When an unexpected inheritance or lawsuit proceeds are received by a person with disabilities who is on SSI-disability or SSI-elder benefits, the event calls for some special needs planning to continue the SSI monthly checks and Florida Medicaid without going over the $2,000 resource limit. Many think the best or only answer may be an individual or pooled Special Needs Trust. That is not the case. This practice note discusses the advantages of a room and board contract for a term of months or for lifetime, can in some circumstance have significant cash and other benefits over a personal services contract or a special needs trust.

In 1999 the Social Security Act was changed to impose an Supplemental Security Income (SSI) transfer of resources penalty for transferring assets for less than fair market value (FMV) for a period of months capped at 36 months. Prior to that persons with disabilities could simply give away excess resources, continue to receive SSI which would trigger continuation of Medicaid. The Social Security Administration (SSA) immediately added Section SI 01150.005 to the Program Operations Manual System (POMS) to explain how the agency is to assess fair market value and delineate the exceptions to the transfer penalty, giving the special needs attorney some additional and often better tools to maintain public benefits. SSA defines fair market value as “the current market value (CMV) at the time the resource transfers,” noting that CMV is the going price that the resource could be reasonably be expected to sell on the open market in the local area involved. 3 SSA also defines “compensation” as the cash or other valuable consideration provided in exchange for the resource, paid by cash or real or personal property received in exchange.

The value of the compensation received by the SSI claimant is determined by looking at the legally binding agreement between the SSI claimant-transferor and the person or entity receiving the resource. Particularly important is the POMS statement that “The transferor may actually receive the compensation before, at, or after the actual time of transfer.”

Inkind support and maintenance (ISM) may provide the compensation for the transfer valued at its full current market value multiplied by the length of time for which the ISM is to be provided under the agreement. SSA provides a helpful example of a contract for a period of years:

Example: Determining whether ISM applies:

Mr. Thomas transfers $30,000 cash to his sister based on a written contract that she would provide him with food and shelter for 5 years. The sister values the food and shelter at $500 per month. The CR develops Mr. Thomas’ living arrangements and determines that he has a flat fee arrangement with his sister and required to pay $500 per month. The food and shelter for 5 years is worth $30,000 (5 years x $6,000 per year). Therefore, Mr. Thomas received FMV for the $30,000 he transferred. ISM is not counted because the Mr. Thomas has prepaid for his food and shelter with the $30,000 he transferred. SSA Staff are instructed to use the actual value of the ISM as defined in the standard food and shelter instructions and not the one-third reduction or presumed maximum value (PMV) to set the value of the compensation in the agreement. Staff are further instructed to obtain a statement from the ISM provider to confirm that the ISM is being provided using SSA’s form 8011-F3 (Statement of Household Expenses and Contributions).

What about a legally binding agreement that in exchange of some real property, personal property or cash, the SSI claimant will receive ISM for his or her life? Staff are instructed to multiply the yearly CMV of the ISM provided by the “Years of Life Remaining” corresponding to the SSI claimant’s age (or next lower age) found in POMS SI 01150.005F. Note that this chart may be different that the life expectancy charts in the Florida Medicaid Manual. SSA provides two useful examples showing the effect of an agreement to provide ISM for life: Example 1: Total value of ISM results in FMV compensation Valerie Payne transferred nonhome real property valued at $185,000 to her sister. As compensation, her sister agreed to provide Ms. Payne with room and board in the sister’s home for the rest of Ms. Payne’s life. ISM development showed that her sister’s total household expenses were $1,500 per month. The household consisted of 3 persons, including Ms. Payne who was age 53 at the time of the transfer. The CMV of the ISM was $6,000 per year ($1,500/3 = $500 per month X 12 months = $6,000). Then, $6,000 X 31.61 (average years of life remaining at age 50) = $189,660 compensation. In this case, Ms. Payne received FMV for the transferred resource. We do not count ISM because the individual prepaid for her own food and shelter with the value of the home she transferred. For procedure on determining an individual’s contribution
toward household operating expenses, see SI 00835.480D.

Example 2: Total value of ISM results in uncompensated value

Assume the same case facts as Example 1 except that Ms. Payne is 80 years old at the time of the transfer. As in Example 1 the ISM is worth $6,000 per year. At 80 years of age the life expectancy table indicates 7.16 years. Multiplying 7.16 years times $6,000 results in compensation of $42,960. In this case there is uncompensated value of $142,040 ($185,000 minus $42,960). Therefore, Ms. Payne is subject to a period of ineligibility for SSI because she transferred the house for less than FMV. The agreement between Valerie Payne, the SSI claimant, and her sister could arise in a couple of ways. Perhaps Valerie and her sister were living together for years, and Valerie then inherited a home (described in the example as “nonhome real property”) as an inheritance from another person. Or perhaps Valerie was living in her own home, and as she became more physically wanted to move in with her sister who could help care for her. Her former home then became a countable resource since it was no longer her primary residence.
In all likelihood, before the ISM agreement and property transfer, either scenario would see Valerie’s SSI check go down due to her inability to pay her fair share of her sister’s household expenses.

SSA is required to deducted for the ISM received by her sister shouldering disproportionately more of the household expenses. This one-third loss of Valerie’s SSI check amounts to approximately $3,000 per year. At this point Valerie decides to sell for cash or transfer the real property and move with her sister. What are the options?

Option 1.

Just give the money to her sister. If Valerie sells the house and receives the $185,000 sales proceeds and just gives the money to her sister, with no agreement for anything in return, the transfer penalty applies in full. The amount transferred ($185k) divided by the Federal Benefit Rate (currently $794 per month), produces the number of months that Valerie would receive no SSI checks at all, but capped at a 36 month penalty. The amount transferred in this case results in a penalty
calculation of 232 months but capped at 36 months causes the loss of benefits from the date of transfer for three years. While that choice is only a loss of approximately $10,000 per year tax free for three years, or $30,000 total, the more significant potential loss is the SSI-related Medicaid health insurance coverage. There are no income tax consequences to the sister since it is a gift.

Option 2.

Use a Special Needs Trust. If she sells the home, receives $185,000 cash and puts
the funds in a special needs trust with the trust paying Valerie’s share of the household expenses, the trust’s contribution triggers the ISM reduction anyway for payments for food and shelter. She still loses over $3,000 per year in tax free SSI benefits by having a trust because her SSI check is reduced from $794 to $530 per month. And she incurs attorney fees, trustee fees, and CPA fees, and if she uses a
pooled or individual SNT, and a potential startup fee as well. The result is that Valerie has more expense and less tax-free income. At 31 years of life expectancy the one-third loss of tax free SSI income amounts to $93,00 alone, and the trustee fee could amount to $172,000 (at 3% over 31 years).

Option 3.

Use a personal services contract. Instead, Valerie decides to engage in some other
special needs planning and transfers the sales proceeds to her sister in an agreement for personal services to be received in the future. Such Personal Service Contracts (PSC) are specifically allowed under the same POMS. 8 How to draft a proper PSC is laid out in a SSA Atlanta Regional Chief Counsel Precedent (opinion letter). The amount the sister receives is IRS-taxable income of $185,000 which results in a potential substantial loss of $36,011 if using the standard deduction.

Option 4.

Use the ISM contract for room and board detailed in the POMS above. The benefit
of using the SSA-suggested option of transferring the sales proceeds, or transferring title to the non-home property, to the sister would include avoiding:
the ISM deduction from her SSI checks; attorney fees for trust preparation; and
lifetime trustee fees and expenses. Once received, the sister does not have to account further for the funds. She is required under the contract to provide food and shelter, but not maintain an account to do so. Ongoing accounting
fees are also eliminated. In addition, three separate tax experts have advised our office in three separate cases that the room and board contract to share food and shelter expenses results in no federal income tax consequences for the person who receives the funds and agrees to provide the food and shelter. Thus, the $36,011 income tax loss by using the Personal Services Contract is eliminated by the ISM agreement.

Special needs planning should not be one shoe fits all, nor should special needs planners apply only one single technique to a particular SSI claimant’s situation. Combinations of some appropriate spend down (paying off credit card bills, paying down mortgages, purchasing new appliances, vehicles, clothes, computers, dental care, and infinitely more), ABLE accounts for those eligible, some funds in ISM contracts, etc., can make clients extremely happy to have a special needs plan tailored to meet their individual needs.

Room and board or ISM contracts can effectively handle small or larger amounts of funds since such contracts can be for a term of several months, several years or as described SSA in the POMS’ example, for a lifetime. Additionally, room and board contracts increase the SSI check over the use of Special Needs Trusts by legally avoiding the monthly loss of full SSI benefits due to Inkind Support and
Maintenance deductions. Such contracts are not appropriate in every case, but where they are, the advantages over SNTs and PSCs are substantial.

1 Foster Care Independence Act of 1999 (P.L. 106-169).
2 Florida Statutes §409.903(2) enacted pursuant to the Social Security Act, Section 1634.
3 SI 01150.005.B.1.
4 SI 01150.005.B.2.
5 SI 01150.005.C.2.
6 POMS SI 00835.001
7 POMS SI 01150.005.D.3.
8 POMS SI 01150.005.D.4
9 PS 01820.011 Florida, A. PS 14-102 Supplemental Security Income Resource Determination—Validity Of Personal
Services Contract.