Careful: These 2 Words in a Trust Document could cut off Access to Public Benefits

A trust agreement is a document that spells out the rules that you want to be followed for property held in trust for your beneficiaries. Common objectives for trusts are to reduce the estate tax liability, to protect property in your estate, and to avoid probate.

Suppose that you want to set up a trust. Just like with a cooking recipe or building something in your garage workshop, you need to make sure you have everything you need before you start. Look out for the following points.

• 7 Things to Add to your Trust Document
• The Role of a Trust Deed
• Why is Trust Documentation So Important?
• What are Public Benefits
• Public Benefits Effectiveness for the Elderly
• Public Benefits Effectiveness for Families with Children
• Careful: Supplemental Security Income (SSI) and Medicaid
• The Basics on Public Benefits
• Careful: A Trust Can Be Considered a Countable Asset

7 Things to Add to your Trust Document

To cook up a trust, you need these seven basic ingredients:

• The person setting up the trust. The person is commonly known as the trustor, though you may sometimes see the terms settlor or grantor.
• The objective of the trust. You use different types of trusts to achieve a variety of specific estate-planning objectives. You can use some trusts for a single estate-planning objective, while others help you achieve more than one goal.
• Specific kind of trust. Trusts come in many different varieties. Regardless, when you’re setting up a trust, you need to decide what type of trust you want and make sure that you follow all the rules for that particular type of trust to make sure that it’s proper and legal, and carries out your intentions.

• Property. After you place property into a trust, that property is formally known as trust property.
• Beneficiary. Just like with other aspects of your estate plan (your will, for example), a trust’s beneficiary (or, if more than one, beneficiaries) benefits from the trust in some way, usually because the person or institution will eventually receive some or all of the property that was placed into trust.
• Trustee. The person in charge of the trust is known as the trustee. The trustee needs to understand the rules for the type of trust he or she is managing to make sure everything in the trust stays in working order.
• Rules. Finally, some of the rules that must be followed are inherently part of the type of trust used, while other rules depend on what is specified in the trust agreement. You will find still more rules in state and federal law.

The Role of a Trust Deed

The most important piece of trust documentation will be the trust deed. This agreement is, essentially, what creates the trust. Outlined within the trust deed will be key pieces of information like what properties or assets will be held within the trust and who the beneficiaries are.

A trust deed is not just a guideline or a suggestion: it is a contract binding all parties involved and is enforceable by law. In order to be officially considered a trust deed, your trust documentation should include all of the following information:

• An official name for the trust
• The name of the trustee
• The objective of the trust
• The country in which the trust is founded
• The powers granted to the trustee, which might include adding beneficiaries or removing them

Other Trust Documentation That Might Be Needed

The trust deed is the primary piece of documentation needed to establish a trust, but additional documents can help to better protect your assets and held the trustee gain or limit their power in the future.

For example, a document declaring durable power of attorney for property management is a way to grant control to a trustee should you be unable to unavailable to manage new assets that haven’t been specifically mentioned in a trust deed.

This is quite common, especially if your assets can generate additional income or need to be bought and sold regularly in order to increase their value. 

An advance health care directive is also an option that allows a trustee to make vital decisions regarding your trust in the event that you are no longer able to make them for yourself.

When you trust your trustee and know that they fully understand the thought process and goals behind the establishment of your trust, conferring greater power to them through official documentation ensures that there are no bureaucratic snags that could get in the way of your wishes.

Why is Trust Documentation So Important?

From the very beginning, trust documentation is vital. Your trust won’t be legal without formal documents declaring what assets are contained within, who the trustee is and who the eventual beneficiaries will be. Without documentation, you are simply handing over control of your assets to a third party. Documents do more than keep trustees in line, however.

They also serve as protection against taxation, asset freezes and more. Having the right documentation is proof that you are not controlling the assets, that they are not eligible for individual taxation and that they can’t be seized today or anytime in the future.

What are Public Benefits

When individuals and families experience crises such as job loss, illness, disability, or divorce, they may face the prospect of falling into poverty (or becoming poorer) and losing health insurance coverage.

Various government assistance programs are designed to lessen these hardships. These programs also provide support when families work but have low earnings and when people reach retirement age.

An examination of Census data shows that as a whole, the U.S. public benefits system, sometimes referred to as the “safety net,” has the following effects on poverty and health insurance status.

• It cuts the number of Americans living in poverty almost in half. (As discussed later, the Census data used here understate the degree to which public benefits ease poverty.)
• It reduces the severity of poverty for those who remain poor. Without these programs, these families would have average disposable income equal to 29 percent of the poverty line. With the programs, their average income rises to 57 percent of the poverty line.
• It provides health care coverage to tens of millions of individuals who otherwise would be uninsured.

There are two principal categories of public benefit programs — those that provide benefits regardless of income and those that limit assistance to people with low or modest incomes. The first category of programs includes the major social insurance programs such as Social Security, unemployment insurance, and Medicare. Programs in the second category are often referred to as “means-tested” programs.

Means-tested programs play a large role in reducing the extent and severity of poverty and providing health care to low-income Americans. Some 11 million low-income Americans are lifted above the poverty line by means-tested benefits, and more than 55 million receive health insurance from the means-tested medical programs, Medicaid and SCHIP. Most of these people would otherwise be uninsured.

This analysis provides an overview of the role of income support programs in reducing poverty and the role of health insurance programs in providing access to needed health care. It also examines the effects of these programs on different demographic groups and how the effects of these programs compare with the effects of comparable programs in other countries.

The programs examined here could be strengthened, as is indicated by the continuing existence of significant poverty in the United States and the large number of individuals who lack health insurance as well as by the fact that other wealthy industrialized nations provide stronger assistance (particularly for low-income families with children) and generally have lower poverty rates. Nevertheless, the strengths of the public benefits programs in the United States are impressive.

When Public Health Insurance Is the Only Health Insurance

U.S. programs and policies provide health insurance coverage for eligible elderly people, low-income families with children, and individuals with severe disabilities. The two principal public health insurance programs are Medicare, for seniors and many non-elderly individuals with disabilities, and Medicaid, for low-income children, families, the elderly, and individuals with disabilities.

Closely related to Medicaid is the State Children’s Health Insurance Program (SCHIP), which provides health insurance to children whose families earn too much to qualify for traditional Medicaid but nevertheless have low incomes. Altogether, the programs provide health insurance for over 80 million Americans each month, administrative records show.

The means-tested medical programs, Medicaid and SCHIP, provide coverage for more than 55 million low-income people over the course of a year, including some low-income individuals for whom Medicaid pays their Medicare premiums and deductibles.

The majority of Medicaid enrollees lack any other health insurance during the year. Census data for 2003 show that:

• Four of five people enrolled in Medicaid or SCHIP had no private insurance during the year and relied exclusively on public health coverage.
• Two of five Medicare enrollees had no private insurance during the year and relied exclusively on public health care coverage.
• More than 40 million Americans received their only health insurance during the year from government programs.
• Another 45 million Americans had no health insurance at all.

It is worth noting that federal policies affect the health insurance status of more Americans than those covered by Medicare, Medicaid, and SCHIP.

Many Americans are affected by federal tax exclusions and deductions for health insurance, and the federal government directly insures millions of federal employees, military personnel, and their dependents, and provides health care to veterans. This analysis focuses on the main public health insurance programs — Medicare, Medicaid, and SCHIP.

Public Benefits Effectiveness for the Elderly

The nation’s most potent income-security policies are for the elderly. The combination of Social Security, SSI, food stamps, and other programs reduced the overall number of seniors living in poverty in 2003 by 14 million (more than 80 percent), and lifted the disposable income of those remaining in poverty from an average of just 8 percent of the poverty line to 62 percent of the poverty line.

In addition, Medicare and Medicaid combine to provide health insurance for virtually all of the 35 million Americans age 65 and older.

Even for seniors, gaps in the safety net remain. In many cases, Social Security payments are not large enough to lift recipients out of poverty, and some retirees (such as domestic or seasonal workers whose past employers failed to pay the required Social Security payroll taxes) may receive little or no Social Security benefit.

Seniors who qualify for small or no Social Security benefits are supposed to be covered by the Supplemental Security Income program, but SSI pays a maximum federal benefit that is 27 percent below the poverty line for an individual living alone. Partly as a result, 3.1 million seniors had disposable family incomes below the poverty line in 2003, even after all benefits are counted.

Another 13.7 million seniors remained barely above this income range, with disposable incomes between one and two times the poverty line (between $8,825 and $17,650 a year in 2003 for a senior living alone).

While seniors are the least likely age group to live below the poverty line, they are the most likely age group to be just above the poverty line. (It should be noted that many near-poor seniors are not counted as poor because of a quirk in the poverty line itself.

The federal poverty line is set 8 to 10 percent lower for elderly single individuals and couples than for similar non-elderly individuals and couples. Most of the elderly live alone or with a spouse.

If the poverty definition were adjusted to use the same poverty line for the elderly as for the non-elderly, the poverty rate for seniors would be slightly higher, rather than lower, than the poverty rate for younger adults. )

Public Benefits Effectiveness for Families with Children

Public benefits also substantially reduce the amount and severity of poverty for families with children, although not nearly to the same degree as they do for seniors.

Government benefits lifted nearly one of every three otherwise-poor children above the poverty line in 2003. For millions of other poor children, poverty was made less severe than it otherwise would have been.

Over the past two decades, the nature of the safety net has changed markedly for families with children. Assistance has expanded for low-income working families with children; low-income working families can now receive a stronger federal earned income tax credit (EITC), greater federal and state child care assistance, and greater health insurance coverage, among other supports. Most families with children that are lifted above the poverty line by public benefits are working families.

At the same time, protections have weakened for the poorest families (those with very low or no earnings) due to restrictions in TANF income assistance. To be eligible for income assistance through TANF, families typically must have incomes far below the poverty line.

Despite this, the federal government estimates that only about half of families with children that are poor enough to qualify for TANF income assistance now receive it. In the mid-1990s, about 80 percent of families who qualified for the predecessor AFDC program received income assistance.

Many poor families also are being left deeper in poverty due in part to the overall reduction in the amount of income assistance provided through the TANF program. A poor child now is more likely to experience deep poverty than was the case a decade ago. Nearly one in three poor children (31 percent) had disposable income below half of the poverty line in 2003, compared with fewer than one in four (23 percent) in 1995.

Public Benefits for Immigrants and Non-Elderly Childless Individuals

The U.S. safety net is weakest for two other groups — immigrants and non-elderly individuals without children. For immigrant families, eligibility for safety-net programs ranging from food stamps to medical assistance was sharply restricted in the mid-1990s.

These cuts have been restored only partially in the years since then. In 2002, low-income people in families headed by an immigrant were only half as likely as Americans overall to have their family income lifted above the poverty line by public benefits.

For individuals who are not raising minor children (and are not elderly or disabled), cash income support and publicly-funded health insurance are not widely available, and housing programs give low priority to serving such people.

Even the food stamp program, which has relatively few limitations on eligibility for those who meet its financial requirements, imposes much more severe restrictions on these individuals.

Most individuals between the ages of 18 and 50 who do not have disabilities and are not raising minor children are eligible for food stamps for only three months while out of work in any 36-month period. 

The safety net largely bypasses these individuals, doing little to lessen the severity of their poverty. In addition, federal and state tax policies actually tax this group somewhat deeper into poverty.

The U.S. system of public benefits achieves important objectives. It reduces both the extent and depth of poverty while ensuring that millions of Americans have access to medical care. This system lifts 27 million people out of poverty and provides health insurance to tens of millions of people who otherwise would be uninsured.

Both social insurance programs and programs targeted on low-income Americans play an important role. Social Security lifts millions of seniors and families in which a breadwinner has become disabled or has died out of poverty.

Programs such as the EITC, SSI, and food stamps help those who receive little or no help from the social insurance programs to meet basic needs. The means-tested assistance programs lift 11 million Americans out of poverty.

In addition, public health insurance programs — Medicare, Medicaid, and SCHIP — provide access to medical care to more than one in four Americans, including nearly all of the nation’s elderly. Without these programs, the ranks of the uninsured — already 45 million strong — would be far more numerous.

Public Benefits Are Stronger, More Effective in Other Countries

Public benefit programs in the United States could be stronger. This can be seen by a comparison with other nations. Most other Western industrialized nations have more effective anti-poverty policies — and lower poverty rates — than does the United States, especially for children.

Research by economist Timothy M. Smeeding, one of the foremost experts on public benefit programs in developed nations, has shown that government cash and non-cash benefits and tax credits in the United States lift only 1 in 9 otherwise-low-income children to half of the national median income.

The equivalent programs in Canada lift 1 in 3 such children to half of that country’s median income. In Britain, Germany, the Netherlands, Belgium, and other countries, the figure is more than 1 in 2.

Smeeding also found that children at the bottom of the economic ladder in the United States tend to have lower real incomes, with less buying power, than their counterparts in these other nations. Thus, the poorest 25 percent of American children have lower family incomes than do the poorest 25 percent of Canadian children.

And the poorest 22 percent of American children have lower income than the poorest 22 percent of German children. This is the case even though the United States is a wealthier nation overall, with a higher per-capita gross domestic product.

The United Kingdom provides an example of how a nation can make significant strides against poverty. The British government stepped up its anti-poverty efforts markedly after Prime Minister Tony Blair pledged in 1999 to end child poverty within 20 years and cut it in half in ten years.

To achieve this ambitious poverty reduction goal, the United Kingdom has strengthened public benefits and provided new work supports such as child care and a U.S.-style EITC to families. Smeeding calculates that the proportion of British children who would be considered below the poverty line by U.S. standards has dropped since 1999 by more than one-third.

Limits on ‘Countable Resources’

SSI and Medicaid eligibility will also require that the child possess “countable resources” that have a value of not more than $2,000, in most states. (Benefits under the SSDI program are based on the work history of the applicant or his parent, without regard to resources.) “Countable resources” generally refer to cash and assets that can be converted to cash, including assets held in a trust that can be used for the child’s maintenance and support.

A substance abuse trust created for the child’s benefit will thus be examined by the state to determine if the trust property can be classified as a countable resource. If it is, that will almost certainly cause the application for SSI and Medicaid to be denied until the trust property has been almost completely exhausted.

Careful: Supplemental Security Income (SSI) and Medicaid

Parents naturally want to protect their children and help them when they have problems by guiding them in the right direction. When that problem is a substance abuse disorder, one way they do that is by drawing up a trust.

But unless they’re very careful about how they structure the trust, they could unwittingly deprive them of the powerful safety net provided by Supplemental Security Income, Medicaid and Social Security Disability Income.

When designing a trust for a beneficiary with a substance use disorder, you should anticipate that the child, if over 18, may at some point become eligible to receive government-provided benefits from Supplemental Security Income (SSI) and Medicaid, and possibly Social Security Disability Income (SSDI), all of which may help pay their living and recovery-based expenses.

Eligibility will depend on whether they are “disabled,” as defined by federal law, and have a minimal level of countable assets.

Parents who are drawing up a trust for a child tend to already have the assets to care for an heir who is struggling. But notwithstanding that SSI and Medicaid are needs-based programs with strict resource limits, not many people, even of means, are willing to ignore available government benefits. Relying on these benefits, in fact, can be a good first line of defense in preserving the family’s assets.

There are several considerations to take into account to preserve these benefits, but the process can be convoluted for those going through it for the first time.

The Basics on Public Benefits

Eligibility for SSI will entitle the child to receive a monthly benefit of up to $771 (for 2019) that can be used for their support; in addition, most states provide a small supplement to this base amount. In many states, SSI eligibility will automatically qualify the child to receive Medicaid, which will cover doctor visits, hospital expenses and many other health care costs.

Beyond direct monetary assistance, eligibility for SSI and Medicaid will also allow the child access to numerous community-based programs and services, which can be very beneficial.

SSDI will pay a monthly benefit based on the child’s work history, but younger adults with substance use disorders may not have enough work credits to qualify. Alternatively, an adult disabled child of a deceased parent who had been receiving SSDA will be entitled to a survivor’s benefit if the child became disabled prior to age 22.

Careful: A Trust Can Be Considered a Countable Asset

A trust funded with the assets of the parents or other third parties will be treated as a countable resource if, by its terms, the trustee has a duty to provide for the beneficiary’s maintenance and support.

Careful drafting is essential here, since the typical trust language found in form books, which require distributions to be made for the beneficiary’s “health, maintenance, and support,” will cause the trust to be considered as a countable resource. To avoid that, at a minimum, the words “maintenance” or “support” should not be found in the trust document.

The trust also should restrict the purpose of distributions to paying for services that will only supplement, but not supplant, all the benefits the beneficiary is eligible to receive from any government-funded program or private insurance policy.

This language makes it clear that benefits received from the government-based programs are to be the primary source of the child’s maintenance and support.

To further express the parents’ intent in this regard, the trust can contain a list of “extras,” such as personal care services, travel and entertainment, that would serve as examples of what would be a permissible use of trust funds.

Applying this concept of “extras” to a substance abuse trust, issues may arise as to whether one or more recovery-related expenses — such as the child’s stay in a rehab facility, tuition at a job-training center or the professional fees for medical, clinical and therapeutic services — will be treated either as “extras” or as falling within the definition of maintenance or support that could cause the trust assets to be treated as available resources.

To eliminate uncertainty, the trust document can state as an overarching principle that the trustee’s discretion to make disbursements will be limited in all cases to only those goods and services that are not otherwise fully paid for by SSI, Medicaid or any private coverage insurance.

Income Considerations

The child’s earned income will reduce the SSI payment by 50 cents for each dollar earned. Unearned income, on the other hand, such as income distributions from the trust, will reduce the SSI payment dollar-for-dollar.

However, there is a special allowance, In-Kind Support, and Maintenance (ISM), for food or shelter provided directly to the child and paid for by a third party, including the trustee of a trust.

This type of unearned income will not cause a dollar-for-dollar reduction of the SSI benefit but will be limited to a maximum reduction of one-third of the benefit, regardless of the actual value of the food and shelter being provided.

Based on these rules, when the child is receiving government benefits, the trustee should generally avoid using trust money to provide him with food or groceries, rent or mortgage payments, property taxes or utilities.

However, the trust need not specifically forbid all expenditures for these purposes, if it would be in the child’s best interests that it does so, even if it would result in a reduction in the child’s SSI benefits.

For example, assume that a child who is eligible for SSI has just completed an in-patient drug treatment program and now needs a new place to live. He found an apartment near to where he will be taking a job-training course, as well as where he will be attending out-patient therapy sessions.

The rent will be $1,500 per month, which obviously is more than the child’s monthly SSI benefit of $771, and he has no income or assets to make up the difference. If the trustee would agree to have the trust pay all the rent, under the ISM rules the $771 benefit would be reduced by $277 (one-third of the benefit, or $257, plus $20), leaving the child with $494 per month.

Based on the math, the trustee could reasonably conclude that the advantages to this living arrangement outweigh the disadvantage of the $277 monthly reduction, especially since the child will continue to be eligible for SSI and Medicaid benefits.

Each case is different, so consulting with an attorney is advised to help determine the best strategy going forward and ensure the child maximizes the benefits they can receive.