Divorce & Supplemental Needs Trusts for Children with Disabilities

If you’re negotiating a divorce settlement, and you have a child with disabilities, make sure to account for special needs planning.

Here is a rundown of factors to consider from the special needs planning attorneys at the Cuddy Law Firm:

GETTING FAMILIAR WITH KEY GOVERNMENT AID PROGRAMS BASED ON FINANCIAL NEED

Children and adults with disabilities often rely on means-tested federal and state government programs for health and financial benefits. These programs have limits on the income and resources that a qualifying person can have.

In New York, such programs include Supplemental Security Income (SSI)1 and Medicaid.

SSI provides monthly income to an individual with disabilities who has limited countable resources and other monthly income.

The stipend is intended for basic needs, including food and shelter. A child under 18 will only qualify for SSI benefits if his or her parents’ resources and income are below the state’s eligibility requirement.²

Upon turning 18, a child with disabilities is treated as an independent person for SSI purposes, so they’re no longer tied to their parents’ economic resources. The amount of their SSI stipend will depend on factors such as how much they need for monthly rental and household expenses3, the amount they earn from employment (if employed), and the amount of cash, gifts or other income they receives.

Medicaid is a government program providing access to medical care for people meeting certain financial requirements.
Many individuals with disabilities rely on Medicaid to meet their basic health care needs. People also use Medicaid as they age, often through Medicaid-funded nursing care and nursing homes.

HOW DOES CHILD SUPPORT WORK WITH THESE MEANS-BASED GOVERNMENT PROGRAMS?

Divorce settlements usually spell out financial responsibilities for each parent regarding a child’s care and schooling.

Often, the non-custodial parent’s responsibility takes the form of a monthly child support payment.

It can also be a good idea for the matrimonial settlement to require each parent to get a life insurance policy, ensuring financial support for the children in the event that either parent dies.

When the divorcing couple has a child with special needs, the divorce settlement often recognizes that the child will require support into adulthood. And it makes provisions for support of adult children.

According to Medicaid eligibility and Social Security regulations that govern SSI payments, one-third of child support for a child under 18 is considered income. That means it counts toward the income limits for deciding who qualifies for the benefits.

Once a child with disabilities turns 18, all of their child support payments are considered countable income.

That includes child support payments from the non-custodial parent that are made directly to the custodial parent.

Also, since the purpose of child support is for food, shelter and other basic needs of the child, and the purpose of SSI is the same, Social Security will reduce a child’s SSI payments by the amount of child support dollar-for-dollar.

So child support payments may have the unintended consequence of denying or reducing the child’s access to government benefits.
Consider the following two examples of a child with disabilities who is under 18:

Example No. 1:
A 10-year-old boy has severe autism. He lives at home with his father. His father’s income and resources are low enough to make him eligible for SSI.

The boy’s mother does not provide child support. The boy receives $794 in SSI monthly (the standard amount as of 2021).

Example No. 2:
Now what if the same boy’s mother pays $300 of child support monthly?

Two-thirds of that payment, or $200, is countable for SSI. This offsets the SSI payment dollar for-dollar. So instead of receiving a monthly SSI check for $794, the boy’s monthly payment is reduced to $594.

Example No. 3:
Now let’s look at what happens when a child turns 18.

An 18-year-old with developmental disabilities lives at home with her mother and attends a day habilitation program.

She contributes toward monthly household expenses thanks to government financial assistance.

She has no income from employment, doesn’t have reportable cash or gifts, and her mother receives no child support.

In this case, the 18-year-old’s income and resources make her eligible for SSI and Medicaid. She receives $794 in SSI monthly.

Example No. 4:
But for an adult child, child support payments have a bigger impact on SSI benefits.

Let’s say the 18-year-old’s father pays $400 of child support monthly.

Because she is over 18, the entire $400 child support payment is countable as income for SSI eligibility purposes. And it offsets the SSI payment dollar-for-dollar.

As a result, instead of receiving a monthly SSI check for $794, the child’s monthly stipend is reduced to $394.

Parents and their attorneys need to be aware of this and factor it into planning divorce settlements and planning for the future of a child with special needs.

HOW SUPPLEMENTAL NEEDS TRUSTS CAN PROTECT YOUR CHILD’S BENEFITS ELIGIBILITY

A supplemental needs trust (SNT)5 is the most basic and crucial planning tool for families of individuals with disabilities.

SNTs may be established for a loved one with chronic or severe disabilities. They allow family members or others to set aside money for a loved one with disabilities without jeopardizing government benefits.

By law, SNT funds are available only to supplement (and not to supplant) government benefits, meaning funds can be used only for those items that cannot be paid for using government benefits.

There are two basic types of SNTs.

No. 1: First-Party SNTs
Also known as self-settled or payback trusts, these are funded with money belonging to the person with disabilities.
In order to establish a first-party SNT, you have to meet several criteria:

• The person is under 65
• The person meets Social Security’s definition of having a disability.
• The trust is for the benefit of the person with disabilities.
• The “Grantor” must be a parent, grandparent or legal guardian of the individual with disabilities (or a court).
• The trust must have a provision providing that government entities such as Medicaid that spend money on the individual with disabilities during their lifetime must be repaid out of any funds that remain when the person dies.

No. 2: Third-Party SNTs

Third-party SNTs are funded with money from someone other than the individual with disabilities.

Grandparents, parents or friends who want to leave money for someone with disabilities can do so through a third-party SNT.

Divorcing parents may consider establishing an SNT to hold monthly child support payments.

We would recommend this when a child would otherwise qualify for government benefits.

If a child is under 18 and his or her parents’ finances would prevent the child from receiving government benefits anyway, an SNT is not necessary and would place unnecessary restrictions on the money.

But for a child or adult with disabilities who would be eligible for government benefits based on other financial benchmarks, assigning child support payments to an SNT allows child support payments while maintaining the government benefit eligibility.6
The assignment of child support money must be irrevocable.7

For purposes of SSI, child support is viewed as the child’s money. Therefore, if the child support will be assigned to an SNT, you must use a first-party SNT with payback provisions.

The assignment of child support to a first-party SNT can be done through a court order, or through a post-order agreement between the parties.

Third-party SNTs can also be part of divorce agreements.

As discussed previously, as part of special needs life planning for their child, parents sometimes agree to maintain life insurance to ensure survivors will have necessary finances in the event of a death.

When a child with special needs is involved, the parties may want to consider naming the third-party supplemental needs or special needs trust as a beneficiary of the life insurance policy.

OTHER CONSIDERATIONS FOR DIVORCING COUPLES WHO HAVE CHILDREN WITH DISABILITIES

If you’re divorcing and have a child with disabilities, you should be aware of several other factors:

No. 1: Guardianship
Everyone should agree on who will be appointed guardian of the child with disabilities and how guardianship plans will work when a child with special needs reaches the age of majority.

No. 2: Special Education Decision Making
The divorcing parents should agree on who has authority to make decisions about education of the child with special needs.

No. 3: Estate Planning
You may also want to agree on certain estate planning provisions regarding the child.

SUPPLEMENTAL NEEDS TRUSTS AND AN ELDERLY OR DISABLED EX-SPOUSE

An article a few years ago in The New York Times said more Americans over 50 are divorced than widowed.⁸

More senior divorcing couples should understand that Medicaid is the largest payer for nursing home care and community-based health care services in the country.

That means preserving Medicaid eligibility should be an important variable in creating a divorce agreement.

Under New York Medicaid laws, alimony received by a Medicaid beneficiary, regardless of whether that person has a disability, will be viewed as income and taken into consideration when deciding whether he or she will remain eligible for Medicaid.

Also, for individuals applying for nursing home Medicaid, there is a five-year look-back period.

Medicaid will look at any transfers made within the five-year period preceding an individual’s application.

If non-exempt transfers above the Medicaid threshold were made, Medicaid will impose a penalty period commensurate to the amount of money transferred. During the penalty period, an individual will be denied Medicaid benefits and will be responsible to pay for nursing home care out of pocket.

Older divorcing couples who do not anticipate using Medicaid benefits within five years can agree to a lump sum payment in lieu of continuing monthly alimony.

The receiving spouse could conceivably quickly spend down the money on real or personal property purchases that are exempt from Medicaid’s calculation of income or resources—thus preserving their qualifications for Medicaid.

But this approach has risks. If the lump sum recipient requires nursing home Medicaid within five years, Medicaid may attempt to impose a penalty period commensurate with the value of the alimony paid. In that case you may need to make an argument that the transfer was made for a purpose other than qualifying for Medicaid.

Another option is to structure the divorce settlement so that alimony funds go directly to an SNT.

Funds in the SNT will be available to provide for any need of the beneficiary that is not met by Medicaid or other government benefits.

An SNT is beneficial with regard to SSI as well. According to SSI rules, any funds paid directly to a trust as a result of a court order are not considered income.

While putting funds in an SNT does limit what the funds can be used for, for many couples at more advanced ages, it may be the best route to preserving eligibility for crucial needs-based government benefits.

When your marriage is ending, you want to be sure your needs and the needs of your child with disabilities will be provided for now and in the future.

The special needs planning lawyers at the Cuddy Law Firm can help you navigate this complex process. Contact us today.

1. See 42 USC 1381 et seq.
2. In New York, the 2014 monthly limits are $2000 for individuals and $3000 for couples.
3. If a valid rental and household agreement is created, an adult with disabilities who lives at home may still be considered liable for rent and household expenses.
4. Program Operation Manual Systems (POMS) SI 00830.420 Child-Support Payments.
5. Estates Powers and Trusts Law (EPTL) 7-1.12.
6. POMS SI 01120.200 G.1.d.
7. Id.
8. Roberts, Sam, Divorce After 50 Grow More Common, September 20, 2013. URL: http://www.nytimes.com/2013/09/22/fashion/weddings/divorce-after-50-grows-more-common.html