Posts Tagged ‘Handbook for Trustees’

Debit Card for Special Needs Trust Creates Eligibility Problem


As part of Pennsylvanian Sharon Edwards’ (not her real name) divorce settlement, she and her husband agreed to establishment of a special needs trust to hold some of the marital property she would receive. With the trust in place, Sharon would continue to qualify for Supplemental Security Income (SSI), and she would still qualify for Medicaid coverage of her medical needs.

At least that was the plan. It relied on federal law that permits SSI recipients under age 65 to transfer assets to a self-settled special needs trust. This kind of trust must have some specific provisions, including:

  • the trust can not be used for food and shelter costs (although that limitation is not absolute)
  • the beneficiary can not receive cash or items that could be redeemed for cash
  • the trust must pay out to the state Medicaid agency at the death of the beneficiary (at least to the extent of any Medicaid services the beneficiary has received)

That was how Sharon’s trust was constructed. Her father was the initial trustee, and her daughter was the backup trustee if her father became unavailable. The trust terms required a payback to the Pennsylvania Medicaid agency upon Sharon’s death. The terms of the trust prohibited the misuse of trust funds.

What went wrong? When Sharon’s father became ill, Sharon took over a debit card on the trust’s bank account. She used the card to pay doctor’s bills, and to pay her monthly telephone, insurance and electric bills. There was some evidence that she used the card for other (and impermissible) purposes, but ultimately the result was not dependent on whether Sharon herself used the card for other kinds of things.

With online and electronic banking so widespread, debit cards and automatic bill payment arrangements are commonplace. They might seem to be a reasonable approach to handling special needs trusts, too — but they are a dangerous option. The result of Sharon’s use of her trust’s debit card: the Social Security Administration ruled that she had improperly received SSI for over two years, and that she owed the agency $18,137.

Sharon appealed the Social Security Administration’s ruling, but the Federal District Court upheld the agency. Elias v. Colvin, Middle District of Pennsylvania, July 27, 2015. The decision is unsurprising, but it does give us a chance to examine its different elements.

What, precisely, did Sharon and her trust do wrong? Was it the very existence of the debit card, or the specific uses of the card, or the fact that Sharon held it for over two years? Could the problem be solved by tearing up the card, or returning it to the trustee, and stopping the challenged payments? Let’s review some of the principles.

Generally speaking, Sharon’s trustee could have directly paid her doctor’s bills (though most should have been covered by Medicaid, of course), and her telephone bills. Neither of those payments would have been an issue, even if the trust covered all the costs, and/or made monthly payments.

Sharon used the trust to pay for insurance, as well. It is unclear from the reported court decision whether that was auto insurance, health insurance, life insurance or homeowners (or renters) insurance. If her insurance bills were for her automobile, the trustee could have paid those bills without any problem. If health insurance, the same answer applies — except, again, it would be unclear why health insurance was required if she was covered by Medicaid. Life insurance payments would have been permissible, though if Sharon owned a life insurance policy it might have resulted in a loss of SSI and possibly Medicaid coverage. Homeowner’s insurance would be fine, provided that it was not required by the bank holding a mortgage on her home (that would make the homeowner’s insurance look like a housing cost).

Finally, Sharon’s use of the debit card resulted in the trust paying for her electricity. If the trustee had written checks directly to the electric company, that might have been permissible — but it might not, depending on state Medicaid rules and the language of the trust itself. If permissible, it would have resulted in a reduction in her SSI payments.

On balance, if the trustee had paid for everything Sharon admitted using her debit card for, the result should have been (at worst) a slight reduction in her SSI. So why was she found to be ineligible for SSI altogether?

The primary problem for Sharon was that she effectively had access to the entire trust. Even though she did not, she could have gone to the ATM and withdrawn every penny in the trust’s bank account. That fact made the trust an available resource, and its income counted as income to Sharon.

Does that mean that no special needs trust should ever have a debit card, or that no special needs trust beneficiary can ever have access to a debit card? No, it does not — but there are limitations on the use of debit cards that must be observed.

Sharon’s trustee could have had a debit card and arranged for payment of her bills (except, perhaps, for the electricity bill) using the debit card. That would not have caused problems for Sharon’s SSI eligibility.

Sharon herself could have had a debit card, provided that it did not permit her to withdraw funds from the trust’s main account. Her trustee could have set up a small account with Sharon’s SSI money and let her have a debit card on that account. Or her trustee could have arranged for a specialized debit card that could not be used for cash withdrawals or purchase of food or shelter items — one such card is available and marketed by True Link Financial, and we have used their services with excellent results.

It’s also worth noting that Sharon was not given a chance to “fix” the problem by handing back her debit card. For a little more than two years, she had access to her special needs trust’s bank account — and that meant she was ineligible for SSI during that period. It did not mean that her trust was defective, or that she could never get on SSI again, but it did mean that simply giving back the card did not reverse the $18, 137 overpayment notice.

Management of special needs trusts is very complicated and often confusing. We strongly endorse the Special Needs Alliance‘s “Handbook for Trustees,” a very helpful resource for trustees and those interested in understanding how special needs trusts work. Best of all, the “Handbook” is priced right: it’s free.

Can My Brother’s Special Needs Trust Pay His Property Taxes?

A client’s question:

My brother has a special needs trust, and I am the trustee. He lives in his condo and gets services from AHCCCS and ALTCS. Can the trust pay his property taxes?

Interesting question. The answer isn’t as easy or straightforward as it ought to be. Let’s start with the simple (but not completely accurate) answer, and then explain some of the limitations and qualifications.

Unless the trust language prohibits payment of property taxes (and sometimes the trust does prohibit such payments), they can be paid from the trust. There may be consequences he will have to deal with, and there may be some circumstances in which it is not permitted, but generally it can be done.

There are a number of questions that will affect the answer:

  • Is the trust a “self-settled” or “third-party” trust? In other words, was it set up to handle your brother’s money (perhaps from a personal injury settlement, for instance) or was it created by a family member and funded with their own money? If the former, the rules will probably be somewhat stricter. If the latter, there will be no problem with paying the taxes (again assuming the trust language permits it), though there may be some reduction in public benefits (especially Supplemental Security Income).
  • Does the trust own the condo? If not, does it belong to your brother, or to some other family member? It may be a little easier to pay the taxes if the trust owns the property. The most difficult problems will arise if title is in a third person’s name, with your brother not owning any interest.
  • Do other people live with him? If so (at least in Arizona) it may be a little more complicated, though it may not. In some situations the trust may only be able to pay a proportional share of the property taxes. In other words, if he has a roommate it might only be possible to pay half the property tax bill.
  • Is he on AHCCCS or ALTCS? If the former, the rules are likely to be a little bit easier. If the latter, the payments might be treated more strictly. (If your brother does not live in Arizona, this distinction will not make any sense — AHCCCS and ALTCS are the Arizona programs for Medicaid and the long-term care component of Medicaid, respectively. Other states not only do not use the same acronyms, they also do not necessarily make the same distinctions between programs). If your brother is on ALTCS but receiving most of his services from the mental health or developmental disabilities program, the ultimate answer may be different yet again.
  • Is he receiving Supplemental Security Income (SSI) payments? If so it is probably going to be much easier to pay the property taxes.

You can see that the question is getting more complex as we go along. It is an unfortunate reality of the public benefits arena — the rules are complicated and often draconian.

Let’s assume that we can get past the threshold question, and can determine that it is permissible to pay the property taxes on your brother’s condo. That immediately raises a couple of related questions:

  • What is the best way to do it? Two payments each year, or one payment? Most people pay their Arizona property taxes in two equal installments. One is due in October and the other in April. There is an alternative, however, and it is usually attractive for special needs trusts: you can make both halves of the tax payment at once, without interest, provided that you do so by December 31. In other words, no payment in October, a full payment in December, and then no payment in April. Why do it this way? Because paying the taxes might reduce your brother’s SSI payment for each month in which a payment is made — so it makes sense to have that only happen once a year.
  • What about other payments, like the homeowner’s association dues, and the insurance? Those two payments are treated differently than property taxes. First, though, look at the trust document. Does it permit payment of household expenses? If so, then public benefits rules do not prohibit payment of HOA and insurance bills — except that the HOA dues might be a problem to the extent that they include water, garbage pickup or other utilities, and the insurance may be a problem if it is required by a mortgage lender.
  • What about utilities? Does that mean they can’t be paid? Once again, look first at the trust document.  Assuming it permits these payments, you can then consider the public benefits rules. Generally speaking they may allow payment of utilities, but with a reduction in SSI payments. Some payments may be prohibited by ALTCS rules. The utilities that cause particular problems are water, gas, electricity, and garbage pickup. No problem for internet, telephone, newspaper delivery, and cable subscriptions.
  • What about home improvements and repairs? Generally speaking they are alright — though if there are others living with your brother there may be issues for some kinds of payments. Talk to us about the details (or, if your brother does not live in Arizona, consult with a lawyer familiar with special needs trusts in his state).

Exhausted? So are we. These rules are too complicated and the repercussions to serious — for that we are sorry. We can help navigate them for Arizona benefits recipients.

Where can I get more information? Good question. If you and your brother do not live in Arizona, you might want to talk with an attorney familiar with the area. Start with the Special Needs Alliance — it includes about 120 lawyers across the country, each of whom spends a considerable amount of time on special needs trusts and public benefits issues.

There is also a really good handbook available for trustees of special needs trusts. It is offered by the Special Needs Alliance, and the price is right — it is free and downloadable directly from the SNA website. If you prefer, you can get a beautifully printed version mailed to you. There are also a number of books on the topic — we favor one called “Managing a Special Needs Trust: A Guide for Trustees“.

Good luck. It isn’t always easy to be trustee of a special needs trust, and we appreciate that the challenges are sometimes legal, sometimes medical, sometimes familial.

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