How to Direct a Children's SBP Annuity to a Trust

by

Ronald S. Pearson

Many years ago, I wrote an article1 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 Act2 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 attorney3. 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 SNTs4 (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 1495 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 annuity6.

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

____________________

Notary Public

____________________