The Voice is the e-mail newsletter of The Special Needs Alliance. This installment was written by Special Needs Alliance member Carol S. Battaglia, Esq. of San Diego, California. She is one of the authors of Special Needs Trusts: Planning, Drafting and Administration, published by the State Bar of California. Carol also serves as counsel to the Special Needs Trust Foundation of San Diego, a charitable pooled special needs trust. Her practice is limited to the creation of estate plans using special needs trusts and assisting trial lawyers in implementing special needs trusts and other strategies to receive an injured party’s settlement funds while maintaining eligibility for government assistance.

August 2011 - Vol. 5, Issue 14

People with special health care needs and limited funds of their own often rely on public benefits for their well-being. Some of the most common public benefits include Supplemental Security Income (SSI), administered by the Social Security Administration, and Medicaid, administered separately in each state. To be eligible for SSI and/or Medicaid, an individual usually is limited to $2,000 in resources (or $3,000 for a couple). For SSI, there also is a very low income ceiling.

Because the resource limits for SSI and Medicaid are so low, the receipt of a lump sum, including an inheritance or a settlement, can easily disqualify the individual. Upon the receipt of sums in excess of the resource limits, the individual can opt to discontinue benefits, shelter the excess amounts in certain types of special needs trusts, or attempt to re-qualify for benefits through a process known as a “spend down.”

What is a Spend Down?

The term “spend down” describes the process of literally spending the excess money received by a benefits recipient down to the maximum allowable resource limits. By spending the excess funds in the month in which they are received, the individual can remain eligible for benefits. Note that although a spend down can preserve eligibility for SSI/Medicaid, it is likely that the individual may need to repay part or all of the SSI benefit for the month in which the lump sum is received. The reason for this is that SSI considers a lump sum to be income in the month received. Any income not spent in the month of receipt will be countable as a resource in the following month. Some state Medicaid agencies also treat a lump sum as income in the month of receipt; other states only count the lump sum as a resource in the month after the month of receipt.

When Might a Spend Down be Appropriate?

There are legal strategies that can help an individual maintain public benefit eligibility after receiving a lump sum. Transferring excess funds to a properly drafted and administered special needs trust is a common strategy. In several instances, however, a spend down might be a better choice. If the amount of the excess resources is relatively small, it might make more sense to spend the money rather than to incur the set-up and ongoing administration costs associated with a special needs trust. A spend down could also be a strong option is in the situation where the beneficiary has current need for high-ticket items such as a home, a handicap-modified vehicle, or even to pay off debt. Spending for these items would not be possible if the beneficiary were to rely solely on public benefits.

Timing a Spend Down

It is wise to have a spending plan in place prior to receipt of the lump sum. In order to minimize the loss of SSI and Medicaid, goods and services must be purchased in the same calendar month in which the lump sum is received. Note that the individual does not have a period of a month or 30 days to complete the spend down. If a lump sum is received on the 20th of August for example, the spend down must be completed in 11 days to bring resources below the applicable limit before September 1.

Prioritizing Items and Services to Purchase

To be clear, spend down does not imply or encourage the frivolous wasting of money. It is important that the funds be spent only on exempt resources and that the items purchased are solely for the benefit of the disabled recipient. There are certain resources that the SSI and Medicaid programs do not count in determining eligibility, including one’s residence, a vehicle, household furnishings and certain burial arrangements. These are referred to as “exempt resources.” Purchasing exempt assets will ensure that the items will not be counted toward the asset limitation in determining eligibility. Purchasing items for other people is usually considered a gift of assets, and making a gift will usually cause a period of ineligibility for benefits. The following is a nonexhaustive list of exempt expenditures that the lump sum recipient could make and still qualify for SSI:

  • Purchasing a home; paying off a mortgage on a home; paying rent for that calendar month only; modifying a home to accommodate an individual’s disabilities; home repairs, remodeling, or deferred maintenance expenses (including landscaping)
  • Purchasing home furnishings or appliances
  • Medical expenses/bills not covered by Medicaid or Medicare (e.g., better quality wheelchair than what is authorized by Medicaid/Medicare)
  • Dental expenses, eye glasses, physical therapy, support services not covered by any benefit program
  • Education expenses (including computer, software, books, etc.)
  • Entertainment/recreation expenses (books, magazines, movie/concert tickets, sporting events, audio/video equipment)
  • Vacation travel (airline tickets, train/bus passes, food & shelter while temporarily away from home on vacation, etc.)
  • Pay an attorney to do estate planning and/or Medicaid planning
  • Pay off debts (existing credit card debt, loans with supporting paperwork)
  • Pre-pay burial arrangements
  • Personal hygiene (haircuts, manicures)
  • Purchase an automobile, pay for registration and insurance
  • Purchase clothing
  • Set aside up to $2,000 for a single person, or up to $3,000 for a married couple, in non-exempt resources, e.g., in savings, checking, etc.

Reporting the Spend Down

The spend down must be reported to Social Security by the 10th day of the month following the month in which the lump sum was received. State Medicaid agencies have similar or even earlier reporting requirements. Here are some guidelines to follow in order to properly prepare for the reporting:

  • Keep sufficient funds in a bank account to repay SSI benefits for the month in which the excess funds were received—but remember that this amount needs to be included as part of the individual’s countable resources.
  • Keep receipts for all items or services purchased, including payments for home remodeling.
  • The beneficiary must be on the title to any real property or vehicle purchased with the lump sum.
  • The beneficiary must be the loss payee for any auto or homeowners insurance purchased with the lump sum.
  • Make copies of current bank statements from all accounts, as well as a printout on the last day of the month showing the balance as of that day.
  • Checks to purchase items and services should clear the beneficiary’s bank account by the last day of the spend-down month. If there is any question that a check may not clear the account in the month, payment should be made by certified check or a cashier’s check.
  • Have the bank provide documentation of the bank balance on the first day of the next month to verify the spend down was successfully completed.

An individual may have spent down the lump sum in the month of receipt, but an SSI check or other monthly income is deposited into the account at the beginning of the next month, pushing the bank balance above the non-exempt resource limit. That will not be a problem because the SSI check or other monthly income is not counted as part of the resource limit in the month the income is paid to the individual.

In conclusion, spending down a lump sum can be a great option in certain circumstances, either alone or in conjunction with other options. Keep in mind, however, that a downside to a spend down is that the money will not be available in the future to pay for special needs. Careful thought and planning must go into the preparation for a spend down to minimize the ineligibility period and to avoid wasting critical funds. Although funds will no longer be available, if the spend down is done properly, the beneficiary’s quality of life can be improved for years to come through use of the items and services purchased.

About this Article: We hope you find this article informative, but it is not legal advice. You should consult your own attorney, who can review your specific situation and account for variations in state law and local practices. Laws and regulations are constantly changing, so the longer it has been since an article was written, the greater the likelihood that the article might be out of date. SNA members focus on this complex, evolving area of law. To locate a member in your state, visit Find an Attorney.

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