by Greg D. Trapp
Greg Trapp is an attorney practicing in New Mexico and a member of the National Federation of the Blind of New Mexico. He has done research on the ways in which trusts can be used to assist people receiving Supplemental Security Income. As we were going to press, Mr. Trapp notified us that the federal budget bill, the Omnibus Budget Reconciliation Act (OBRA- 93), contains an amendment which will drastically reduce the circumstances under which a trust can be used to qualify a person for Medicaid. The law, as currently proposed, could even require the state to seek reimbursement from the estate of Medicaid beneficiaries. The bill is being debated as this edition of the Monitor is being distributed. The likelihood that this amendment will pass makes it even more important to understand your rights and to be involved in the political process. The changes, however, will not affect the use of trusts to maintain SSI eligibility, only that for Medicaid. Here is Greg Trapp's article:
Are you named in a will? Are you about to receive money from a legal settlement? If so and if you are receiving Supplemental Security Income (SSI) or Medicaid, you may have good reason to consider the advantages of using a trust. A trust could make it possible for you to receive an inheritance, settlement, or gift and still be eligible for SSI and Medicaid, if the state rules permit.
A trust is a legal instrument in which a first person, called a grantor, places property in the control of a second person, called a trustee, for the benefit of a third person, called a trust beneficiary. The trust designates a trustee and specifies how he or she is to manage the trust funds, called the trust principal. The most common type is a testamentary trust, which is created at the time a will is made. In addition to protecting inheritances, trusts can also protect a gift or legal settlement. If the trust is intended to supplement the needs of an SSI recipient and if the recipient cannot spend or control the trust principal, then it is called a special needs trust. It is important to emphasize that, if you are given money or property directly, you will be unable to create a trust and may have to exhaust these assets before you will be eligible for SSI or Medicaid. Therefore, it is essential to do advance planning while the money or property that you expect to receive still belongs to someone else. Once it is yours it is too late to establish a trust for SSI or Medicaid eligibility.
A special needs trust can be used to establish or maintain SSI eligibility. In some cases a special needs trust can also make a beneficiary eligible for Medicaid. Medicaid will pay for medical treatment, prescription drugs, and transportation to treatment. In most states eligibility for SSI automatically entitles a person to Medicaid. However, a trust which qualifies a person for SSI will not necessarily qualify him or her for Medicaid. If you are thinking about a trust, you should give careful consideration to its impact upon Medicaid eligibility, separate from SSI. Even if it is not practical to use a trust to qualify for Medicaid, you should still consider a special needs trust to establish SSI eligibility since the trust principal can be used to pay directly for medical costs or to purchase health insurance.
A trust can pay providers directly for items other than food, clothing, and shelter without causing a reduction in SSI payments. Items which can be paid for by a trust can include medical care, telephone bills, education, entertainment, and travel. The cost of attendance at professional meetings or conventions such as the NFB's could also be paid by a trust. The trustee can also make cash distributions to the trust beneficiary; however, cash which is distributed directly to the beneficiary will be counted as unearned income, resulting in a dollar-for-dollar reduction in SSI benefits after the twenty- dollar unearned income disregard is applied. Payments made directly to providers for items such as food, utilities, clothing, and shelter will also be counted as income and could result in a reduction in SSI benefits. However, the reduction resulting from these direct payments will not be greater than $164.66 per month during 1993. Direct payments from the trust for food, utilities, clothing, and shelter exceeding $164.66 in any single month will not reduce SSI payment in that month. If trust distributions would reduce or terminate benefits, the distributions should be made in a single month so as to minimize the loss of benefits.
In some cases a trust can also be used to qualify for Medicaid. Medicaid can pay for medical expenses which could otherwise rapidly exhaust an inheritance or settlement. In the case of a person with serious medical problems, Medicaid eligibility can save hundreds of thousands of dollars in trust distributions. Because Medicaid programs are overburdened, Medicaid trusts are closely scrutinized to prevent wealthy persons from benefiting at the expense of the poor.
The Social Security Administration does not consider trust principal to be a resource of the trust beneficiary if he or she is unable to revoke the trust and does not have direct access to the principal. So a trust created to assist a blind beneficiary should be a discretionary trust, which grants complete control to the trustee. It should include a statement of the goals and purposes of the trust. It should also contain a specific clause stating that the purpose of the trust is to supplement state and federal entitlement programs and to pay for only those items or services not paid for by the entitlement programs. It should also state that the purpose of the trust is to create a better quality of life than would otherwise be provided by the entitlement programs. It should also describe how public policy would be benefitted by the trust. To show a benefit to public policy, the trust could state that the purpose of the trust is to enable the beneficiary to become employed or otherwise become less dependent on public benefits.
The trust should include provisions protecting the trust principal from potential creditors or changes in the law. In the case of a non-testamentary trust, it is critical that the trust be in place so that it can be funded directly by the gift, settlement agreement, or court. As noted earlier, if you are given the assets directly, you will be unable to create a trust and may have to exhaust the assets before you will be eligible for SSI or Medicaid. Finally, since a discretionary trust places complete control in the trustee, the grantor should take great care when deciding whom to name as trustee.
The appropriateness of establishing a special needs trust will primarily depend on the grantor's income, marital status, age, and health and the potential amount of the trust principal. If the grantor has a blind or disabled spouse or child, the spouse or child may be benefitted by a trust later, even if the family's present income or resources currently prevent SSI eligibility. When the bread-winner dies, his or her income will cease, and the surviving blind or disabled family members may then become eligible for SSI benefits.
A trust will be appropriate for persons who have a financial need for the SSI program or who need Medicaid to cover medical expenses. It will be most beneficial to a blind or disabled SSI recipient in cases where the assets that would otherwise be given directly to the recipient are relatively modest. Small amounts of money received in the form of an inheritance, for example, can easily cause SSI ineligibility unless the inheritance is paid into a trust. Use of a trust to shelter larger amounts may be appropriate when there is a need to qualify for Medicaid, when the beneficiary would be unable to spend the money placed in the trust, or when the beneficiary has a desire to preserve the money for future heirs.
Ross, Sterling, "Sheltering Zebley Retroactive SSI Benefits in Trust," 25 Clearinghouse Review 1335, February 1992.
Sheldon, James, "PASS: SSI's Plan for Achieving Self-Support," 25 Clearinghouse Review 962, December 1991.
Silber, Mayer Y., "The Effect of a Trust on the Eligibility or Liability of the Trust Beneficiary for Public Assistance," 26 Real Property, Probate and Trust Journal 133, Spring 1991.