New Law Penalizes Gifts By SSI Applicants But Permits Trusts

DECEMBER 20, 1999 VOLUME 7, NUMBER 25

On December 14, 1999, President Clinton signed the Foster Care Independence Act of 1999. While most of the new federal legislation deals with foster care programs, it also changes the law and practice regarding so-called “Special Needs” trusts.

The Supplemental Security Income (SSI) program, administered by but separate from Social Security, helps guarantee a minimum income for disabled Americans. SSI provides a maximum of $512 per month (beginning in January, 2000) to disabled individuals who do not qualify for Social Security Disability Insurance. Because SSI is a welfare program, however, it requires that the recipient not have significant assets or income available from other sources.

Under prior law it was possible for most disabled persons to qualify for SSI fairly easily, however. For many years the SSI program did not impose a penalty on asset transfers by applicants; in other words, a disabled individual could satisfy the asset eligibility limitations by simply giving away most of his or her property.

In practice, this opportunity was usually exercised in one of two common ways—either the prospective SSI recipient gave assets to family members (who could be counted on to use the money for the original owner’s benefit), or the recipient established a trust for his or her own benefit and transferred the assets into that trust. These trusts—usually called “Special Needs” or “Supplemental Benefits” trusts—could be used to pay for the SSI recipient’s needs other than necessities. In other words, the trust could take care of everything but food, clothing and shelter, while SSI income could be used to pay for those items.

Because SSI recipients automatically qualify for Medicaid coverage, even a fairly wealthy disabled individual could secure medical care from the federal welfare system by use of a Special Needs trust or an outright gift of assets. The new law changes the rules permitting such a transfer. Beginning immediately, a gift of assets by an SSI applicant will disqualify the applicant from receiving benefits for a period of time based on the size of the gift. Transfers into most trusts will simply be ignored—if there is any circumstance in which the trust assets or income can be used for the benefit of the SSI applicant, it will be treated as an available resource (or income, as the case may be).

This does not end the usefulness of Special Needs Trusts, however. An exception in the new law expressly permits transfers of assets into such a trust—but only if the trust includes a provision reimbursing the government for any benefits received by the beneficiary upon the beneficiary’s death. Only trusts established after January 1, 2000, must include such “pay-back” provisions, so pre-existing trusts should not be affected by the new law.

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