Loud and Clear: A Special Needs Conversation

Divorce Settlements Can Imperil Public Benefits

by Katherine N. Barr

The prevalence of divorce for couples having a child with special needs is hotly contested. Some studies cite divorce rates up to 85 percent, while studies at the Kennedy Center at Vanderbilt University have reported significantly lower rates than the general population for couples having a child with Down syndrome.

What’s incontestable is that when divorce becomes an issue, financial support for a child with special needs requires careful attention. This is because child support payments made directly to the custodial parent are counted as the child’s income, with the result that eligibility for means-tested public benefits-Supplemental Security Income (SSI) and Medicaid- may be adversely affected. Since access to many programs that serve individuals with disabilities depends upon qualifying for Medicaid, there can be a particularly severe ripple effect to losing such eligibility.

This can become a significant issue regardless of whether the child has started receiving SSI or Medicaid. Often a child with disabilities will not become eligible for public benefits until the age of 18 because all household income is considered in determining eligibility until that age. If, however, the custodial parent suddenly becomes a full-time caregiver and is no longer able to work, household income drops, and eligibility may be within reach. Having SSI in addition to receiving child support may become an important source of financial security.

Unlike a typical divorce situation, in which support payments cease when the child reaches adulthood or completes college, support for a child with special needs often continues throughout life. So even if government benefits are not immediately at issue, those lifelong child support payments must be handled in a manner that will not imperil future eligibility.

The solution is to obtain a divorce decree that requires the payee of the child support payments to be the custodial parent as trustee of a self-settled special needs trust (SNT) created for the sole benefit of the child. Each situation is unique and must be evaluated in light of state laws and regulations relating to alimony, child support and Medicaid. Once the level of monthly child support has been established, the divorce lawyer should consult an attorney versed in drafting this particular type of special needs trust.

Posted: September 7th, 2011 | 6 Comments »

6 responses to “Divorce Settlements Can Imperil Public Benefits”

  1. Where qualified retirement benefits are involved, there needs to be care given to any income tax results involved. A person advising in this area should consult with a knowledgeable attorney and accountant about income tax issues. Sometimes difficult decisions must be made that can cause a choice between maintaining the IRA assets in qualified form or withdrawing them and moving them into an SNT. Recent PLR s have provided support for allowing inherited IRA assets to be moved into a self-settled SNT for the IRA beneficiary that needs to maintain or qualify for SSI or Medicaid. However, in the case of a person’s own IRA (not inherited), the matter has not been made clear. Several attorneys at SNA are meeting regularly to try to get clarity on this issue. In the case of an IRA being divided in a divorce, the parties should consider a QDRO for the non-participant spouse’s share, if it is determined that the IRA needs to be awarded in part to both parties. The income of the party withdrawing the IRA assets, whether the IRA participant or the QDRO owner) pays the income tax at his or her respective bracket. That could make a difference on the amount of income tax paid.

  2. Allan:

    I am not aware of any developments in this area. You have a situation with multiple complexities for sure, and no clear or easy answers. I wish we had more guidance.

    Katherine

  3. Katherine & Allan:

    It sounds like I have the same dilemma that Allan has. My client was awarded $50,0000 from her ex-husband’s IRA in 2009. She has been on SSI & Medicaid for years. I was recently retained to help draft her self-settled d4A SNT. We have been ready to finally transfer the IRA assets into a new account with Waddell & Reed, with the account to be owned by the d4A SNT and using the client’s adult daughter as the trustee, but W&R believes the transfer will be a taxable distribution of the IRA. I’ve read all the relevant PLRs I can find but haven’t found a favorable one with my exact fact pattern to convince W&R that this proposed IRA transfer and ownership through the d4A SNT will not result in an outright taxable distribution. If anyone has additional guidance in this context, I’d greatly appreciate it. Thanks, Jon P.

  4. terri Witts says:

    Has anyone got an answer to this. 2017 now and I have a QDRO and am trying to put it in a SNT. Even better I am trying to put it into a Self directed Roth IRA then into the trust. Who can help?

  5. Jennifer guillen says:

    Looking for help with a divorce for my disabled father

  6. I have been on SSI for the last 15 years. MyMy husband and I have been married for 33 years. Our date of Separation is Jan 15, but my husband botched the initial filing paperwork and has not refiled.

    Originally, I intended to have a stipulated marriage settlement agreement declaring that the alimony be used to pay for direct goods and services, excluding food and housing expenses. This structure could be a difficult of court order to enforce. For this reason, I am investigating the alternative of a court ordered trust to handle my alimony and child support. Our son lives with me full time. He is our only minor child, a rising senior of age 17.

    Our home is already owned by our eldest two children, which is at odds with three of our for children inheriting the property ( In a few years our third born will ordain as a Buddhist monk and can’t own anything). Before Steve asked for a divorce, I intended to put our home in an irrevocable trust with a life estate. From my research “Irrevocable” avoids Medi-Cal payback and “Life Estate” protects me from being put on the streets by a ne’er do well son-in law or daughter-in-law.

Leave a Reply

Your email address will not be published. Required fields are marked *