Assets in 529 College Tuition Plan are Not Considered Available Resources of the Over Age 18 Beneficiary

A recent question has arisen regarding whether or not assets held in a 529 College Savings Plan (“Qualified Tuition Program”) for the benefit of a beneficiary who is disabled over eighteen years of age will be treated as a “resource” by either or both SSI (Supplemental Security Income) or Medicaid.

Some parents establish a 529 Plan for a young child in anticipation of saving for the child’s future (and the presumed need for) post-high school education expenses at a college or university.  Years later, due to illness, injury, developmental delays, or disabilities, it may become apparent to the parent that the child would not likely be able to attend college or university but instead does then, or shortly will, need to apply for and receive public benefits like SSI and/or Medicaid.  Will those funds held in a 529 Plan contributed by the parents (or others) now hinder, or even prevent, the beneficiary from being able to obtain SSI and Medicaid, if the beneficiary would otherwise qualify for those benefits??

Social Security has issued a POM which addresses how College Savings Plans are to be treated by the SSA.  The POM is found at SI 01140.150, entitled “Qualified Tuition Programs” (QTPs).  Included in the provisions of this POM is the specific finding that, since the 529 is deemed to be “owned” by the person establishing the account, it is therefore not owned by the beneficiary and, therefore, should not be deemed a resource of the disabled beneficiary.  This is great news for the beneficiary.  In fact, the parent (who is normally the custodian of the account) can use the funds to benefit the beneficiary in certain circumstances for educational needs without having the transfer the assets into an ABLE Account (see blog post), or into another alternative, such as a Medicaid Payback Trust [e.g., (d)(4)(A) or (d)(4)(C)].

In addition, the 529 Plan does not require any “Medicaid payback” to the state Medicaid program since the assets held in the 529 Plan are not deemed to be owned by and are not, therefore, “resources” of the beneficiary.

The recently passed “Tax Cuts and Jobs Act” expanded the use of 529 Plans for expenditures for K-12 tuition, thus making the assets available for educational purposes of a younger disabled person who may not qualify for college or university.  After completion of whatever educational needs the beneficiary has, the new tax act does allow 529 Plans to be rolled over into an ABLE account.

Using the funds in the 529 Plan to benefit the disabled beneficiary, without damaging the beneficiary’s public benefits and without incurring a Medicaid “payback” at the death of the beneficiary, is a two-fold benefit, a real “win/win.”
 

Curtis J. Shacklett, Esq.

Barber & Bartz, P.C.

525 S. Main St., Ste. 800

Tulsa, OK 74103-4511

Telephone: (918) 599-7755

Facsimile: (918) 599-7756

Email: cshacklett@barberbartz.com

Website: www.barberbartz.com

CAN A SPECIAL NEEDS TRUST BE THE BENEFICIARY OF AN IRA? (Part I)

The accumulated assets in many families often include some form of a retirement account, such as an IRA, 401-k, or qualified pension plan (herein IRA).  Designating a disabled child as the direct beneficiary of an IRA is not advised for several fairly obvious reasons.  First, the entitlement to the IRA account by the disabled child will normally cause an immediate loss of SSI and/or Medicaid benefits unless spent down immediately or withdrawn from the IRA (income taxes being withheld) and transferred into one form or another of a Medicaid Payback Trust [(d)(4)(A) or (d)(4)(C)].  Secondly, if the child is mentally disabled, the mere availability of the funds to the disabled child may result in his/her misspending the funds or being exploited by others.

To solve or avoid these problems, it is possible to name a trust to be the recipient or beneficiary of the IRA.  There are two basic types of trusts that are used in conjunction with the IRA.  One is called a “conduit” trust and the other is an “accumulation” trust.  A conduit trust is designed to receive the “Minimum Required Distribution” (MRD) from the IRA which are yearly distributions of a fraction of the balance in the IRA based upon the child’s remaining life expectancy.  When the trust receives the yearly distribution from the IRA, the Trustee immediately distributes the funds received to the disabled beneficiary.  A conduit trust avoids the risk of a disabled person using the IRA all at once if he/she were named directly as the beneficiary.  However, the annual MRD coming into and then out of the Trust to the disabled beneficiary may harm the receipt of public benefits received by the disabled person depending on whether or not the beneficiary was receiving SSI and/or Medicaid.  One solution to this problem is the use of an “accumulation” trust to receive and hold onto the MRD received by the Trust from the IRA without being required to make a distribution of the MRD to the disabled beneficiary.  Holding on to the MRD avoids disqualifying the disabled beneficiary from receipt of SSI or Medicaid but may have negative income tax consequences.  There are usually ways to avoid the more negative tax consequences with a carefully drafted accumulation trust.  The ins and outs of an accumulation trust will be addressed in my next blog post. 

Curtis J. Shacklett, Esq.
Barber & Bartz, P.C.
525 S. Main St., Ste. 800
Tulsa, OK 74103-4511
Telephone: (918) 599-7755
Facsimile: (918) 599-7756
Email: cshacklett@barberbartz.com
Website: www.barberbartz.com

WILL AN INHERITANCE AFFECT SSI AND/OR MEDICAID?

This question arises frequently, and I often receive calls from parents of disabled children or professional Trustees as to the impact of an inheritance received from a grandparent or other relative, and whether or not that inheritance will affect “social security benefits.”

The short answer to this question is YES–if the disabled person is receiving either or both SSI and/or Medicaid.  Under both SSI and Medicaid rules, the disabled person cannot possess more than $2,000 in non-exempt resources.  (Exempt resources include things like clothing, household goods, personal effects, etc.) 

Thus, if a disabled individual inherited or received a gift of money or property that increased his/her bank account or list of assets/resources above $2,000 in value, the recipient would lose his/her SSI and Medicaid benefits unless the excess funds were immediately: (1) spent down below $2,000 for the benefit of the disabled person; (2) used to acquire exempt resources; (3) used to purchase a prepaid irrevocable burial contract up to $10,000; or (4) transferred into one form or another of a Medicaid pay-back trust [called a (d)(4)(A) trust, or a (d)(4)(C) trust, the later also known as “pooled” trust.]

If a disabled person is receiving SSDI (or “SSD”) which is an earned benefit program called “Social Security Disability Income,” an inheritance will not affect the continued receipt of that benefit.  SSDI is not a welfare program like SSI, and thus is not affected by receipt of an inheritance.  But if a person was receiving SSDI and Medicaid, he or she could still lose their Medicaid benefits unless one or more of the four strategies described above was implemented.

CONCLUSION:  A parent, guardian, or other caregiver should rarely discourage gifts be given to a disabled person from other family members, grandparents, etc., since there are ways to salvage these gifts via proper spend-down strategies or setting up a Medicaid payback trust, as described above. 

Curtis J. Shacklett, Esq.

Barber & Bartz

525 S. Main Street, Suite 800

Tulsa, Oklahoma  74103-4511

Telephone:  (918) 599-7755

Facsimile:   (918) 599-7756

E-mail:  cshacklett@barberbartz.com