Some Frequently Asked Questions
About Special Needs Trusts
by Peter S. Stern, Esq.
I get many phone calls from attorneys and members of the public asking questions about special needs trust situations. Some require a lot of work, and often lead to case referrals, while others can be answered quickly (and accurately, I hope!) with a brief phone call. What follows are some typical questions I’ve received, and my answers:
- I’m the trustee of my brother’s special needs trust. He’s on SSI and Medi-Cal. What am I allowed to spend the trust on?
This, of course, is the BIG question, and until the trustee has an attorney review the trust to see what the mandates are, this question can’t really be answered. Further, there may be a large gap between what the trustee can spend and what the trustee ought to spend. But in most cases, it turns out that the trustee has discretion to use the trust for special or supplemental needs, often described in the trust, and may even have the power to spend for in kind support.
Is the beneficiary on SSI? If so, how much SSI does the beneficiary receive? And what is the beneficiary’s living situation? Any money paid directly to the beneficiary will cause a loss of SSI, dollar for dollar. But if the trustee makes payment directly to the payee, the only question is whether or not the payment was for food or shelter. If so, it counts as in-kind support, it must be reported to the Social Security office, and it will lead to a reduction in SSI. If the amount paid for food or shelter was less than the "presumed maximum value," which for 2007 is $227.66, the SSI will be reduced by the amount paid for food or shelter. If the amount paid for food or shelter was $227.66 or more, the reduction will be limited to $227.66. The "presumed maximum value" approach applies to individuals who live in their own households or are living in non-institutional care situations or group homes.
What about other expenditures? Again, see what the trust permits, and then look at the sample trustee instruction letters provided in CANHR’s SSI and special needs trusts trainings at our annual Elder Law Conferences.
- How can I figure out the "presumed maximum value" and other rules about In-Kind Support?
Every year DHS publishes an All County Letter with Social Security Title II and Title XVI cost of living adjustments and related issues. The most recent one is ACL 06-29, dated November 1, 2006. It has all the SSI payment levels, the federal benefit rate calculations, the presumed maximum value and VTR rates, and other SSI related information. All ACLs are available online at: http://www.dhs.ca.gov/mcs/mcpd/MEB/ACLs/default.htm
If you want to read the detailed rules published by the Social Security Administration about the PMV rates and the VTR rates, go to SI 00835.200 in the POMS (Social Security’s regulations), found online at: https://s044a90.ssa.gov/apps10/poms.nsf/aboutpoms
- I thought clothing was a "prohibited" item for purchase for an SSI recipient.
Clothing used to be on the list, and there used to be limits on how valuable an automobile an SSI recipient could own, and how much the recipient could have in the way of household items, furniture, computers, and the like, but the Social Security Administration changed the law, effective in March 2005, and now clothing doesn’t count. Your SSI beneficiary can drive a Lexus, and the trustee can go on a spree at Bed, Bath, and Beyond and not cause a problem for the beneficiary.
- Mom just died and left my brother and me her estate worth $500,000. I’m fine but my brother is on SSI. Will my brother lose his SSI?
You and your brother should consider all the options. He might be better off without SSI. Is he on Social Security Disability? Does he have Medicare yet? If the answers to these questions are "Yes," and if he does not need Medi-Cal, even though he qualifies for it, figure out how much he would lose if he goes off SSI. If he gets a very small supplement only, on top of Social Security, he might well want the freedom of having his money outright, if he is able to use it intelligently.
If he does accept the inheritance, he will of course lose his SSI. He can, however, consider several courses of action. First, is mom’s estate in a living trust, and is the trust still managed by the trustee? If so, it might be possible to go to court and have the trust reformed to create a special needs trust for your brother. The probate code does permit modification even of irrevocable trusts under the proper circumstances. A trust that is reformed to hold your brother’s share of the estate as a special needs trust would permit him to retain his SSI and Medi-Cal. Next, whether the estate is held in trust or will distribute outright to your brother, if he is under age 65, and if he has a living parent or grandparent, he could have a parent or grandparent establish a special needs trust and transfer the inheritance to the trust. If he does not have a parent or grandparent who can help, he can, if he has capacity, set up a general durable power of attorney that has a power in it permitting the attorney in fact to set up a special needs trust. The attorney in fact can then have a trust prepared and ask the court to approve the trust, and once the trust is approved, it will be possible for your brother to transfer what he has inherited to the trust.
If your brother does not have capacity to establish the trust and there is no suitable parent or grandparent available, it would be possible to have a conservatorship established for the purpose of setting up a trust under the substituted judgment doctrine.
- We just got an order reforming mom’s trust, so my brother’s share is all in a special needs trust now. It turns out the trustee was paying a lot of money for his rent over the past six months. What do we do?
Your brother should report the payments to the social security office. He will have his SSI reduced to pay back the overpayments.
- But the trustee wants to keep paying his rent, so he can have a nicer apartment. And he’s only getting $150 in SSI, far less than the $1,200 a month the trustee pays. But he really needs his Medi-Cal. What happens now?
He will lose his SSI, but he can reapply for Medi-Cal, and he will be eligible, since he is still under assets and has a very low income. For some people, even those that have special needs trusts, they are much better off without SSI if the trust can be used to enhance their enjoyment of life. There is an Old Age and Disabled waiver available for a person like this to keep his Medi-Cal.
I live in Section 8 housing. I’m on SSI and Medi-Cal, and I’m under 65. I just got a $300,000 settlement in a personal injury matter. Will this affect my housing?
You bet! First, let’s assume you are able to keep SSI and Medi-Cal either by having a d4A trust set up for you by a parent, grandparent, or the court, and that you have transferred your settlement proceeds to the trustee. The Section 8 Program is a lot harder to deal with. Your attorney should obtain the CANHR materials from the 2006 Elder Law Conference as a first step and review the materials under the "SNTs/Trusts" tab. Next, you have to figure out whether you are on "project based" housing or "tenant based" (voucher) housing. This is one area of the law where we don’t have easy to find rules to refer to. Further, keep in mind different Housing and Urban Development (HUD) offices, which administer Section 8, often apply different rules, or what appear sometimes to be no rules.
Most people try to get a voucher for their Section 8 housing, so they can pick among available apartments in the area they wish to live. The rules for tenant based housing are unfavorable.
Whether you are project based or tenant based, the Section 8 program will deem income from the assets you have "given away," BUT—if you received a settlement or judgment to fund your trust, as in this case, there is an exception: there should not be any deeming of income, whether you are in project based or voucher based housing.
If you had your trust set up with a lottery winning, or if you received an inheritance, for instance, and then transfer it to your trust, there will be income deemed to you, at 2% of the amount you received and transferred, for two years. If your $300,000 was an inheritance, you will have $6000 of income per year ($500 per month) deemed, and this will, of course, affect how much rent you have to pay for your Section 8 housing.
Once you’ve figured out the deeming, you have to measure what effect any distributions from the trust will have on your income. Here, there’s a big difference between project based and voucher based Section 8.
Project based: Counts only your actual income and the distributions to you directly or to others on your behalf.
Voucher based: Counts all distributions to you or on your behalf, including administrative expenses, payments to attorneys, etc., except those costs incurred in setting up the trust, as income!
In recent communications with attorneys who specialize in this area, HUD has been taking a harsher line, relying upon 24 CFR 5.603(b)(2): "In cases where a trust fund has been established and the trust is not revocable by, or under the control of, any member of the family or household, the value of the trust fund will not be considered an asset so long as the fund continues to be held in trust. Any income distributed from the trust fund shall be counted when determining annual income under § 5.609." The effect of applying this rule to both project based and voucher based recipients would be to put project based recipients in the same boat as voucher based recipients.
But note the emphasis on income: most of my special needs trusts do not have much income. They distribute principal, for the most part, and if the Section 8 recipient has a good lawyer, he or she might be able to prevail in arguing that none of the principal spent should be counted as income to the Section 8 recipient.
Here’s what 24 CFR 5.609(c)(17) says:
"Amounts specifically excluded by any other Federal statute from consideration as income for purposes of determining eligibility or benefits under a category of assistance programs that includes assistance under any program to which the exclusions set forth in 24 CFR 5.609(c) apply."
Keep in mind that individual Section 8 offices apply the regulations differently, so you may find things aren’t as bad as I’ve described them. And consider something else, which might be handy to know if the trust is not yet set up: if your trustee is directed to add all income to principal, and then make distributions only from principal, you MAY be able to convince the Section 8 office that no income has been spent on your behalf.
(A special thanks to Tom Beltran, Esq., of Burbank, for updating the answer for this and the following question.)
- I live in Section 8 housing, and I am the beneficiary of a special needs trust my grandmother set up for me in her living trust. Will this trust affect my Section 8 housing?
Well, you haven’t received the inheritance directly—it stayed in a trust, so there will be no deeming of income, regardless of whether you are in project based or voucher based Section 8. As for distributions to you or on your behalf, the rules are the same as for the first party trusts described above: if you are in project based housing, the actual distributions to you and for your behalf count as income; but if you are in voucher based housing, all the distributions, including administrative expenses, count as income. But look at the answer to question 7: project based housing may also be subject to the same regulations under HUD’s new policy.
- My attorney called and said she just received a check from a personal injury settlement for me. It’s the third of the month. I’m over 65 now and can’t set up a special needs trust (other than a pooled trust), and I’d like to give the money away. I’m on SSI and Medi-Cal. What happens if I do so?
According to a recent case won by a CANHR attorney, Social Security has to interpret the transfer rules to mean that the receipt of the settlement counts as income in the month it is received, and if you hold on to the settlement (or if your attorney holds on to it on your behalf) past the first of the month, it becomes a resource. If, however, you transfer the settlement in the month you receive it, it does not count as the transfer of a resource, and you will not lose your SSI (although you will have been over income for one month). SI 01150.001 defines transfer of ownership of resources, which is determined by what one owns at the beginning of the month, and SI 01150.B.5 makes a special exception to the first of the month rule only for inheritances. (You or your attorney can look up these Social Security regulations in the POMS on line at https://s044a90.ssa.gov/apps10/poms.nsf/aboutpoms)
- I had a special needs trust set up for me by my attorney-in-fact last year. Now I’m really unhappy with my trustee. What can I do?
Your first course of action is to discuss your concerns with your trustee. After all, the trust was set up to help you out. But you might be asking your trustee to make distributions that go beyond the scope of the trust. Try to work it out, first. If you really can’t reach an accommodation with your trustee, discuss with your attorney what provisions there are in the trust to change trustees. If your trust has a provision that allows you to change trustees, either by naming a successor trustee to serve or by naming a new trustee entirely, you can exercise that right. Remember, however, that you had to give up substantial control over the money in the trust when you had the trust established—that’s the reason why you are allowed to have the trust.
- Can I go to court to have the trustee changed?
Consult your attorney. In California even a trustee who has absolute discretion cannot violate the terms and provisions of the trust or the intent of the Settlor of the trust. Most trustees want to carry out their duties according to the trust’s purpose and would be willing to discuss the pattern of distributions they are making. And if you do go to court, it might be very expensive for the trust. See your attorney to determine how much it will cost to file a petition for instructions to the trustee or for removal of the trustee.
- I think there will be a lot left in my trust when I die, even if my trustee has to pay the state back for what I have received from Medi-Cal. Can I change the persons who are named as beneficiaries after my death?
If your trust is a third party trust, set up by someone else with assets belonging to someone else, the answer is generally no. After all, it’s not your money in the trust—it’s someone else’s money. Whoever set the trust up may have had a special plan in mind for what would happen if there was something left when you died.
Whether it’s a trust set up with your funds or a trust set up with someone else’s, though, you should have your attorney review it—the drafter of the trust may have given you a special power of appointment. If this is the case, you are able to determine who the remainder of the trust goes to, but you have to have the trust reviewed in detail—you may have to write a will in order to exercise the power of appointment. Or you may have to use some other form of writing to notify the trustee of your intentions.
If you are contemplating setting up a first party trust, and if you want to keep some flexibility regarding who should get what’s in the trust after your death, when the state has received what it is due, ask your attorney to be sure the trust has a provision in it that allows you to designate in the future changes in the beneficiary selection.
(Peter Stern, Esq., is an attorney in private practice in Palo Alto, CA)