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disabled child will normally cause an immediate loss of SSI and/or Medicaid benefits unless spent down immediately or withdrawn from the IRA (income taxes being withheld) and transferred into one form or another of a Medicaid Payback Trust [(d)(4)(A) or (d)(4)(C)].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

ARE RETIREMENT ACCOUNTS OF A SPECIAL NEEDS PERSON IGNORED BY SSA AND MEDICAID?

On several occasions I have been consulted by parents of adult disabled children who have worked and accumulated a retirement account via a 401k or 403b (provided by a non-profit employer) and have run afoul of SSA (Social Security Administration) or OKDHS (Oklahoma Department of Human Services-the state agency that determines Medicaid qualification) rules resulting in a disqualification of the receipt of continued benefits.

This is a trap for the unwary, since the rules allow for a person receiving SSI or Medicaid, to have a retirement account provided by his/her employer without the account’s existence, or the funds held therein (regardless of the amount), being deemed a “resource” to the worker. If deemed a “resource,” the retirement account might otherwise disqualify the worker from continued receipt of public benefits such as SSI and/or Medicaid. Parents, or guardians, or trustees assume that since the account was allowed and not deemed a resource for those years of employment, then such retirement accounts will always be deemed not a resource. Though this sounds logical, unfortunately, that is not the rule. There is some guidance (not as clear as we would like, sometimes) in the POMS (“Program Operating Manual System,” the SSA policy/rules providing guidance to the Social Security worker) as well as in the Oklahoma Administrative Code (“OAC”), the latter being promulgated by the Oklahoma Health Care Authority (the state’s Medicaid paying agency), dealing with retirement accounts and how they should be treated by those agencies when seeking to determine whether or not such retirement funds are no longer protected, i.e., no longer deemed a non-resource. The SSA rules (POMS) provide the following instructions:

“A retirement fund is not a resource if an individual must terminate employment in order to obtain any payment” (POMS-SI-01120.210 subsection C-1). However the same section in the POMS makes clear that if the individual worker could withdraw funds from the retirement account, that the value of the retirement fund is the amount of money that an individual can currently withdraw from the fund. This value is the amount left after the penalty deduction if any, but is not further reduced by any taxes that are then due based upon the withdrawal.

Similarly, the OAC contains the following “policy” provisions relevant to this issue:

“A retirement fund is not a countable resource if the applicant is currently working and must terminate employment in order to receive benefits” (OAC 317:35-5-41.7) [Emphasis added]

The policy for Medicaid benefits is worded very similarly to the SSI rule in the POMS. Thus the key appears to be that the retirement funds ARE treated as a resource for both SSI and Medicaid IF the individual, while working, has the right to withdraw funds from the retirement account for any reason permitted by the plan. Since many retirement plans do grant the employee the right to withdraw funds for certain reasons while remaining employed, it might go unnoticed to the employee or guardian, or trustee that such funds might be an excess “resource” to the individual thus hindering the continued receipt of either or both SSI and/or Medicaid.

CONCLUSION: It is thus important to remember for the benefit of a disabled worker who is receiving either or both, SSI and Medicaid, that upon termination of employment, steps should immediately be taken to withdraw and/or transfer the retirement account into a d4A special needs trust (sometimes called a Medicaid payback trust) OR withdraw the funds and find appropriate ways to spend down the funds to keep the child’s total funds and non-exempt assets at $2,000 or below. There may of course be income taxes due upon the withdrawal that will need to be taken into consideration, although frequently any tax withheld will be later received as a tax refund, depending of course on the worker’s tax circumstances. A guardian or trustee should inquire of the employer as to what exactly are the rights of withdrawal of the employee while the employee is still working. If the employee has a present right to withdraw from the retirement account, then it appears that the retirement fund would be treated as a resource thus creating the likelihood of disqualification of the employee from receipt of Medicaid and/or SSI.

If you find yourself facing this type of problem, please contact us as soon as possible so that appropriate steps can be taken in an attempt to preserve any SSI and/or Medicaid benefits.


Curtis J. Shacklett, OBA # 8101
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

CAN THE TRUSTEE OF A SPECIAL NEEDS TRUST EMPLOY A PARENT OF A DISABLED CHILD AS A CAREGIVER FOR THAT CHILD?

I have been asked this question numerous times by professional trustees and parent-trustees of special needs trusts (“SNT”). The answer is: “it depends.”

First of all, an SNT established by a parent or other “third party” and not funded by assets belonging to the disabled person is not subject to the “sole benefit” rule that governs what are called “first party” SNT’s.  A first party SNT is one that is statutorily authorized and is established for the sole benefit of the disabled person and funded with assets/resources that belong to the disabled person.  This type of trust is a “Medicaid pay-back” trust and the assets contained in it are not treated as an available resource to the disabled person and thus do not hinder receipt of SSI and/or Medicaid.  However, these first party trusts (sometimes called d4A trusts) must be established for the “sole benefit” of the disabled person and no other person can be a co-beneficiary with the disabled person as long as the disabled person is alive.  It is this “sole benefit” rule that gets in the way of providing compensation to a parent as a caregiver.

Generally, the law requires a parent to care for his/her minor child (whether disabled or not) without any compensation for doing so.  Sometimes, however, if both parents are working, and in particular, if they are doing so because of economic necessity, it creates considerable hardship if substantial expense is incurred for specialized care-giving services for a live-at-home disabled child.  This may result in not much economic benefit to one of the parents for continuing to work, when much of the income from employment is spent on caregivers. In addition, a parent may feel (and often does) that he/she can provide far better care giving services to their disabled child than those they would otherwise hire to provide care.  Thus, two questions arise: (1) “Can I quit my job, stay at home with and take care of my disabled child, and be compensated from my disabled child’s Medicaid-payback SNT?”; and (2) “If, so, how much can I be paid?”

If the disabled child is an adult (i.e., of legal age-i.e. at least 18 years old), there is currently no requirement by SSA (Social Security Administration) or Medicaid to provide care and support for that child by the parent.  Thus, obtaining consent or approval by SSA or Medicaid for parental compensation from the SNT may be more likely to be approved (subject to considerable scrutiny by SSA and Medicaid).  However, if the disabled child is a minor, due to the legal obligation of support placed upon all parents, a parent obtaining consent to be compensated from a first party SNT is far less likely. In addition, because of the “deeming” of income rules by SSA the child may experience a reduction in his/her SSI benefits if the parent is paid from the SNT.  In the event the parent is approved to receive compensation from a first party SNT, in all events the parent could not be paid more than that charged by independent qualified/trained caregivers.  Further,  the parent may not be able to be paid for more than forty (40) hours per week since it will be assumed that the parent can provide care for the child on nights and weekends, etc.  Because the “sole benefit” rules are a potential hindrance to compensation to a care giving parent, and somewhat vague as to how they might apply to specific circumstances, we suggest you check with our office and discuss your particular circumstances before assuming that compensation from a first party SNT to a parent will be allowed. (also see SSA POMS: SSI 01120.201F)

Curtis J. Shacklett

Barber & Bartz

525 S. Main, Suite 800

Tulsa, OK 74103

(918)599-7755

cshacklett@barberbartz.com