Funding a Special-Needs Trust with a Survivor Benefit Plan

By Rob Wrubel, CFP^®

An estimated 20 percent of military-connected children have special needs, according to the National Institutes of Health, and those families have a unique planning tool.

Survivor Benefit Plan (SBP) income payments can be directed to a special-needs trust (SNT) in certain circumstances. The National Defense Authorization Act of 2015 allowed services members to designate their child’s SNT as their SPB’s beneficiary. Until that Act passed, families had to decide whether to forgo valuable income benefits under SPB or lose valuable SSI and Medicaid benefits. A tough choice and frequently families did not continue SBP payments to the child with disabilities until the Act passed.

A special-needs trust can hold funds to benefit a person with a disability. The funds in the trust do not count as a resource which would otherwise cause them to lose access to public assistance programs like Supplemental Security Income (SSI) and Medicaid.

What Are Survivor Benefit Plans?

When military service members die while on active duty or during retirement, Survivor Benefit Plans provide financial support to their surviving spouses and dependent children. Beneficiaries receive monthly income payments.

For some service members, coverage is automatic and free. This includes individuals who die on active duty and reserve component members who pass away because of a service-connected cause in inactive duty training. Upon retirement, active-duty members and reserve component members may opt into SBP coverage and they pay premiums to join the program (that reduce their net monthly retirement pension payment).

Retirees can choose annuity amounts up to 55 percent of their retired pay. They may select a lower annuity amount, for which they pay a lower premium.

Survivor Benefit Plan Beneficiaries

After a service member passes, the SBP delivers annuity payments to elected individuals, typically their spouses or dependent children.

Service members can choose among several beneficiary options upon retirement. In most cases, these decisions are final. They are changeable only in specific instances, like a change in marital status or the death of a beneficiary.

According to the Defense Finance and Accounting Service, eligible beneficiaries include the following:

• Spouse
• Spouse and dependent children, including those dependent because of age and disability
• Children only, with the spouse’s consent
• Former spouse
• Natural interest person, for those with no spouse or dependent children

For Military Members Who Have Children with Disabilities

An adult child with a disability is eligible as a dependent if the child became physically or mentally disabled before age 18, or age 22 if pursuing education.

Your family member with a qualifying disability may receive benefits like SSI and Medicaid before the SBP income starts. Once the SBP income begins, the monthly payments might put your family member over program income and resource limits. This income increase could cause them to lose their benefits.

Instead of taking the income into a bank account, you work with SBP to direct those payments to a special-needs trust. The income will not count towards benefit program limits.

How Does a Special-needs Trust Work?

Special-needs trusts (or supplemental needs trusts) serve as funds that can benefit individuals with disabilities. A properly drafted SNT provides financial support to a person with a disability while keeping them eligible for benefits. A trustee manages the trust funds and makes disbursements to support the individual with the disability.

Strict spending rules govern special-needs trusts. For example, to preserve SSI benefits, this type of trust cannot pay for things that SSI covers, like housing. Assets in the trust can cover other expenses, however. These may include travel, recreation, legal services, insurance, home furnishings, uncovered medical expenses and education.

Covering a Special-needs Trust Under a Survivor Benefits Plan

Currently, a military member or retiree can choose to cover a dependent child’s SNT in the following circumstances:

• The individual must have elected spouse and child or child-only coverage for a child with special needs.
• The dependent child with a disability must also have an established and certified first-party special-needs trust or pooled SNT.

When an SBP benefits a dependent child with a disability, the direct payment can be changed to a special-needs trust at any time before or after the military member’s death. The service member can make the change during his or her lifetime. Or, after death, a surviving parent, grandparent or court-appointed legal guardian can designate the trust to receive the annuity payments.

Directing annuity payments to an SNT requires submitting the following documentation to the Defense Finance and Accounting Service:

• A statement of intent
• An attorney’s special-needs trust certification
• The SNT’s name and tax identification number

Additional Assistance for Active and Retired Military with Children with Special Needs

Various other forms of support are available for retired and active military personnel with children with disabilities. These include the following:

• The Military and Family Support Office offers the Exceptional Family Member Program. This program provides community support, housing, and educational, medical and personnel services to military families with special needs.
• U.S. Armed Forces Legal Assistanceoffices, available nationwide, give advice as well as local attorney referrals. The office can help families find attorneys who practice special-needs law.
• An official Department of Defense website, Military One Source, is another resource for military families with children with disabilities. Military One Source offers support with special education, financial planning and childcare. Speak to a Military OneSource consultant by calling 800-342-9647.

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This article is not intended as investment advice or representative of any specific investment strategy. Consult with your legal, tax, benefits and investment team before taking any action.