How to Direct a Children’s SBP Annuity to a Trust
Ronald S. Pearson
Many years ago, I wrote an article
<sup>1</sup> discussing the negative potential outcome of designating your child with a disability as a beneficiary of the military’s Survivor Benefit Plan (SBP) annuity. That article and the lobbying of many organizations finally led to a change in the law to now allow SBP payments to go to a Special Needs Trust (SNT) without impacting the child’s Supplemental Security Income (SSI)/Medicaid benefits. This article attempts to show you how to implement the new changes for your child.
Specifically, the 2015 National Defense Authorization Act<sup>2</sup> allowed dependent children’s SBP annuities to be paid to Special Needs Trusts (SNTs). Over a year after being signed, the Office of the Secretary of Defense released a memorandum with policy guidance. The individual services are working with the Defense Finance and Accounting Service (DFAS) to implement that policy. My contacts indicate that the services are aware of the population of military retirees who have children with disabilities and will proactively contact you with specifics of how to make this happen.
Whether or not you hear from your former service, the first step is to determine what SNT you will designate to receive your child’s future SBP annuity. The SNT you choose may exist for many years before it is needed and this can impact your decision-making regarding what SNT to use. In addition, you should choose a trustee for your SNT who is knowledgeable about SSI/Medicaid rules as well as how to properly invest the money in the trust to last the lifetime of your child.
Since the SBP annuity income goes to your child, and is considered the child’s asset, the SNT to be used for your child must be a self-settled trust (as opposed to a third-party trust that might also exist with money from you or someone else). Medicaid rules require that these self-settled SNTs have provisions repaying Medicaid for amounts spent on the child once the child dies (not required for third-party trusts).
One option is to contact an attorney to draft a self-settled SNT for your child. I would recommend that your attorney have knowledge/experience in these types of trusts. Please see the notes at the end for some suggestions on how to locate such an attorney<sup>3</sup>. You will also have to decide who will be trustee and who will invest the money. Keep in mind that family members may not be qualified to do either task (and may not live long enough). Many families might choose a bank as trustee, however bank trustees typically have minimum fees of $2,000/year and this could seriously deplete your child’s assets since their trust will (at least at first) be relatively small.
Another option is to look within your state. Many states have non-profits who manage pooled SNTs<sup>4</sup> (the assets are lumped together for investment management, but each trust’s portion is tracked for investment gains/expenses/distributions). These trusts usually have lower costs than banks, have trustees who know the SSI/Medicaid rules, and subcontract to professional investment managers at below-market expense rates. In my opinion, these trusts will likely be the best solution for most of you. They typically have an upfront fee to “join” the trust and a nominal annual expense to maintain your trust until it is funded.
I am familiar with and recommend contacting the Commonwealth Community Trust (CCT), a national nonprofit organization that administers pooled special needs trusts. For more information go to their website at www.trustcct.org and click on the Military SBP tab where you will find the Process of Joining, the Joinder Agreement, the legal document to join and the Fee Schedule or call 888-241-6309. You will be asked to complete a Joinder Agreement, pay an initial Enrollment Fee of $850 and an annual fee of $75 until the trust is funded. CCT currently provides services in 31 states.
One of the issues that we will face in setting up self-settled SNTs is that the law requires they be set up for beneficiaries under age 65. Since we usually don’t know when we will “kick-the-bucket” and trigger the SBP annuity, waiting until death to set up the self-settled SNT can be problematic. My recommendation is to set up the SNT immediately and fund it with a nominal ($10). Then the SNT will have been “set up” before your child is 65. You will want to look at the cost of having an “empty” trust set up for a number of years and include this in your decision-making about whether to set up an individual trust on your own or to “join” a pooled trust.
Once you have determined the SNT you will use, you will need to complete a DD Form 149<sup>5</sup> for your service and send it in for review by that service’s Board for Correction of Military Records (family members can do this for deceased military members). Along with that form you will need the correct name for your child’s trust (to be used as the beneficiary designation) as well as the tax ID for the trust. Finally, you will need a letter from an attorney attesting that the SNT meets the requirements to be the beneficiary of your SBP annuity<sup>6</sup>.
For those with children already receiving an SBP annuity, these steps should immediately allow the child to regain eligibility for SSI/Medicaid. For those, who have designated their child as an SBP beneficiary, these steps will prevent loss of SSI/Medicaid benefits. For those who chose not to designate their child as an SBP beneficiary, once the Board for Correction of Military Records approves your request to reinstate your child as an SBP beneficiary, DFAS will require you to pay back SBP premiums (about $20/month) for all of the months since your retirement.
I hope you will find this information useful in setting up the SBP annuity to enhance your child’s life!
Ronald S. Pearson is owner of Beach Disability Consulting. He is a retired Navy Captain who has frequently spoken on this topic nationally and regionally and has been quoted in USA Today, Kiplinger’s and numerous other media. He has two sons with intellectual disabilities.
1. SBP and the Disabled Child by Ronald S. Pearson, CFP(r)
2. Section 624 of the Howard P. “Buck” Mckeon National Defense Authorization Act for Fiscal Year 2015 (FY 15 NDAA), Public Law 113-291, which amends title 10, United States Code (U.S.C.) sections 1448, 1450, and 1455. The amendments allow a person who has established a Special Needs Trust (SNT) in accordance with either title 42, U.S.C., section 1396p(d)(4)(A) or (C), to direct payment of a dependent child Survivor Benefit Plan (SBP) annuity directly to the SNT as an add-on election to a member or retiree’s SBP election for coverage of a dependent child.
3. Special Needs Alliance, www.specialneedsalliance.org
National Association of Elder Law Attorneys, www.naela.org
4. This list is seven years old but, hopefully, still of some use (from Special Needs Trust Handbook, Thomas D. Begley, Jr. and Angela E. Canellos). Note: not all trusts are self-settled trusts.
5. DD FORM 149
6. Attorney Template:
Template for Special Needs Trust Certification
I certify that I, ____________________ (attorney’s full name) prepared a Special Needs Trust (“Trust”) on behalf of _______________________ (dependent child’s full name), who currently resides at ______________________________________________________________ (physical address), and that the Trust complies with all applicable state and federal laws including but not limited to (e.g., 42 U.S.C. § 1396(d)(4)(A) or (C)). ________________________ (dependent child’s full name) is the dependent child of ________________________ (name of military member or retiree).
I understand and have counseled my client that if the child named above has previously applied for, or in the future applies for, Supplemental Security Income (SSI) or other benefits, the Social Security Administration may need to review the SNT and ensure that it is compliant with all applicable state and federal laws. If the SNT is found to be insufficient by the Social Security Administration, the applicant may be impacted in qualifying for SSI and may incur a liability for past public benefits received.
Name of practicing attorney ____________________
State licensed to practice ____________________
State Bar Number ____________________
Signature of attorney ____________________
State of (STATE) ss.
County of (COUNTY)
SUBSCRIBED, SWORN TO AND ACKNOWLEDGED before me on __________ (DATE), by