How Can My Nephew Protect His Social Security Back Pay Award?
My cousin’s only son, David, who is 33 years old, just received notice that he has qualified for SSDI, retroactive for a year and a half. He had a brain tumor at age 12. The good news is that he lived and he is a high school graduate. The bad news is that he has some deficits. He has no depth perception, so he cannot do any job with machinery and he cannot drive. He has significant anxiety. I am not sure he knows how to write a check or even pay a bill at a restaurant. He has held several jobs and I believe got the disability on his own work record. He was a dishwasher, he cleaned offices, and he worked as a gas station attendant.
David has been on Medicaid and it is essential he keep that coverage. The lump sum of $17,397 for the retroactive coverage would take him over the asset limit for Medicaid so he needs to spend the money down. The advice I want him to get is twofold: (1) what can he spend down the money on and not affect his Medicaid eligibility; and (2) what can he spend his monthly benefit on and not affect his eligibility?
As to spending down the lump sum, I think he can get a burial trust but I’m sure there are rules and limits. I wonder whether he should buy a fixed annuity to create a stream of income that would supplement the $841 he will be getting from SSDI, but still keep him below the Medicaid income rules. Or are there other things a savvy person would do? (And how do we make sure the annuity people are selling him the right kind of annuity?) He read on the internet about a special needs pooled trust, but I’m not sure what that is or whether it is a good idea.
You are right that many states have both income and asset limits for Medicaid. Some states, however, give beneficiaries nine months to spend down Social Security back pay. So, first check with your state’s Medicaid agency to determine what the rules are where you live. If your state provides no grace period, there are a number of possible ways for David to protect his funds, some of which you suggest. Here they are:
- Prepaying for David’s funeral or setting up a funeral trust as you suggest. Given David’s age, I’d probably not take this step.
- Create an ABLE account. This is a special safe harbor and probably the easiest solution if David qualifies. The problem is that it’s limited to people who become disabled before age 26. It’s not clear that David qualifies given that he was able to work at some level for many years. But it’s worth looking into. You can find more information here: wwwablenrc.org.
- Create a (d)(4)(A) trust. This is an individual trust that serves as a safe harbor for disabled individuals under age 65. It would work, but may be a bit of overkill for the small amount of funds involved.
- Create a (d)(4)(C) trust account. These are similar to the individual trusts and are managed by non-profits. This is the pooled trust you mention, and it may make the most sense. There’s a directory of these trusts here: https://specialneedsanswers.com/pooled-trust
- The annuity you suggested. The risk with the annuity is that the rules could change or he may have a need for a larger amount than his monthly income and in either case, he would be stuck with the annuity he purchased at the outset. So I’d probably not go with this solution if the others are available.