Special Needs Families in Divorce

By Christina Lesher
January 31, 2015

When parents of special needs children experience a divorce, family law attorneys are in a unique position: Not only can they handle the divorce proceedings, but they can also steer their clients toward a plan for maintaining or establishing valuable Medicaid benefits. Skilled lawyering at the time of divorce can help preserve a high quality of life for special needs children for years to come.

Families can use a supplemental needs trust (SNT), sometimes called a special needs trust, to help them establish and maintain Medicaid coverage. Medicaid can provide not only health care but also housing, caregiver and nursing services.

However, many Medicaid programs limit the beneficiary's amount of income and assets. The SNTs are a critical tool in maintaining benefits: They allow the beneficiary to enjoy the use of assets and income (such as child support) while not counting the income and assets as belonging to the child.

Two Forms

A supplemental needs trust most commonly comes in one of two forms: a first-party SNT or a third-party SNT. They are distinguished based on who funds them.

First-party SNT

First-party SNTs are financed with the disabled individual's own assets or income, such as child support. The individual might receive assets as a result of a personal injury settlement, in the form of inheritance or from previous employment. Assets placed in the trust are considered exempt as a countable asset for purposes of determining the beneficiary's eligibility for Medicaid, Social Security and other public benefits, as long as the beneficiary does not have direct control over any distributions or the ability to revoke the trust.

Under federal law, the grantor of a first-party SNT must be the parent or grandparent of the beneficiary; a court order or guardian also can establish the SNT. Further, the trust must exist for the sole benefit of the beneficiary. The trust must be established and funded prior to the beneficiary reaching age 65, or it may result in a loss of Medicaid eligibility.

When the beneficiary dies, the state Medicaid program will recover against any remaining trust property up to the amount expended on the beneficiary's care through the Medicaid program during the beneficiary's lifetime. This is called a “payback provision,” and the trust agreement must include it to maintain the exemption as a countable asset. After any Medicaid payback or claim, the rest of the trust property can be distributed as provided in the trust agreement.

Cash child support received by the child or on the child's behalf counts as income for the purposes of determining eligibility for public benefits. Two-thirds of the child support will count as income if the “child” is unmarried, under age 22, and a student. Otherwise, if any of those conditions are not met, all the child support counts as income.

When an individual reaches the age of 22 and is no longer eligible for the one-third exemption of child support, there are at least three possible strategies lawyers can consider to help a parent support an adult disabled child while still preserving the offspring's eligibility for benefits. They can also be used for younger children.

1. Presumed maximum value strategy: The supporting parent may pay the support in the form of food or shelter, as long as he or she does not make payments directly to the child.

For example, the supporting parent could pay rent for the child directly to the landlord or another party, such as another parent or roommate. This amount is counted as income for purposes of assessing eligibility for benefits, but it is not counted according to its actual dollar value; Social Security sets the maximum total designated as income for food and shelter at $260.33, even if the actual amount the supporting parent pays exceeds $260.33. For example, a supporting parent could pay for an expensive apartment for the child, but so long as the payment goes directly to the landlord, this rental payment counts as no more than $260.33 in the calculation of the child's income.

2. Special needs payments strategy: The supporting parent could pay the support to someone other than the offspring for something other than food and shelter. For example, the parent could pay for the offspring's health insurance, medical care, training, counseling, etc., if the parent made payments directly to the service provider. Payment of such services falls into the category of “special needs” and is thus not counted as income at all.

3. Special needs trust strategy: The supporting parent can pay the support directly into a SNT pursuant to court order, with a provision for repayment of the Medicaid program as in any other self-settled trust. If the trustee of such a trust distributes funds only for “special needs,” no income is actually ever produced and thus is not subject to the income limits.

Third-Party SNT

Much like the first-party SNT, a third-party SNT also allows for the exemption of any assets placed in trust. However, in this case, third parties ' generally friends and family members of the beneficiary ' place property in the trust. Anyone can serve as grantor of a third-party SNT; they can place assets into the trust after the beneficiary turns 65, and no payback provision to the state is required. For these reasons, it is more desirable to place assets in a third-party SNT than in a first-party SNT whenever feasible.

The trust document must provide clear guidance on what distributions the trust can make that will not constitute income and will enhance the beneficiary's quality of life. As an example, in Texas, the following distributions are suggestions from the master pooled trust managed by the Arc of Texas, a nonprofit group that serves individuals with disabilities:

Health and dental equipment for which funds otherwise are unavailable;
Clothing;
Rehabilitative and occupational therapy services;
Private case management;
Cultural experiences;
Medical procedures that are not medically necessary or life-saving;
Medical insurance premiums and supplemental nursing care;
Supplemental dietary need;
Travel/vacations within agency guidelines, entertainment and companionship; and
Pre-need funeral/cremation contracts.
The trust can make distributions for housing, shelter and food, but this takes careful planning; it is not always advisable.

Conclusion

This is by no means an exhaustive or definitive list of items that may be purchased by the trustee through the SNT without concern that Social Security or Medicaid will determine the purchase to be income. It is merely an illustration of how SNTs, if carefully managed, can provide for the extras that will improve the beneficiary's quality of life.

Families with special needs children face a multitude of challenges. With proper planning and advice, families can establish plans to provide a high quality of life for these children now and in the future.

Christina Lesher is a solo at the Law Office of Christina Lesher in Houston. She provides comprehensive legal advice on elder law, Medicaid and special needs planning, veteran's benefits, and other legal issues confronting seniors and persons with disabilities. She serves on the board of directors for the Texas Chapter of the National Academy of Elder Law Attorneys and is a member of the board of directors of Alzheimer's Association Houston/ Southeast Texas Chapter.