[This article originally appeared in the Legal Network News published by California Advocates For Nursing Home Reform, Fall 207, Vol 28, No.3. It was designed for a readership of California Elder Law and Special Needs Attorneys]
We are all familiar with the use of Special Needs Trusts to protect receipt of inheritances and injury settlements for those receiving public benefits, and the use of Spousal SNT’s created by Will for a surviving incapacitated spouse. But what may be less familiar is the use of SNT’s in the context of divorce. Simply put, the use of a SNT may protect public benefits when an otherwise eligible spouse receives a property settlement, spousal or child support award that would render the beneficiary ineligible for benefits.
A Threshold Inquiry
An important threshold question is whether the spouse-beneficiary is (1) Under age 65, not yet on MediCARE, and thus a candidate for Medi-Cal based upon the MAGI income counting rules of the Medi-Cal Expansion Program of the ACA [i] ; (2) Is already on MediCARE or is age 65 or older, where eligibility is tested under the traditional Medi-Cal resource cap criterion; and/or (3) Is SSI eligible and qualifies for both SSI and Medi-Cal only if both income and resources are below certain thresholds. At this writing, there is concern that that only those in categories (2) and (3), above, may benefit by the use of the SNT to shelter income, for the reasons set forth in the companion footnote. [ii]
Example For Dual Eligible: SSI & Medi-Cal
Example: Mary and John, both 66 years of age, have been living separate and apart for some time and are now going through a Dissolution of Marriage. Mary is a person with a disability. Since their separation, she has been receiving both SSI and Medi-Cal benefits. [iii] John is fully employed and earns a good salary. In connection with their Dissolution of Marriage, John proposes that he pay to Mary spousal support in the amount of $2,000 per month for a term set by the court, on the assumption that this support, together with her SSI, will combine to just meet her needs. In addition, John proposes a division of marital assets which would allocate to Mary one-half of John’s 401(k) acquired through his employment during marriage, and $200,000 in cash. John would retain the marital residence and the remainder of his 401(k). They have no minor children.
Problem: Under this proposal, Mary would receive countable assets substantially in excess of the $2,000 resource ceiling, thus rendering her ineligible for both the SSI and Medi-Cal programs. By thus eliminating her SSI benefit, the proposed $2,000 in monthly spousal support would not be the anticipated addition to her SSI but, instead, would completely eliminate it. John’s proposal would, for the same reason, render her ineligible for Medi-Cal to pay for co-pays and deductibles not covered by Medi-CARE. The loss of these benefits may place Mary in a worse position after the divorce settlement, than before.[iv]
Question: Can John’s proposal be modified in a way that optimizes Mary’s benefits without imposing any additional burden upon John?
Answer: Yes. There may be two solutions to this dilemma:
Solution #1: Use SNT for Support & Resources
Spousal Support: Assign to SNT: Let’s consider spousal support first: In this regard, there are two SSA requirements that must be observed:
(1) First, to protect Mary’s SSI, the support payments must be “irrevocably assigned” to the trustee of a SNT. Otherwise, the support payments would be treated as “income” and would disqualify Mary from SSI. In this regard, the Social Security POMS provides as follows:
Ad. Assignment of income: A legally assignable payment (see SI 01120.200G.1.c. for what is not assignable), 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). Accord: Social Security POMS SI 01120.201(J)(1)(d).
But wait! Would this assignment deprive the family law court of jurisdiction to enforce the support order? While there is nothing definitive on point, it is this author’s view that, so long as the payments are irrevocably assigned to the SNT, the court may still reserve jurisdiction as to other matters, namely: enforcement of the payment obligation, as well as the amount, timing and duration of the support payments to the Trustee of the SNT. [v] Further, it is best that this irrevocable assignment be made by the court, rather than by the recipient spouse. [vi]
Likewise, unless so assigned, the support would so dramatically increase Mary’s Share of Cost (“SOC”) under the Medi-Cal program so as to render her benefit all but illusory. This is because all of her income in excess of $600/month must first be used to pay her SOC before Medi-Cal will pay anything, thereby rendering access to Medi-Cal unaffordable for Mary.[vii]
(2) There is a second requirement, namely that, if the SNT is be established by court action, the court order must “require” the creation of the SNT; a proposed SNT cannot be merely “approved” by the court. In this regard, the relevant POMS provides as follows:
“In the case of a trust established through the actions of a court, the creation of the trust must be required by a court order. Approval of the trust by a court is not sufficient. POMS SI 01120.203(B)(1)(f).” [Emphasis added]
This author interprets the POMS on this point as saying that the order cannot be the subject of agreement or stipulation. In the family law context, where the courts favor agreements and stipulations, this requirement can be problematic. However, in this author’s opinion, there are three potential solutions to this second requirement:
- a) If the parties anticipate asking the court to establish of a First Party SNT under 42 USC 1396p(d)(4)(A), the parties should request a conference in chambers to alert the court to the special problem of the above cited POMS and, essentially, request that upon return to open court, the court formally “require” the creation of the SNT. Better yet, the court should fashion an order which, itself, “establishes” the SNT, so as to be in closer conformity with the authorizing statute [viii];
- b) The recipient spouse may, if under age 65 and on SSI, set up her own first party SNT, as now permitted under recent SNT Fairness Act of 12/2016, which modified 42 USC 1396p(d)(4)(A) so as to permit competent individuals under age 65 to set up their own SNT; [ix]
- c) Instead of considering a First Party SNT under d(4)(A), consider arranging for the party with a disability to join a Pooled SNT created by a non-profit organization pursuant to 42 USC 1396p(d)(4)(C). In this situation, the Pooled SNT would already have been created by a nonprofit, and not by the court, presumably thereby rendering this second POMS requirement inapplicable.
Countable Marital Assets: Assign to SNT: Once the SNT is established, or the decision made to join an existing Pooled SNT, countable assets, such as cash, could likewise be assigned to the SNT with the same protective result. Mary’s eligibility for both SSI and Medi-Cal would thereby be preserved, and the resources in the SNT could be managed by the Trustee for her benefit without impairing her eligibility for Medi-Cal or SSI.
Medi-Cal also recognizes the SNT as a protective vehicle. 22 CCR §50489.9; and All County Procedures Manual Letter No. 192, pages 9J–72 through 9J — 87.
Solution #2: Reallocate Marital Assets
So Recipient Retains the Exempt Resources
If the allocation of countable resources to Mary is the primary concern, another approach may be considered:
In the allocation of marital assets, special attention must be given to the nature of the marital assets, with particular attention to those, such as the home, which are considered exempt under the Medi-Cal and SSI programs. To the extent a division can be accomplished which allocates to Mary assets which are exempt, the resulting allocation would not adversely affect her eligibility for SSI and/or Medi-Cal.
Alternatively, the division of marital assets can involve a “mix and match” approach: Mary might receive a greater division of “exempt” assets, while any non-exempt assets would be assigned to an SNT for her benefit. Like spousal support, resources may also be assigned to the SNT.
Example: the parties might agree, for example, to re-allocate the marital residence to Mary, and the $200,000 in cash to John along with his entire 401(k). If, after re-allocating exempt assets to Mary, there were still countable cash assets available to Mary, those might be assigned, once again, to the trustee of an SNT.
Minor Children: The SSI “Deeming” Issue
If the parties have one or more SSI-eligible children, SSI permits a one-third (1/3) reduction in the amount of child support taken as an offset against that child’s SSI, even if paid directly to the custodial parent. [x] In other respects, the impact of child support upon the child’s SSI is a bit complex. The complexity derives out of the concept of “deeming”. Deeming is the word the SSA uses to attribute resources or income to another family member for the purpose of testing that family member’s eligibility for SSI. In child support matters, the focus is usually parent-to-child deeming.
Under the SSI Program, the excess resources and/or income of the primary custodial parent are deemed to the child, and this deeming could impair the child’s own eligibility to receive SSI. Thus, if Mary received $200,000 in the division of marital property in the above example, the excess resources above the individual resource caps for two people ($2,000 for Mary and $2,000 for the SSI-eligible child) would be deemed to the child, and prevent that child from qualifying for SSI.[xi] Parent-to-child deeming occurs until the minor child’s 18th birthday. However, the adverse effect of deeming, as well as the dollar-for-dollar reduction in SSI for every dollar of child support (after the 1/3 reduction) paid directly to the custodial parent, can be avoided altogether if the child support is irrevocably assigned to a SNT for the benefit of the child. [xii]
As with the SNT for spousal support, the SNT for child support cannot be created by agreement but must, instead, be “required” by the court. [xiii] As with spousal support, the practitioner may have the best outcome by educating the court in chambers as to this peculiarity of the POMS and by being sure that opposing counsel is likewise informed.
The use of SNT’s in the context of divorce can preserve public benefits when they may be needed the most, and thereby enhance the quality of life of the spouse or child with a disability. They also present a unique opportunity for us to work with our family law colleagues to promote the well-being of our mutual clients.
Gene L. Osofsky is an attorney in private practice in Hayward, California. In his former life, he practiced family law and was a CFLS for many years. He wishes to thank Patricia Tobin for reviewing a draft of this article and for her helpful comments.
[i] MAGI refers to the Modified Adjusted Gross Income which is the test for eligibility under the so-called Medi-Cal Expansion program provided under the Patient Protection and Affordable Care Act (“ACA”). For a good discussion of how income is determined, see “The Advocate’s Guide to MAGI”, prepared by “the National Health Law Program, October 2013, [updated 2/2014] at pages 22—31 in terms of how income is calculated. It does not , however, address the use of a SNT to shelter support.
[ii] Unless and until there is clarification in the law, it is unclear whether persons in category (1), above, and eligible for Medi-Cal under the MAGI income counting rules of the Medi-Cal Expansion provisions of the Affordable Care Act, may protect their Medi-Cal benefit by a court-ordered assignment of spousal support to a Special Needs Trust. Reason: Eligibility for Medi-Cal for this under age 65 group is tested under the MAGI income counting rules, where the determination of income is heavily dependent upon the inclusion of same on the federal Form 1040 Income Tax Return. Since most first party SNT’s will be grantor trusts under IRC § 677, the payment of support to an SNT will still reflect as income on the beneficiary’s own Form 1040, and may be treated as such by Medi-Cal. If this taxable income pushes the recipient spouse over the MAGI income limit for Expansion Medi-Cal eligibility, this support payment would presumably render the recipient spouse ineligible for Medi-Cal. . . . at least under the Expansion Medi-Cal program. Note, also: The relevant federal and state authorities which endorsed SNT’s, and the protective assignment of income to an SNT, pre-dated the MAGI rules under the ACA, which appears not to have carved out an SNT exception to counting income. Whether eligibility for SSI would likewise be impacted by MAGI income is likewise uncertain. Notwithstanding the above, there is room for advocacy with regard to both Expansion Medi-Cal and SSI benefits.
[iii] Since Mary and John are living separate and apart, and not in the same household, there is no SSI deeming of income from John to Mary. POMS SI 01320.400.
[iv] For simplicity, I have not evaluated Mary’s new circumstances to determine whether she would qualify for subsidized health insurance through the Covered California exchange.
[v] Of note is that this author has advanced this same position in the CEB reference on SNT’s. See, CEB, “Special Needs Trusts, Planning, Drafting and Administration“, at Section 4.23.
[vi] That said, this author is unaware of any SSI ruling or court decision requiring that the assignment be made by the court, and is aware that some practitioners take the view that a court assignment is unnecessary and may, instead, be made by the recipient spouse.
[vii] In this example, Mary is not eligible for the Aged & Disabled Federal Poverty Level Program which would eliminate a Medi-Cal SOC for individuals with countable income under $1,235 (for year 2017).
[viii] In this regard, there is some difference in key wording as between the statute [the court must “establish” the SNT as per 42 USC 1396(d)(4)(A)], and the POMS [the creation of the trust must be “required” by the court; POMS SI 01120.203(B)(1)(f)], a difference that is easy to overlook and which has tripped up practitioners in the past. In essence, the statute requires that the court must be the actor, and not one of the parties. Thus, if the SNT is to be created by court action, the safer course would be for the court to “establish” the SNT by the court’s own order, and not merely direct or “require” one of the parties to do so.
[x] POMS SI 00830.420(B)(1).
[xi] See CEB, “Special Needs Trust: Planning, Drafting and Administration”, at section 4.28
[xii] The SSA POMS permits the assignment of child support to a SNT for the child, just as it does for spousal support. POMS SI 01120.200(G)(1)(d). Accord, POMS SI 01120(J)(1)(d).
[xiii] Notwithstanding the authorizing SNT statute and POMS, under California family law it is not entirely clear that a court may, over objection by a parent, order child support to be irrevocably assigned to a SNT. In Marriage of Chandler (1997), 60 CA 4th 124, the court held that, absent agreement to the creation of a trust for child support, the family court cannot order child support paid to a trust and thus restrict the custodial parent’s access to income from child support, and thus reversed the trial court. However, the majority opinion suggests that an exception would be permitted where “there is a strong showing of necessity”, which appeared absent in the Chandler case. That said, this author believes that the better argument favors such an order where there is a sufficient showing of necessity. And, compare, Wilson v. Shea (2001), 87 CA 4th 887, which distinguished Chandler, and approved a father’s contribution of $150/month from Guideline child support into a travel trust fund where there was a strong showing of necessity, in order to encourage visits to repair the father — child relationship. See CEB, “Special Needs Trust: Planning, Drafting and Administration”, at section 4.26.