Social Security Rules for Diverting Income to a Trust

By Tom Streissguth

The Social Security Administration administers two benefit programs for the disabled: Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). Eligibility for disability is based on your work record and record of Social Security payroll taxes, but SSI does not require that an individual have a work history or pay in to the system. SSI is a means-tested program. In determining eligibility, the agency limits an applicant's income or assets, including those placed into a trust account.

Eligibility

To be eligible for SSI, you must be disabled and have very limited income and assets, i.e. financial resources. As of 2012, resource limits were $2,000 for an individual and $3,000 for a married couple. Social Security counts bank accounts, investments, property (excluding your principal residence), a second car or motorcycle, jewelry and other valuables, and "in-kind" benefits such as housing, food or other support provided by a relative. Assets held in a trust may count toward your resource limit, depending on how the trust is structured.

Trust Control and Income

If someone else has established a trust and named you as a beneficiary of that trust, you should declare the trust to Social Security when applying for SSI benefits. Social Security will make a determination based on control of the assets in the trust. If the trust is revocable, it will be counted toward your resource limit. If the trust is irrevocable, but you are allowed to manage and control the assets in any way (for example, as a trustee), it is also counted. In addition, any income that you draw (or could draw) from the assets in a trust will count against your monthly non-wage income limit. As of 2012, that limit stood at $718 for an individual and $1,068 for a couple.

Protect your loved ones. Start My Estate Plan

Diverting Money

If you divert your own money to a trust, you must inform Social Security. Money you control, no matter how you control it, is counted as a resource. If you attempt to place money in a trust to shelter it from SSI eligibility rules, you are committing fraud and could be prosecuted. The same applies to any money drawn from a trust and spent, no matter what the purpose of the spending is. If you draw SSI benefits while failing to report income or resources, Social Security will charge an overpayment and start collection actions.

Special Needs

Social Security also has rules for Special Needs Trusts or SNTs. These trusts are designed to disburse money for an individual's medical and care expenses. Someone with a permanent disability resulting from an accident, for example, may have an SNT established by an insurance settlement. Social Security will exempt assets and payments from SNTs depending on how the trustee collects and spends the money.

Protect your loved ones. Start My Estate Plan
SSI & Inheritance

References

Resources

Related articles

Disposable Income Used in Chapter 13

Consumers have two options in bankruptcy court: Chapter 7 and Chapter 13. Chapter 7 liquidates assets and discharges your debts without further payment; Chapter 13 allows you to keep your car and house, but places you on a court-supervised repayment plan. If you are ineligible for Chapter 7 protection, by exceeding a means-tested average income limit for your geographic area, you must petition for Chapter 13 bankruptcy and commit your disposable income to pay creditors.

How to Legally Protect Assets From Creditor Claims

In a lawsuit-happy society, protecting assets from potential claims is a smart financial step. There are several methods of exempting assets, such as setting up a limited liability company, or a domestic or foreign trust. It's important to remember the laws against fraudulent conveyance, which prohibit hiding property to protect it from a claim that's already been filed. The IRS and other government agencies will also take action against suspected tax evasion or money laundering.

What Does Spend-Down Inheritance Mean?

If you are receiving certain government benefits, such as Supplemental Security Income or Medicaid, your eligibility is means-tested, meaning that you must not exceed a certain level of income or resources to remain eligible. If you receive an inheritance by the terms of a will or trust, you may exceed these eligibility levels. "Spending down" an inheritance means disbursing the money to remain eligible for public assistance. Inheritances do not affect your eligibility for Social Security retirement benefits or Social Security Disability, not to be confused with the Supplemental Security Income program.

LegalZoom. Legal help is here. Start Here. Wills. Trusts. Attorney help.

Related articles

Does Your IRA Survive Bankruptcy?

When extreme financial hardship strikes, you have the option of filing for bankruptcy protection. Under Chapter 7 of ...

What Is an Irrevocable Medicaid Trust?

The cost of long-term care, even for a short while, can easily eat up an individual or couple's estate. An irrevocable ...

What Happens if You Are in Bankruptcy and Win the Lotto?

Declaring bankruptcy means asking a federal court for protection from creditors. You begin the case by filing a ...

How to Create a Trust to Claim Lottery Winnings

Winning the lottery is just the beginning of your financial adventures. To manage that jackpot, and protect your ...

Browse by category
Ready to Begin? GET STARTED