Careful: These 2 Words in a Trust Document Could Cut Off Access to Public Benefits

When children have a substance abuse problem, public benefits like SSI and Medicaid can make a big difference. Those needs-based benefits could be jeopardized by improperly structured trusts.

(Image credit: KLH49)

Editor’s note: This is the second part of a three-part series on trusts for people with substance use disorders. Click here for part one and here for part three.

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.

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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.

The ‘Disability’ Test and How It Relates to Substance Abuse

Eligibility for benefits depends, first, on whether the child has a “disability,” as the term is defined by the Social Security Act. As far as the government is concerned, it means that they are unable to engage in any substantial gainful activity because of a serious, medically determinable physical or mental impairment, and that the disability has lasted, or is expected to last, for at least one year or to result in death.

This test will likely be difficult to meet for an adult child with a substance use disorder. First, substance use disorder by itself is not considered an impairment that qualifies as a disability. Second, even if the child has a separate mental health impairment that is recognized as the basis for disability (e.g., bipolar disorder, major depression or anxiety, OCD and panic attacks), the child’s substance abuse will negate his eligibility if it is found to be a material contributing factor to the impairment.

The key question will be whether the child would still be disabled if they stopped using drugs or alcohol. For example, if a person with a substance use disorder cannot work because of an impairment caused by lupus, which is a recognized basis for disability, his stopping the use of drugs or alcohol would not improve the lupus, and thus would not affect the finding of disability. On the other hand, if the person with a substance use disorder cannot work due to major depression and anxiety, his ceasing the use of alcohol may be enough to improve his condition to the point where he could engage in substantial gainful activity, in which case he would not meet the test for disability.

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: 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 do 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.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Martin J. Hagan, J.D.
Partner, Private Clients Group, Meyer, Unkovic and Scott

Martin J. Hagan, a partner at Meyer, Unkovic & Scott, has been serving clients in the areas of estate planning and administration, estate and gift taxation, special needs trusts, elder law, and estate and trust litigation for over 35 years. Hagan earned his Bachelor of Arts and Juris Doctor from the University of Notre Dame.