expenses of the home.
  • Legal Obligation of Support. A self-settled trust cannot be used to pay a legal obligation of support for the parent.  Parents have a duty to provide shelter for their minor children and in some states for their disabled adult children.
  • Extraordinary Care. The rules pertaining to a parent’s legal obligation of support do not apply to extraordinary care.  If a parent has quit his/her job to provide the care, does this rise to the level of extraordinary care?  Where there is an issue as to the parent paying a pro rata share of expenses of a home, careful practitioners will have an appraiser determine the fair market rental of the home, and have a care planner estimate the value of the extraordinary caregiving services contributed by the parents.
  • Tenancy in Common. If the parent and disabled child own the property as tenants in common, there may be a lien for Medicaid estate recovery against the interest of the disabled child on the death of the disabled child.
  • Trust Acquires Residence. In situations where the trust is to acquire the residence, the trust document should expressly authorize the acquisition and maintenance of residential real estate.  Otherwise, the home is a wasting asset that is an inappropriate fiduciary investment.

There is an issue as to whether a state can require that a home purchased by the trust be titled in the name of the trust.  CMS takes the position that states can make their own rules in this regard for purposes of Medicaid eligibility.  The states should be following the SSI rules, however, unless they have a 209(b) exception, which is highly unlikely.  In the SSI program, the trust can own the house and the states cannot be more restrictive.

(b) Tenancy in Common

If the self-settled trust purchases a home as a tenant in common with the parents of the beneficiary of the trust, there would be a Medicaid payback with respect to the interest in the home owned by the trust.  Parents still have to pay a pro rata share of expenses and the trustee cannot pay to discharge a legal obligation of support of the parent.

(c) Beneficiary Owns Home

The advantage is that the home will not be subject to the pay back provision of the trust.  However, it may still be subject to Medicaid estate recovery on the death of the beneficiary, if the beneficiary receives medical assistance after age 55.  The disadvantage of home ownership by the beneficiary is that if the beneficiary is not financially responsible, the beneficiary may mortgage the home, may fail to maintain homeowner’s insurance, or may fail to pay real estate taxes or other expenses.  An incompetent or minor person should not own a home.

In most states there is no problem with a third-party special needs trust owning the home.  The issues pertaining to sole benefit of and legal obligation of support do not arise.  There is no payback to Medicaid in a third-party special needs trust on the death of the disabled beneficiary.

Another disadvantage is that if the beneficiary sells the home and does not buy another one, he has a large countable resource which would disqualify him from SSI unless placed into a self-settled special needs trust.  In many instances, the disabled beneficiary is not physically, mentally or emotionally able to care for a home and manage the problems attendant to home ownership.  If the beneficiary has a housemate, the profit from rental payments may count as income to the disabled beneficiary.

Payment of gas, water, taxes, and other home operating expenses would be in-kind support and maintenance (ISM).  The beneficiary would need to pay those expenses from his or her SSI or suffer a PMV reduction if the trust pays them.  If parents live in the home and pay rent, such as payment of utilities, taxes, or other ISM items, would this payment constitute income or ISM to the disabled beneficiary?  Is a written lease required spelling out that the payments are in lieu of rent?

A variation on home ownership by an individual is for the trust lend the beneficiary money to purchase the home.  The loan must be secured by a mortgage, so that the loan is considered genuine and there is a good faith and realistic expectation of repayment.  The loan is not countable income and the loan proceeds are not a countable resource, if invested in the home.  The loan can be with or without interest.  Repayment of the loan can be deferred so that the beneficiary only has to pay if the beneficiary’s interest in the home is transferred.  If the beneficiary sells the home or dies, the money is repaid to the trust.  If the trust is a self-settled special needs trust, there will be a Medicaid payback.  However, the disabled beneficiary had the advantage of the use of the money interest free for a considerable period of time.

(d) Trust Pays for Life Estate in Home with Remainder to Parents

The advantage is that the trust pays the lion’s share of the purchase price of the home, because the value of the beneficiary’s life estate will be significant based on the beneficiary’s relatively young age.  At age 18, it is .97590.  In some states, there is no estate recovery against a life estate.  State law must be consulted.   The disadvantage is that the parents/spouse must pay for the remainder interest and their share of any home improvements or expansions.

In some cases, it may make sense to have the trust purchase a life estate in the family home.  In those situations, an appraisal must be obtained to establish that the purchase price was the fair market value.  Consideration must be given to any real estate tax, rebates, credits, deductions or reductions in this situation.  If the parents live in the home, a fair market rental should be paid because a life tenant technically has the right to use and occupy the entire property.

The reverse of this strategy is often useful where the disabled parent is receiving a settlement, but it is not large enough to warrant establishment of a self-settled special needs trust.  Or, if the parent is over age 65, the parent could purchase a life estate in the home of an adult child to protect the settlement.  The adult child would give the parent a deed transferring the life estate.  In those situations the adult child would then pay rent.  The parent must actually reside in the home for a period of at least one year.[25]

Another variation is to have the trust purchase a life estate in a home and transfer it to the beneficiary as a gift.  The beneficiary’s ownership of an equity share will decrease over time.  So long as the beneficiary resides in the home, it is not a countable asset.  The beneficiary will not own anything subject to estate recovery on death.

(e) Third Party Special Needs Trust

If a Third Party Special Needs Trust purchases the home, there is no Medicaid payback.  Items owned by a Third Party Special Needs Trust avoid any Medicaid lien, if the beneficiary dies after age 55.

(f) Parents Purchase Home

The advantage is that there is no Medicaid payback or estate recovery.  The disadvantage is that the parents must pay for the home It is sometimes possible for a portion of the personal injury settlement to be allocated to the parent.

However, if the trust pays rent to the parents, the result may be “circular deeming.”  If the SSI recipient’s parents were also on SSI, the payment of rent from the trust would be income to them, which may disqualify them from SSI.  Alternatively, if they are not receiving SSI, the additional income from the rent may increase their income to the point where when it is deemed to the person with a disability it disqualifies the person with a disability from SSI.  Circular deeming applies if the person with a disability is a minor.

In any event, if the parents provide shelter to the person with a disability, if would be considered in-kind support and maintenance and result in a reduction of the person with a disability’s SSI benefit.  The Second Circuit Court of Appeals held that a special needs trust payment of income to the person with a disability’s parents for his room and board constituted in-kind support and maintenance reducing the beneficiary’s SSI benefits.[26]

(g) Revocable Living Trust Purchases Home

In states with a narrow definition of estate recovery, it may be possible for a revocable living trust to purchase the home and avoid estate recovery.

(2) The Home and the POMS

If a Self-Settled Special Needs Trust owns a house used as a home for the beneficiary, the house is not a resource to the beneficiary. SSA considers the beneficiary to have an “equitable ownership under a trust.”

The beneficiary living in the home is not considered to be receiving in-kind support and maintenance in the form of rent-free shelter because he/she has an ownership interest.[27] However, the purchase of the home by the trust results in ISM for the month in which the purchase is made.  The ISM is valued at no more than the Presumed Maximum Value (PMV).[28] If the home is purchased subject to a mortgage, each mortgage payment constitutes ISM.[29] Payment of household operating expenses by the trust also constitutes ISM.  These consist of improvements or renovations, including those renovations needed to make the home handicapped accessible.  However, improvements that increase the value of the home are not considered operating expenses and do not constitute ISM.[30] This may still be a benefit to the person with a disability even with the ISM reduction.  Since the beneficiary has an ownership interest in the home, a business arrangement, in the states that allow it, cannot be used.

Only the property insurance required by the holder of a mortgage is considered a household cost.  Insurance held at the owner’s or renter’s option is not a household cost.[31]

There are certain noncountable resources that can be purchased by the trustee, such as a home to be used as the disabled individual’s principal residence, or an automobile.[32]

B. The Vehicle

The special needs beneficiaries and their families need to buy a vehicle, very often a handicap van.  The issue is:  who should own the vehicle?

(1) Trust Purchases Vehicle Titled in Name of the Trust

The advantage of this arrangement is that it gives the trustee maximum control.  However, there are several disadvantages:

  • The van is a wasting asset.  It is not really an appropriate trust investment.
  • The trust would be liable for injuries caused by the driver of the van.
  • It is often difficult to get insurance under an individual policy and a commercial policy is much more expensive.  Many professional trustees will refuse to take title to a vehicle.

An issue arises as to whether a State Medicaid Agency can require that a vehicle be titled in the name of the trust.  The reason would be so that the vehicle would be subject to a Medicaid payback.  CMS takes the position that states can make their own rules.

(2) Trust Purchases Vehicle Titled in Name of Parent

In this situation, the trust purchases the vehicle, titles it in the name of the parent, and takes back a lien for the purchase price.  The advantage is that the vehicle owner is liable for any injuries caused by the driver of the vehicle, and insurance is easier and less expensive to obtain.  The lien prevents the family from selling the vehicle.  Again, there is a violation of trust law, because the lien will never be repaid.  Another disadvantage is that if the trust pays the maintenance and upkeep expenses, it could be argued that the “sole benefit of” rule is violated if the vehicle is used by persons other than the person with a disability.

Some states, such as New Jersey, closely monitor disbursements from (d)(4)(A) trusts.  The state may require that the vehicle be titled in the name of the trust.  Every effort should be made to allocate the settlement in such a manner that some entity, other than the trust, can purchase the vehicle.

(3) Parent/Spouse/Beneficiary Purchases the Vehicle

This is the ideal solution.  Before the settlement is finalized, funds can be allocated to the parents, spouse or beneficiary to purchase the vehicle.  One of the advantages is that the Medicaid payback would be avoided with respect to the vehicle.  However, there may be Medicaid estate recovery if the disabled beneficiary owns the vehicle.  Where the parent or spouse owns the vehicle, the parent or spouse should pay the maintenance expenses.

4. CIRCULAR DEEMING

If a trust pays a parent for the “extraordinary care” of a disabled minor child, the result may be circular deeming.  SSA has no restriction on the payment from the trust to the parent for the extraordinary care.  However, income to the parent is deemed to the child and may cause the child to lose SSI, and if the child loses SSI, Medicaid may also be lost.  The best solution is to get the minor child on a Katie Beckett, or other children’s, waiver program where deeming rules do not apply, if available, and if the child’s disability is severe enough to meet the institutionalization standard.  The same situation would arise if the trust pays the parent rent for the child with a disability.  In fact, any distribution from the trust to the parent constituting income to the parent will be deemed to the child and may cause a loss of public benefits.

While income and resources are deemed from parent to child, if a parent transfers assets there is no deeming of the asset transfer penalty from parent to child.

5. LOANS TO THE DISABLED BENEFICIARY

Loans to persons with disabilities receiving public benefits are not income, if they are genuine loans and there is a good faith and realistic expectation of repayment.  Funds kept into the next month will be a resource.[33] There is no requirement that interest be charged for a loan to be considered a good faith transaction.  No income is imputed from a no-interest loan.  (Gift tax and income tax treatment is different.)

A trust can be a source of funds through a reverse mortgage, lending the disabled individual funds secured by his or her equity in his or her home in exchange for a promise to pay when ownership of the home is transferred.  The loan is in good faith, because payment is virtually certain.  This is a way for the disabled homeowner to pay large expenses, such as real estate taxes or major repairs for which he or she cannot save.



[1] CMS Letter from Thomas E. Hamilton, Director, Disabled and Elderly Health Programs Group, dated July 5, 2001, to Janet L. Lowder.
[2] N.J.A.C. 10:4-11(g)1(iii)(1).
[3] POMS S.I. 01120.200 F.1.
[4] 20 C.F.R. 416.1131(b); POMS S.I. 00835.380 D.4; Jackson v. Schweiker, 683 F.2d 1076 (7th Cir. 1982).
[5] POMS S.I. 00835.020.B.36 and 00835.465.D.1; 20 C.F.R. §416-1130b.
[6] POMS S.I. 01130.430.
[7] POMS S.I. 00815.550; 20 C.F.R. §416.1103(j).
[8] POMS S.I. 00815.050 and .150; 20 C.F.R. §416.1103(j).
[9] POMS S.I. 00835.380.
[10] POMS S.I. 00835.100-170; 20 C.F.R. §416.1131-33.
[11] POMS S.I. 00835.160; 20 C.F.R. §416.1133.
[12] POMS S.I. 01120.200F.1.
[13] 20 C.F.R. §416.1140; POMS S.I. 00385.300.
[14] POMS S.I. 00835.360 and .474.
[15] 20 C.F.R. §416.1133(c); POMS S.I. 00835.474.
[16] 24 C.F.R. §5.603(b)(2).
[17] 24 C.F.R. §982.306(d).
[18] POMS S.I. 01120.150.
[19] POMS S.I. 00835.040 2.
[20] Roger M. Bernstein, Health Insurance and COBRA Issues Collateral to SNT’s and Settlements, Stetson University College of Law, Special Needs Trusts IV (Oct. 18, 2002).
[21] IRS Publication 926.
[22] 20 C.F.R. 416.1103(f).
[23] Supplemental Security Income, Dallas Program Circular, SSIT-05-10 (Oct. 31, 2005).
[24] Bailey Liipfert, III, Homes: Practical Perspectives and Perils for the Trustees of Payback Special Needs Trusts, NAELA Advanced Program, 2004.
[25] Deficit Reduction Act of 2005 §6016(d).
[26] Hecht v. Barnhart, No. 02-06241 (2d Cir. June 27, 2003), unpublished opinion.
[27] POMS §S.I. 01120.200.F.1.
[28] POMS §S.I. 01120.200.F.2.
[29] POMS §S.I. 01120.200.F.3.a.
[30] POMS §S.I. 01120.200.F.3.b.
[31] POMS §S.I. 01120.200.F.3.c.
[32] POMS §S.I. 00835.465.
[33] 20 C.F.R. §416.1103(f); POMS S.I. 00815.350 and S.I. 01120.220.

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