Divorce can be challenging under any circumstance. Divorce involving a spouse or child with special needs to consider can make it even more stressful. However, with careful planning families can limit future complications for a family member with special needs.
Specifically, the biggest issue to consider is how spousal or child support for the individual with special needs may affect current or future receipt of governmental benefits, including Supplemental Security Income (SSI), Medicaid, or housing assistance. Parties must be mindful of how they can achieve a divorce settlement or final resolution that will not later disqualify the family member with special needs from receiving his or her full governmental benefits.
The most common scenario is where a minor child has special needs, and one parent seeks child support from the other parent. If the parties were to resolve this issue the conventional way, with one parent paying child support directly to the other parent, they may negatively affect the child’s eligibility for governmental benefits when the child reaches the age of majority. The reason is that once the child is no longer a minor, the payments are considered income to the child, which will result in a decrease in the child’s SSI benefits.
One option is for the parents to establish a Special Needs Trust, where any support payments are paid or given directly to the trust. This way any such funds would not be considered income of the child, thereby preserving the child’s eligibility to retain all governmental benefits.
However, while this might appear to be the simplest solution, there remain significant considerations as to whether a special needs trust is truly the best route. For example, how old is the minor? Has severe is the minor’s disability? Has the minor been formally diagnosed with a disability? How these kinds of questions are answered can affect whether parents opt for traditional court-ordered child support paid directly to one parent or choose to have the funds paid directly to a special needs trust. In either situation, the primary objective should be to determine the most beneficial solution for the child.
There are two (2) basic types of special needs trusts. The situation described above, where the trust is funded by support payments or is otherwise established with assets belonging to the beneficiary, creates a First Party Trust.
To qualify for a First Party Trust, the trust must be:
- established for the benefit of an individual who is disabled and is under 65 years of age;
- established by a court (see Va. Code § 20-124.2(C)) or the parent, grandparent or legal guardian of the disabled individual;
- funded with assets of the disabled individual, and,
- must be irrevocable.
There are certain types of income that may not be assigned to a First Party Trust, such as Social Security, VA pensions, Workers Compensation, or payments from an ERISA plan. A First Party Trust is also referred to as “Medicaid payback” trust because, upon the death of the beneficiary, the trust must pay back to Medicaid the amount that Medicaid paid for the care of the beneficiary, but not to exceed the amount of assets in the trust.
The other type of special needs trust is a Third Party Trust or a Supplemental Benefits Trust. This trust is established and funded by the assets of someone other than the beneficiary, such as a divorcing parent, grandparents, or other family members. It is designed to receive assets, such as lifetime gifts, inheritances, life insurance proceeds, or inheritances. To protect the beneficiary with special needs, the assets in this trust form should be transferred directly from the third party to the trust. The Third Party Trust may pay for any expenses of the beneficiary and will typically pay these expenses directly to the vendor or service provider. Any distributions will not count as income of the beneficiary. Finally, unlike the First Party Trust, upon the death of the beneficiary, there is no payback to Medicaid. This type of trust may be especially helpful where the divorcing couple has an adult child with special needs, and there is no child support order. In this case, parents might choose to voluntarily contribute to a Third Party Trust as a form of support for the supplemental needs of the emancipated child.
Planning for a family member with special needs in the divorce settlement should not be ignored. Talk to a financial specialist. Seek assistance from a professional who understands estate and disability planning issues. Choose a divorce lawyer who understands planning for special needs. Every family is different. Every case is unique. And, families must understand how their particular circumstances could affect all family members involved in the years to come post-divorce, especially if one of those members has special needs.