[This article was originally printed in the Straight Word, a publication of the Burlington County Bar Association.]
In administering a special needs trust, it is crucial that the trustee not advance cash to the beneficiary. Historically, beneficiaries have sent their bills to the trustee for payment. An easier way to accomplish this objective is to obtain a credit card for the trust beneficiary. If the beneficiary has good credit, the card can be obtained in the beneficiary’s name. If the beneficiary does not have good credit or is a minor or is incapacitated, a credit card could be obtained in the name of a family member. The process of determining distributions from a special needs trust should begin by a trustee and beneficiary and/or beneficiary’s family developing a budget. The budget would be broken into three main categories.
One would be shelter expenses. The second would be transportation, and the third would be personal items. Generally, trustees should avoid paying for in-kind support and maintenance (ISM). ISM is defined as food and shelter. There are ten items of shelter expense that constitute ISM. Other categories of shelter expense do not count as ISM. The ten items that do constitute ISM are: mortgage payments, property insurance (if required by the mortgage holder), rent, gas, electricity, heating fuel, water, sewer, garbage collection service and real estate taxes. Frequently, the trustee must pay these expenses because the beneficiary simply does not have sufficient income to do it. Payment of these expenses results in a reduction of the SSI payment of one-third or one-third plus $20, depending on living arrangements. Transportation expenses include the purchase of a vehicle and maintenance including gasoline. It is easier for the beneficiary to get a credit card and pay for gas by a credit card than it is to pay cash. There are a whole host of personal items that can be more easily paid for by credit card than by cash or by sending bills to the trustee for payment.
During the last year, the POMS were changed to permit a special needs trust to reimbursement a third party for goods or services purchased on behalf of the trust beneficiary. This makes it easy for a parent to use a credit card to buy items for the beneficiary and have the credit card bills sent to the trustee for payment. However, there are certain rules that must be strictly followed. If it is impossible for the beneficiary or a family member to obtain a credit card due to bad credit, a secured credit card should be considered. Under a secured credit card, a deposit is made with the credit card issuer and an agreement signed so that if the credit card is not paid, the issuer can obtain payment through the funds on deposit to secure the card. The agreement must be carefully drafted to insure that under no circumstances will the beneficiary ever receive the funds on deposit with the credit card issuer. Rather, those funds would be returned to the trustee.
In appropriate cases, the trust beneficiary, if an adult and competent, should obtain a credit card. The credit card should have a low limit so that it is not abused. Credit cards are loans, and loans are not considered income for SSI purposes. The POMS state, “If a trust pays a credit card bill for the trust beneficiary, whether the individual receives income depends on what was on the bill. If the trust pays for food or shelter items on the bill, the individual generally will be charged with in-kind support and maintenance (ISM) up to the Presumed Maximum Value (PMV). If the bill includes non-food, non-shelter items, the individual usually does not receive income as a result of payment, unless the item would not be a totally or partially excluded non-liquid resource the following month.” The trustee must examine each credit card bill to determine a number of factors:
- Did the beneficiary obtain cash from the credit card? If so, the cash would be income in the month received.
- Did the beneficiary charge any items that constituted ISM?
- Did the beneficiary charge any items that were for the benefit of a third party, rather than the trust beneficiary? If so, there would be a violation of the sole benefit rule and there may be a transfer of asset penalty.
The trustee may refuse to pay an inappropriate credit card bill or the inappropriate portion of a credit card bill.
In some situations, the beneficiary of a trust utilizes a credit card for items that violate the sole benefit rule. The trust may refuse to pay the bill. For certain beneficiaries, the trustee may want to negotiate a payment plan so that the beneficiary can make payments from his or her Social Security income. If negotiations fail, the trustee should petition the court prior to paying for a debt incurred for purchases made in violation of the sole benefit rule. Additionally, the credit card should not be used to pay for items that would be ISM, if this can be avoided.
If there is a third-party special needs trust, distributions for payment of credit card balances where the beneficiary has purchased items for the benefit of others do not violate the sole benefit rule. The trustee may want to seek reimbursement for such charges in appropriate cases.
Gift Cards/Gift Certificates
Trustees love to give trust beneficiaries gift cards or gift certificates. However, gift cards and gift certificates are considered cash equivalents. If a gift card/certificate can be used to buy food or shelter (e.g., restaurant, grocery store or VISA gift card), it is unearned income in the month of receipt. Any unspent balance on the gift card/certificate is a resource beginning the month after the month of receipt. If the store does not sell food or shelter items (e.g., book store or electronic store), but the card does not have a legally enforceable prohibition on the individual selling the card for cash, then it is still unearned income. Best practice dictates the use of credit cards for beneficiaries of special needs trusts rather than gift cards.
 20 C.F.R. 416.1103(f); POMS SI 01120.201 I 1 d.
 POMS SI 01120.201.I.1.d.
 POMS SI 01120.201 I 1 e.