LTC Bullet:  Planning for Public Benefit Eligibility


Tuesday  April 10, 2001


America has two kinds of retirement security and health care programs—social insurance and welfare.  Social Security and Medicare are social insurance programs.  You pay premiums through payroll deductions and you are entitled to benefits.  Supplemental Security Income (SSI) and Medicaid are welfare programs.  You pay income taxes, but that entitles you to zip from these programs unless you also qualify financially based on (ostensibly) stringent income and asset limits. 

Readers of LTC Bullets hear a lot from us about the problems caused by Medicaid planning, i.e. artificial self-impoverishment to qualify for the health care welfare program.  But did you know that the same folks who brought you Medicaid planning perform the identical service for otherwise ineligible people to qualify them for SSI, the income security welfare program for the aged, blind and disabled?  Here's the story.

The National Academy of Elder Law Attorneys (NAELA), the trade association of Medicaid estate planning attorneys, publishes a newsletter called "NAELA News."  Its February 2001 edition contains an article entitled "Planning for Public Benefit Eligibility for Disabled Persons Under the New SSI Anti-Fraud Provisions" by Susan Haines and John J. Campbell. 

We bring the following excerpts from that article to your attention so you can see how arcane and convoluted the legal practice of artificial impoverishment can become.  Of course, this complexity explains why "planning for public benefit eligibility" is so lucrative for lawyers and why it competes so successfully with other methods to fund long-term care by means of savings or investment. 

Read carefully and you will learn exactly how to "inherit a large sum of money from a rich uncle" and win "a large medical malpractice claim," purchase a home for yourself, give a big income to your parents and, by so doing, qualify for public welfare assistance for the "poor" and disabled.  Truly marvelous legal alchemy!  But consider the catastrophic effect this "SSI planning" must have on the availability of public resources for the genuinely needy disabled.  And judge for yourself the appropriateness of this bizarre profession.

"A transfer into trust does not become part of the 'corpus,' and, therefore, part of what could be considered an 'available resource,' unless it is retained in the trust after the end of the month in which it is received by the trust.  Prior to that time, it is considered 'income' to the trust.  It is this dichotomy that helps to create the revolutionary new SSI planning options."  (p. 11)

"To say that the new SSI transfer and trust provisions create new planning options does not mean that the old planning options are gone."  (p. 11)

"Since the SSI transfer provisions only penalize transfers of resources, it should now be possible to transfer income to a third person without incurring a transfer penalty.  Example:  An individual has too much in resources to qualify for SSI.  The individual wants to qualify, but also wants to give money to his parents, even though his parents are not 'disabled.'  His purpose is to ensure that his otherwise impoverished parents can meet his supplemental needs and provide for things that Medicaid and his small SSI stipend do not.  [This last sentence, repeated verbatim elsewhere in the article is pure 'CYA' as the parents may or may not be 'impoverished.']  The individual purchases an irrevocable annuity with his excess resources, then executes an irrevocable assignment of the right to receive the payments to his parents.  Since the annuity and the assignment are both irrevocable, the individual would have no way to liquidate the annuity or to make any part of it available to himself for support.  Therefore, it would not fall within the definition of a 'resource.'  Further, since all that has been transferred is the right to receive payments from an annuity, the transfer consisted only of 'unearned income,' and would not result in the imposition of a penalty period.  Finally, if the individual lived in an  'SSI state,' he would be automatically eligible for Medicaid.  Also, since Medicaid eligibility standards in 'SSI states' can be no more restrictive than the federal SSI eligibility standards, no penalty period could be imposed under the Medicaid transfer provisions."  (p. 11) 

[How's that again?]

"Assume that the individual in the first example wants to qualify for SSI benefits, but is about to inherit a large sum of money from a rich uncle and is also getting ready to settle a large medical malpractice claim.  He wants to put the money into a trust to provide payment for some of his monthly needs directly to the providers.  He also wants to provide income to his parents, even though his parents are not 'disabled.'  Again, his purpose is to ensure that his otherwise impoverished parents can meet his supplemental needs and provide for things that Medicaid and his small SSI stipend do not.  [CYA]  The individual transfers his inheritance to an irrevocable income trust.  The medical malpractice settlement is a structured settlement, funded with an irrevocable annuity.  The individual executes an irrevocable assignment of this annuity to the same trust.  The trust provides that the initial inheritance be used in the month received toward the purchase of a house for the individual.  Also, the annuity payments into the trust must be spent in the month the payments are received.  The trust also provides that the only direct income beneficiaries are the individual's parents.  It is contemplated that the parents will, in turn, use part of their monthly distributions to provide maintenance and support in kind to the individual.

"As in the first example, the annuity is not a 'resource;' and only 'income' has been transferred.  Therefore, no penalty period would be imposed.  Further, since all payments into the trust are paid out in the month received, they never become part of the trust corpus and do not become available resources.  Finally, since the parents are the sole income beneficiaries, no monthly payments into or out of the trust are treated as income to the individual.  The only resulting unearned income to the individual is from the support or maintenance provided by the individual's parents in kind to the individual.  Therefore, the amount of income to the individual will be limited by the 'one-third reduction rule' or the 'presumed value rule.'"  (p. 12)

[Concerned about estate recovery?  Not to worry.]  "Upon the death of the beneficiaries, no remainder need be given to the state out of the trust."  (p. 13)

[In case it's still not clear why you need an expert to perform this financial legerdemain, the article concludes with the following admonition:]

"SSI and Medicaid laws are extremely complex.  Trust instruments and outright assignments of income rights must be carefully drafted; the funding of trusts must be carefully choreographed and monitored; and trustees must be given detailed instructions regarding the administration of the trust.  Otherwise, the result could be disastrous, leaving the disabled individual without the ability to qualify for public benefits under either SSI or Medicaid!"  (p. 13)