PUBLIC BENEFITS IN THE CONTEXT OF DIVORCE

PUBLIC BENEFITS IN THE CONTEXT OF DIVORCE

Written by:
Cynthia Sharp

Sharp Bratton Attorneys at Law

INTRODUCTION

We are often told that the divorce rate in our country is 50%. However, according to Jennifer Baker of the Forest Institute of Professional Psychology in Springfield, Missouri, this is not quite true. The divorce rate in America for first marriages is indeed 50%. However, 67% of second marriages end in divorce compared to 74% for those who married for the third time.

The National Health Interview Survey (an arm of the National Center for Health Statistics) conducted a survey of 50,000 households in 1994 to determine whether there was a disparity in the rate of divorce for disabled adults. The survey found that 20.7 percent of the disabled adults among those polled were divorced or separated, compared with 13.1 percent of those without disabilities. Among the reasons cited were the stresses on the health of the spouse caring for the disabled partner as well as the pressure on family finances, especially if one spouse must quit his or her job to stay home to tend to the needs of the other. The higher rate of divorce for disabled adults was also recognized by Adrienne Asch, a past president of the Society of Disability Studies. She confirmed that "The data are that marriages do break up more often when there is a disability than when there isn't."

When the divorce involves a disabled spouse or child, the implications are far reaching. The individuals must cope with the complications associated with a disability and the emotional and financial aftermath linked with any divorce. Furthermore, taxation considerations as well as the issue of eligibility for public benefits must be examined.

Supplemental Needs Trusts (SNTs) are generally established for those clients receiving (or who may receive) needs based public benefits such as SSI or Medicaid. The trusts can be funded with inheritances, tort or contract settlements as well as funds (support or property) received through a divorce settlement or judgment.

OVERVIEW OF PUBLIC BENEFITS PROGRAMS

In this section, I provide an overview of public benefits programs to establish a context for the remainder of the article.

The programs that are not based on financial need are Social Security (old age and survivor benefits), SSD (permanently and totally disabled) and Medicare. The SSI program is needs based and is administered by the Social Security Administration (Title XVI benefits). To qualify you must be age 65, blind or totally and permanently disabled and have assets of $2000 or less. In addition, you must be a U.S. citizen or meet the alien status criteria. A disability is the inability to engage in substantial gainful activity. Whether someone is qualified for the maximum SSI payments depends on the recipient's living arrangements, marital status, whether the recipient is elderly, disabled or blind. The maximum Federal SSI benefit is $637.00 (living alone). New Jersey supplements this amount so that the maximum benefit for New Jersey residents is $668.52 per month.

In determining SSI qualification, if an individual has assets in excess of $2000 it must be determined if the resources are countable or non-countable. A married couple is permitted to have $3000. The following are countable assets:

• Cash (which is not the current month's income)
• Income producing property, including real estate
• Stocks, bonds, investments
• Vehicle

• Personal residence
• Automobiles that are specially equipped or used for medical appointments
• Life Insurance with cash value of less than $1,500

The three types of income considered in determining whether an individual satisfies the income requirements are earned, unearned or in-kind. Unearned income is income not received from work. An SSI recipient can earn up to $20 per month of unearned income; however, any unearned income in excess of $20 per month reduces the SSI benefit on a dollar for dollar basis. Unearned income includes: Social Security benefits, Annuities, Alimony, Child Support, Dividends, Interest, Rents, Royalties, Prizes, Awards, Gifts, Inheritance and Distributions from Special Needs Trusts. Earned income consists of earnings from wages or self-employment. The receipt of earned income will reduce the SSI benefit. The following is the formula for determining the reduction if there is earned income:

• Deduct the SSI General Exclusion of $20 (if no unearned income)
• Deduct $65 per month (earned income exclusion)
• Deduct one-half of the remaining earned income
• The balance is total countable earned income
• Deduct this from the maximum SSI benefit
• The remaining balance is the reduced SSI benefit

An SSI recipient is expected to pay for his or her own food or shelter. Receipt of food or shelter from a third party constitutes in-kind income also known as in-kind support and maintenance (ISM), which may reduce the SSI benefit. Regulations, which were effective March 9, 2005, eliminated clothing from the definition of income and the determination of in-kind support and maintenance. There are two ways to calculate in-kind support and maintenance. The first is the one-third reduction rule, which is used in limited situations. This is applied when an SSI recipient lives for a full calendar month in the household of another person who provides both food and shelter to him or her without charge. The SSI benefit would be reduced by one-third of the federal benefit rate. The second is the presumed maximum value rule which is used when the SSI recipient has received food or shelter from an outside source and the one-third reduction rule doesn't apply. For example, it will apply if a recipient lives in his or her own home and receives outside help for expenses. Social Security presumes that the maximum value is one-third of the Federal benefit plus $20. There is no reduction if a third party pays directly to a vendor for items that are not food or shelter.

Blind or disabled children may receive SSI; however, if they are under age 18 their parent's assets and income (provided they live in the same household) are deemed to the child.

Deeming stops the month after a child turns age 18.

The deeming concept is applicable between spouses as well as between a parent and a child. Again, deeming applies only if the individuals live in the same household. This means that income and resources of noneligible parents, noneligible children and noneligible spouses will be included when determining an applicant's eligibility for SSI and the amount of his or her payment. Generally, the same deeming rules that apply to a parent also apply to the spouse of a parent (a stepparent). However, payments of child support to a custodial parent eligible for SSI does not count as income to that parent and the deeming rules do not apply from the child to the custodial parent.

Many who receive Medicaid receive it based upon their SSI qualification; therefore it is imperative that the recipients not receive any funds that would disqualify them from SSI.

Social Security Disability Insurance (SSDI) consists of a monthly cash benefit paid to disabled workers and their dependents. The eligibility is not based on economic need.

The eligibility requirements are as follows:

The recipient must: (1) have sufficient quarters of covered employment and (2) be medically disabled.

If the individual is working, earnings must be less than $900 per month ($1500 if blind).

There is no asset limit and no limit on unearned income or in-kind income. A special needs trust is not necessary unless the individual receives SSI or Medicaid in addition to SSDI.

Medicaid is also a needs based program. A nursing home resident may have no more than $2,000 in "countable" assets to be eligible for the Medicaid Only program and $4,000 to be eligible for the Medically Needy program.

The spouse of a nursing home resident--called the 'community spouse'--is permitted to retain the lesser of one half of the couple's countable assets (regardless of whose name is on the asset) or $104,400 (in 2008) in "countable" assets ). The community spouse may keep the first $20,880 (in 2008), even if that is more than half of the couple's assets.

All assets are counted against these limits unless the assets fall within the short list of "noncountable" assets. These include the following: Personal possessions, such as clothing, furniture, and jewelry; one motor vehicle; principal residence if the Medicaid applicant's spouse lives there; prepaid funeral plans and a small amount of life insurance.

For Medicaid applicants who are married, the income of the community spouse is not counted in determining the Medicaid applicant's eligibility. The institutionalized individual is required to pay all of his or her income (less a $35.00 personal needs allowance) to the nursing home.

DIVISION OF PROPERTY

As previously discussed, a spouse who would otherwise meet the income and asset test for SSI or Medicaid may be rendered ineligible because of the "deeming rules". However, when a couple separates, the spouse's income and assets are no longer counted for purposes of determining eligibility for SSI. POMS SI 00501.154 and SI 01110.530.

In New Jersey, the division of marital property in the context of a divorce is called equitable distribution. Until recently, DMAHS' policy was that equitable distribution of less than 50 percent of marital assets to the spouse applying for Medicaid benefits within the Medicaid look-back period results in a period of ineligibility for Medicaid purposes. This issue was addressed by the Appellate Division in 2007, W.T. v. Div. Of Med. Assistance & Health Servs. and Ocean County Bd. Of Social Servs., 391 N.J. Super. 25, 916 A.2d 1066, (App.Div. 2007). W.T. divorced M.T. and pursuant to the parties' property settlement agreement, M.T. received approximately 63% of the couple's marital assets. When W.T. applied for Medicaid benefits 16 months later, the application was denied on the basis that the unequal distribution constituted a transfer of assets. The Court held that W.T.'s and M.T.'s divorce settlement was not designed to impoverish M.T. to qualify for Medicaid benefits, but rather was intended to ensure that M.T. had sufficient assets for her future. Therefore, it was inappropriate for DMAHS to deny eligibility on the basis of a "transfer" theory. The case essentially stands for the proposition that Medicaid may not arbitrarily rule that a divorce settlement must include an equal distribution of property in all cases in order for one spouse to later qualify for Medicaid eligibility, but rather the facts and circumstances of each case must be examined before determining eligibility or noneligibility.

S.P. v. DMAHS and Ocean County Board of Social Services, OAL Dkt. No. HMA 10019-07 involved a denial of Medicaid benefits by OCBSS on the basis of the failure of the estranged wife of S.P. (G.P.) to provide her financial records. The couple had been separated for well over 20 years. A divorce complaint had been filed on February 6, 2003. The Medicaid application was filed on February 28, 2007. OCBSS notified S.P.'s attorney that the case would be denied if G.P. did not supply the records since the couple was still legally married on the date of the application. (A Property Settlement Agreement was entered into on August 14, 2007.) The Office of Administrative Law issued an Initial Decision which was adopted as a Final Decision on June 4, 2008. The ALJ held that the ex-spouses resources acquired after the parties' separation are not available assets for Medicaid eligibility purposes.

When a divorcing spouse is eligible for public benefits, it may be advisable for the Court to order the settlement proceeds into an irrevocable SNT so that eligibility is not lost. Since property division in a divorce setting is considered a legal right of the party receiving the property, the SNT must be self settled and thus meet the requirements set forth in OBRA '93.

It can get tricky when the individual is receiving assets that are noncountable such as a principal residence. He or she must consider whether it is likely that the property will remain the principal residence. If the property may be sold in the future, it may make sense to title it in the name of the SNT at the time of the divorce.

A problematic asset is a retirement plan because tax issues as well as public benefit issues must be considered. The general rule is that transfer of an IRA or other retirement plan to another person triggers income tax liability with respect to the entire amount of funds in the plan. IRC Code Sec. 691(a)(2). However, the IRS issued a private letter ruling in 2006 addressing this issue in the context of the transfer of an IRA share from a deceased father (who died before his required beginning date) into an SNT for the sole benefit of a disabled adult child. PLR 200620025 involved a parent who had named his four children as equal beneficiaries of his IRA. One of the children was receiving Medicaid benefits. The mother obtained a court order establishing a self settled SNT for her son's benefit. She then requested a PLR on the following issues: (1) Whether the transfer of the son's share of the IRA to his SNT results in immediate recognition of income; (2) Whether the son's life expectancy can be used in calculating the IRA's required minimum distributions. The IRS ruled that the trust was a grantor trust, and that the son is consequently treated as the owner of the trust assets. (I.R.C. Sections 671 and 677(a)) Consequently, the transfer to the SNT did not constitute a sale or disposition which would trigger the immediate recognition of Federal income tax. The IRS further concluded that the special needs beneficiary's life expectancy could be used in calculating RMDs. The beneficiaries had taken steps to divide up the IRA by December 31 of the year following death. The IRS also applied the grantor trust doctrine in PLR 200826008 which involved a minor beneficiary of an IRA who wished to transfer the IRA to a Grantor Trust. The transfer did not trigger an immediate tax. However, remember that PLRs may not be cited as precedent and apply only to the case at hand.

ALIMONY

Alimony or spousal support or maintenance is defined by the Social Security Administration as "an allowance for support made by a court from the funds of one spouse to the other spouse in connection with a suit for separation or divorce". The payments can be cash or in-kind contributions to meet some or all of an individual's needs for food and shelter and may be court-ordered or voluntary. The spouse receiving the alimony or spousal support is treated as having received unearned income. POMS SI 00830.418.

The Appellate Division recently held in J.P. v. Division of Medical Assistance and Health Services, 920 A.2d 707 (N.J. Super. A.D. 2007) that court ordered assignment of alimony payments to a d4A trust is a legitimate Medicaid planning vehicle. J.P. involved a trust established by the family court which was funded with property and alimony. The Board of Social Services had determined that the assigned alimony payment was countable income but allowed the trust to be funded with property. The Appellate Division found that there was no rational or legal basis for the agency's attempt to distinguish between alimony and equitable distribution.

Payment of alimony into an SNT can be a valuable planning device. Presume that the court orders a $500 per month alimony payment. If the payment is made directly to the disabled spouse who is eligible for SSI, the benefits will be reduced by $480. However, if the court establishes an SNT and orders payment of the alimony to the trust, that portion distributed for ISM (food and shelter) would reduce the benefits by the PMV ceiling of $242.84.

Another noteworthy New Jersey case relating to support issues is M.E.F. v. A.B.F., 393 N.J. Super. 543, 925 A.2d 12 (App.Div. 2007). A.B.F. was in a nursing home and had qualified for Medicaid benefits. His wife, M.E.F. was granted an increase in the MMMNA on June 29, 2005. She did not file for fair hearing to seek a further increase. In September of 2005, she renewed a motion for separate maintenance previously filed in the Family Part of the Superior Court. The Appellate Division held that the wife had failed to exhaust her administrative remedies in regards to increasing her MMMNA and dismissed her application without prejudice.

CHILD SUPPORT

The definition of child support for SSI purposes is in kind or cash payments to a child or a child's legal representative or custodian to meet the child's needs for food and shelter, whether court ordered or voluntary. POMS SI 00830.420 A.1. Like alimony, the payments are characterized as unearned income except as provided under N.J.A.C10:71-5.3 (a)(14). Under that section, one-third of the amount of a child support payment made by a parent not living in the household is excluded as countable income. The one-third exclusion no longer applies when the child no longer qualifies as a "child" under the definition set forth in POMS SI 00501.010 A child is defined as one who is neither married nor a head of a household and is either: under age 18; or under age 22 and a student regularly attending school, college, or training that is designed to prepare him/her for a paying job.

Payments of child support to a custodial parent eligible for SSI does not count as income to that parent and the deeming rules do not apply from the child to the custodial parent.

It may be beneficial in some situations to pay child support in the form of in kind support and maintenance (ISM) by paying directly for food or shelter. POMS SI 00830.420 B.2 mandates a reduction in the SSI benefit caused by ISM by the lesser of the actual values of the ISM or the presumed maximum value (PMV) which is $242.84 in 2008.

An option is to seek a Court order establishing a Self Settled Trust on behalf of the child. The "out of household" parent would then pay the child support directly to the trust which would then make in kind distributions from the SNT which would be subject to the maximum PMV reduction.

POMS SI 00830.455C.1.a provides: Any portion of a grant, scholarship, fellowship, or gift used for paying tuition, fees, or other necessary educational expenses at any educational institution, including vocational or technical education, is excluded from income. Any portion of such educational assistance that is not used to pay current tuition, fees or other necessary educational expenses but will be used for paying this type of educational expense at a future date is excluded from income in the month of receipt. This exclusion does not apply to any portion set aside or actually used for food or shelter. Consequently, if a child is pursuing an education, the "out of household" parent would be well advised to making direct payments to an educational institution instead of making a direct support payment to the custodial parent.

In re Rogiers, 933 A.2d 971 (N.J. Super. 2007) is worthy of note. The parents of a disabled child were divorced and the father was ordered to pay child support to the custodial mother. An SNT had been established for the benefit of the child and funded with $2.5 million. When the child passed away, $1.1 million remained in the SNT. The mother sued for back child support and was denied relief on the basis that the SNT funds were more than adequate to care for the child's needs.

This author was unable to find any New Jersey cases addressing the issue as to whether funds distributed from an SNT on a child's behalf are factored in determining a noncustodial parent's support obligation.

CONCLUSION

Coordination of family, public benefits and tax law is indeed complex. Matrimonial attorneys who attempt to advocate for clients who are eligible for SSI or Medicaid must either have a mastery of all of these areas or consult with an attorney who does. Otherwise, the matrimonial attorney may be responsible for unwittingly causing a disqualification from these important and necessary benefits.