Bar News - March 16, 2016
Elder, Estate Planning & Probate Law: Military Survivor Benefits and Special Needs Trusts
By: Judith L. Bomster and Ann N. Butenhof
A change in longstanding federal law makes it possible for the first time for active and retired members of the military to direct retirement benefits to a trust designed to benefit a child with disabilities, rather than to such child outright.
This article provides an overview of survivor benefit plans available to members of the military, highlights the important modifications to federal law, and outlines the criteria for taking advantage of this new planning opportunity.
Members of the military entitled to retirement pay may use the military Survivor Benefit Plan (SBP) established under 10 USC Section 1447 to provide for a surviving spouse and dependent children after the military member’s retirement or death. The member can select among options that provide a monthly annuity to a surviving spouse, a spouse and dependent children, or dependent children only with spousal consent. The SBP payment may constitute up to 55 percent of the military member’s retirement pay.
Although beneficial, SBP payments often are insufficient to cover the care a child with disabilities may need, and military parents seek other payment sources for essential services. If a child with disabilities is over the age of 18 and has little income and less than $2,000 in resources, the child often will be eligible for Supplemental Security Income (SSI), which provides a modest stream of income, as well as Medicaid assistance, which affords essential services, including in-home care, supported residential programs, mental health services and educational or vocational assistance.
Until 2015, federal law required military survivor benefits only be paid to living, breathing “persons,” thus excluding the option of distributing SBP annuity payments to a supplemental or special needs trust (SNT) established for a child with disabilities. This left military parents in the untenable position of choosing between disinheriting a dependent child with disabilities from receiving SBP benefits, or naming the child as a direct recipient of monetary support that would jeopardize eligibility for SSI and Medicaid.
The Disabled Military Child Protection Act solved this planning dilemma by amending 10 USC sections 1448, 1450, and 1455, to allow military members to direct SBP payments to a qualifying SNT established for the sole benefit of a dependent child with disabilities. Notably, the act does not authorize similar special needs planning and trust designations when an individual wishes to plan for a surviving spouse with disabilities.
To qualify as a dependent child of a military member, the child must be unmarried and also be: (1) younger than age 18; (2) older than 18 but younger than age 22, and enrolled in a full-time course of study or training at a defined educational institution; or (3) incapable of self-support due to mental or physical incapacity which existed before age 18, or arose after age 18 but before age 22, while the child was enrolled in a full-time course of study or training.
Any child whose incapacity arose on or after a 22nd birthday is not considered “dependent” under the law and thus the military parent is unable to use the special planning option of directing SBP payments to a qualifying SNT. A child not only must be dependent within the meaning of 10 USC Section 1447(11), but also “disabled” as defined under 42 USC Section 1382c(a)(3), which is the same standard used to determine eligibility for SSI benefits – that is, unable to engage in any substantial gainful activity due to physical or mental impairment expected to result in death or expected to last for a continuous period of one year.
Under the act, SBP annuity payments only may be directed to a trust established in conformance with 42 USC Sections 1396p(d)(4)(A) or (d)(4)(C). A Section (d)(4)(A) SNT is an irrevocable trust (1) established by a parent, grandparent, court or legal guardian of the trust beneficiary, (2) for the sole benefit of the beneficiary who must be younger than age 65 upon the SNT’s creation and disabled within the meaning of 42 USC Section1382c(a)(3), and (3) which includes a “Medicaid-payback” provision requiring reimbursement to state(s) that provided Medicaid assistance to the beneficiary, if any assets remain in the SNT upon the beneficiary’s death.
A Section (d)(4)(C) SNT is an irrevocable trust that is (1) established by a parent, grandparent, court, legal guardian or the trust beneficiary, (2) solely for the beneficiary who is disabled within the meaning of 42 USC Section 1382c(a)(3), (3) managed by a nonprofit organization, (4) with trust funds pooled for investment purposes, and (5) that includes a similar Medicaid-payback provision. The act does not allow military parents to direct SBP payments to a third-party SNT that does not include a Medicaid-payback provision.
In December 2015, the Office of the Assistant Secretary of Defense issued a memorandum offering guidance for implementing the Disabled Military Child Protection Act and designating an SNT to receive SBP annuity payments, which is available on the Military Officers Association of America website.
While living, a military member irrevocably may elect to direct SBP benefits to a qualifying SNT by filing a statement of intent that includes the SNT’s name and tax identification number, along with a written statement from an actively-licensed attorney certifying that the SNT complies with all applicable federal and state laws. A certification from the Social Security Administration stating the SNT complies with 42 USC Section 1396p(d)(4)(A) or (d)(4)(C) may substitute for the attorney certification. After a military member’s death, a surviving parent, grandparent or court-appointed legal guardian may make a similar election to send SBP payments to a qualifying SNT.
Members of the military and the disability community advocated for many years to create this critical planning opportunity for children with disabilities. By permitting the designation of an SNT as the recipient of retirement benefits, members of the military finally have an option previously available only in non-military retirement plans. If an attorney or financial advisor is assisting a military member with planning, it is critical to explore beneficiary designations for SBP annuity payments.
Judith L. Bomster is a partner at Butenhof & Bomster, where she focuses her practice on estate planning, special needs planning and elder law. Ann N. Butenhof is a partner at Butenhof & Bomster in Manchester and focuses her practice in the areas of elder law, special needs trusts, estate planning, and probate and trust administration.