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George F. Bearup, J.D. Senior Legal Trust Advisor

2-Jul-19

Special Needs Trust Distributions: A Word of Caution

Take-Away: While special needs trusts are extremely helpful to preserve a trust beneficiary’s eligibility to receive Medicaid benefits, a trustee needs to be cautious in making discretionary distributions when the trust beneficiary is eligible to receive Supplemental Security Income (SSI) benefits.

Background: A disabled or special needs individual may seek a monthly fixed income,  usually from one of three sources, dependent upon the nature of the recipient’s work (or social security contribution) history.

  • SSDI: Individuals who have worked enough quarters to vest in the Social Security trust fund, but who then become disabled prior to eligibility, may apply for Social Security Disability Insurance (SSDI.) If approved, the applicant will receive his/her full retirement age Social Security income ‘early,’ which amount will obviously vary from one individual to another. After two years of SSDI benefits, the individual will then be enrolled in Medicare. [42 USC 1395c.] There is, however, an income limit: SSDI is available only to those individuals who are unable to work enough to support themselves; any non-passive or earned income in excess of $1,220 per month will disqualify the applicant.
  • SSI: Individuals who have either never been able to work or who became disabled prior to fully vesting in Social Security may apply for Supplemental Security Income (SSI.) [42 U.S.C. 1381 et seq.] An SSI beneficiary is eligible for a standard, sub-poverty benefit with a federal maximum in 2019 of $771, but some states may supplement this fixed amount federal benefit. Normally a beneficiary is permitted to own a home, a vehicle and other assets not to exceed $2,000 and still qualify to receive SSI benefits.
  • Public Employees: Workers in the public sector- state, county, city, and federal employees, are generally eligible for disability benefits through their retirement plans. Some public employees do not pay into Social Security, and so they would not otherwise be eligible for SSDI, even after decades of employment. Instead, those disabled public employees are eligible to receive disability benefits under their retirement plan. Often those retirement plans do not impose asset limitations. In addition, these public employer sponsored retirement plans may also use a different standard to determine a participant’s disability than the standards used by SSI or SSDI.
  • Disability Standard: The medical criteria is consistent for both SSI and SSDI eligibility, but SSI uses different standards for adults and children. For an adult to qualify as disabled, he/she must be “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impartment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of no less than 12 months.” [42 U.S.C. 1382c (a) (3) (A).]

In-Kind Support and Maintenance Distributions: As a generalization, a trust should limit the trustee’s ability to make distributions with regard to three purposes: food, shelter, and medical expenses. [Program Operations Systems Manual (POMS) SI 01120.203(E).] Food and shelter are collectively known as in-kind support and maintenance(ISM) for SSI benefits.

  • Food and Shelter: The ability to pay for food and shelter will affect SSI benefits- these expenses are what the $771 per month SSI benefit is supposed to cover- while the latter, medical expenses, avoids duplicating Medicaid services the SSI beneficiary is entitled to receive.
  • Food is pretty straightforward as a prohibited trust expense; a trustee should not make a habit of regularly paying for the SSI beneficiary’s groceries.
  • With regard to shelter expenses, what qualifies as an in-kind support and maintenance expense the POMS include: mortgages, real property taxes, rent, heating fuel or gas, electricity, water, sewer, and garbage removal. [POMS 00835.400.] Consequently, trust distributions for these expenses will be treated as an in-kind support and maintenance expense, which will reduce the trust beneficiary’s SSI monthly benefit. This benefit reduction will also occur with direct distributions of cash, or those trust distributions that result in the SSI beneficiary’s receipt of non-cash, non-exempt assets, such as a second vehicle. If the trustee makes a distribution that is treated as an in-kind support and maintenance expense, the SSI trust beneficiary’s monthly benefit will be reduced by one-third of the maximum monthly benefit.
  • Medical: Not every medical expense incurred by the SSI beneficiary is prohibited by a trustee’s discretionary distribution. A trustee may still pay for the beneficiary’s medical care that is not covered by Medicaid, which includes  massage therapy, acupuncture, other alternative treatments, or dental work.

Trust Provisions: Unfortunately, some states make a distinction between third-party support and discretionary trusts, the assets of which are deemed to be available for governmental benefit purposes. A support trust can be treated as being available to the special needs trust beneficiary. If the trust instrument identifies that the trustee may support the beneficiary, or may make distributions following a conventional health, education support, or maintenance (HEMS) standard, the trustee may be compelled to do so, thus making the support trust’s assets available for the beneficiary’s support, thus triggering a reduction of the beneficiary’s SSI benefits.

In contrast, if the trust instrument authorizes the trustee to make trust distributions in the trustee’s uncontrolled or sole discretion, as the trustee deems advisable, or discretionary distributions can be made by the trustee without regard to any support standard, the third-party special needs trust is a wholly discretionary trust and its assets will not be deemed available to the trust beneficiary for Medicaid or SSI eligibility purposes.

MCL 700.7505 and 700.7815(1), which are part of the Michigan Trust Code, confirm that the beneficiary of a discretionary trust in Michigan has no property interest in that trust and the trustee cannot be forced to make distributions by the beneficiary. As such, a purely discretionary trust in Michigan should protect a disabled trust beneficiary’s entitlement to receive SSI benefits.

Distinguish SSI and Medicaid Trusts: There are several state court decisions with regard to discretionary trusts and the special needs beneficiary’s continued eligibility to receive Medicaid benefits despite being a beneficiary of that third-party discretionary trust. However, those cases do not apply to a trust beneficiary who receives SSI benefits. If the special needs trust beneficiary is on, or he/she is likely to require, SSI benefits the trust instrument must impose a supplemental standard that restricts the trustee from making any distributions that would satisfy the in-kind support and maintenance expenses incurred by the trust beneficiary. Restated, a wholly discretionary trust may work to preserve Medicaid benefits, but if the trustee also possesses the discretion to distribute trust assets for in-kind support and maintenance purposes that discretionary trust’s assets will likely still be counted for the trust beneficiary’s SSI eligibility purposes. If SSI eligibility is not a possibility, then a wholly discretionary trust will work. Otherwise, the trust instrument needs to include the express prohibition on the trustee’s discretion to use trust assets for the trust beneficiary’s support or maintenance, e.g. food and shelter.

Conclusion: If a special needs trust beneficiary receives, or likely to apply for SSI benefits, merely having a discretionary trust may not be enough. If a discretionary trust fails to contain a restriction on the trustee’s exercise of discretion, the trustee should consider decanting the existing trust to a new trust instrument that contains the supplemental support standard restriction on the trustee’s discretion.