Paying Debt with a Special Needs Trust
A Special Needs Trust (SNT) can pay past debt incurred by beneficiaries. This includes credit card debt or cash loans. This text will address the rules and limitations associated with paying past debt properly. It is important to remember that for a Special Needs Trust to pay a loan, it must be bona fide loan.
To be certain a trust can pay for such items the Trust Document must be reviewed, as it governs the proper administration of the Special Needs Trust Account. The Trust Document can have specific limitations on paying for certain items/services, or limitations on how much past debt can be paid. For example, some Special Needs Trusts are drafted to prohibit the purchase of cigarettes, which would then prohibit the Trustee for paying any past debt that went towards paying for cigarettes.
What is a Bona Fide Loan Agreement and a Bona Fide Informal Loan?
The Social Security Administration (SSA) defines a loan as, “a transaction whereby one party advances money to, or on behalf of another party, who promises to repay the lender in full, with or without interest. The loan agreement may be written or oral, and must be enforceable under State law.” A bona fide loan simply means a loan given to a borrower who has an obligation to repay and expresses his/her intention to repay. In addition, the loan agreement was made in good faith.
The Social Security Administration’s definition of a bona fide informal loan is, “is a loan between individuals who are not in the business of lending money or providing credit. An informal loan can be oral or written. An informal loan is “written” when the parties to the loan commit to writing the terms of their agreement.” In contrast, a formal bona fide loan is when a contract is negotiated between an individual and a commercial lending institution, such as a bank (SI DEN01120.220).
An easier understanding of an informal loan is that the lender is usually a friend or family member and not a bank or other entity that provides credit or loans. It is important to note that special attention is given to informal loans given by friends or relatives by the Social Security Administration (SSA).
According to the Social Security Administration (SSA), more specifically, POM SI 01120.220 on Cash Loans, an informal loan is bona fide if it meets all the following:
Even though the Social Security Administration (SSA) states that the loan agreement can be verbal or written and has different requirements, as a Trustee, for example with CPT, proper documentation of a written agreement must be submitted to make payments out of a beneficiary’s account. Why? A Trustee has the responsibility and is obligated to maintain receipts/invoices, contracts, agreements, and as much documentation to support each disbursement made from a beneficiary’s Special Needs Trust Account in the event of an audit by state or government agencies and/or for court accountings (Urbatsch & Fuller, 2016). Furthermore, a Trustee has a fiduciary duty to ensure that the amount requested to be disbursed to a friend or family member for a loan is reasonable with the proper documentation in addition to, ensuring that the beneficiary’s funds last as long as possible. If the request for a loan payback is too high and proper documentation is not provided, more than likely a request for payment will be denied and/or the Trustee may ask for a court order prior to approval.
Paying Credit Card Debt
A Special Needs Trust is permitted to pay past credit card debt. Keep in mind it is a good idea to review the Trust Document, to be certain.
A Trustee must review all transactions on the statements and receipts to ensure that items purchased with the credit card were allowable items to be purchased based on which public benefits an individual is receiving. For example, CPT, as Trustee, permits payment of past credit card debt within the first 90 days of establishing a Special Needs Trust. The past 12 months of statements is required to be submitted with a completed disbursement request form. If future credit card payments are requested, receipts must be submitted for each transaction along with the credit card statement, and as well as a completed disbursement request form.
Please note it is important to know if the Special Needs Trust is a First Party Special Needs Trust or a Third Party Special Needs Trust, as each has different guidelines For Example, if an individual who has a First Party Special Needs Trust and is on Supplemental Security Income (SSI), the Trustee must make sure that each transaction is for the sole benefit of the beneficiary, as well as items purchased are not related to food or shelter (Urbatsch & Fuller, 2016). If such items are paid, the beneficiary would be charged In-Kind Support and Maintenance (ISM) up to the presumed maximum value (PMV). For more information regarding First Party Special Needs Trusts and Third Party Special Needs Trusts, please visit http://specialneedsanswers.com/what-is-a-special-needs-trust-13601.
For further reading and information, please read our blog posts titled, “How Can My Special Needs Trust be Used without Interfering with my SSI?” and “Importance of Submitting Receipts/Invoices to Trustee for Reimbursement of Payment.” In addition, please refer to our suggested further reading/sources list at the bottom of the blog.
DISCLAIMER: The information provided by CPT is for informational purposes only and is intended to be used as a non-legal guide prior to consultation with an attorney familiar with your specific legal situation. CPT is not engaged in the practice of law or in rendering legal advice or counsel. No such legal advice or counseling is either expressly or impliedly intended. This form is not a substitute for the advice or counsel of an attorney. If you require legal advice, you should seek the services of an attorney. © 2017 CPT All rights reserved.
Urbatsch, K., & Fuller, M. (2016). Administering the California special needs trust: A guide for trustees and those who advise them (2nd ed.). Bloomington, IN: IUniverse.
William E. Lindahl, MBA, CLPF