Important Update: Military Families & Special Needs Trusts

Military members can now designate that survivor benefit annuities be placed in supplemental or special needs trusts. For years, military service members faced a serious quandary when planning for the future of their children with disabilities. Their ability to use special needs trusts, an effective tool for providing additional financial support for individuals with disabilities without jeopardizing their Supplemental Security Income (SSI) and Medicaid benefits after a parent’s death, was severely limited.

To get the most recent information on military families and special needs trusts, read: Latest News on Military Special Needs Trusts.

Military members had been able to designate members of their families to receive a percentage of their retirement benefits (Survivor Benefit Plan annuities, or SBPs) after their death. However, persons with a disability who receive income from an SBP run the risk of losing their SSI benefits since that income was often higher than the income cutoff for receiving SSI and Medicaid benefits. At the same time, the income from an SBP is too low to allow beneficiaries to pay for needed services and sustain themselves. The language in the regulations governing SBPs stated that only “natural persons” (meaning human beings, and not legal entities such as special needs trusts) could receive SBP funds. Special needs attorneys, disability advocates, and military member organizations mobilized for years to make changes in the law. Legislation correcting this was included as part of the Carl Levin and Howard P. ‘‘Buck’’ McKeon National Defense Authorization Act (NDAA) For Fiscal Year 2015 and passed in December of 2014.

Sec. 624 of the NDAA of 2015 allows for annuities funded by SBPs to be placed in supplemental and special needs trusts specifically as follows:

subparagraph (A) or (C) of section 1917(d)(4) of the Social Security Act (42 U.S.C. 1396p(d)(4)) for the sole benefit of a dependent child considered disabled under section 1614(a)(3) of that Act (42 U.S.C.1382c(a)(3)) who is incapable of self-support because of mental or physical incapacity may elect to provide an annuity to that supplemental or special needs trust.’’

The legislation now gives military families the flexibility to ensure that their family member with a disability can receive the benefits of the SBP in a special trust while continuing to receive income and services through means-tested government programs such as SSI. The trusts allow recipients to afford life expenses above and beyond those provided by SSI and Medicaid.

Questions on Implementation

There are, however, some drawbacks to this provision under the NDAA 2015. Shane Ostrom, a former military officer and Certified Financial Planner who blogs for the Military Officers Association of America (MOAA), points out some possible implementation issues which will impact individual military families:

“We do not know if current SBP participants will be given an option to change their SBP beneficiaries to the trust.

For all the retirees with incapacitated children who did not enroll in SBP at retirement, we do not know if the DOD will consider an open season enrollment to allow people to take advantage of this new beneficiary category.

We do not know if survivors currently receiving SBP income will be allowed to divert their income to the new trust beneficiary.

We don’t know how members coming up on retirement and making the SBP decision will be managed.”

These implementation questions are not trivial. It’s very difficult for military members to make changes to their elections for Survivor Benefit Plans. Current policy requires requests for changes to SBP elections be approved by the Board for Correction of Military Records.  No changes can be made after the military member’s death.  Some policy changes may be needed for more military families to benefit from the law.

What Families Should Consider

Military families also need to seriously consider the requirement established through the language implementing the Special Needs Trust. The NDAA of 2015 established that SBP-funded trusts must abide by provisions of the Social Security Act regarding the use of Government Funds.  What this means simply is, once the individual who is disabled dies, remaining funds in the trust will revert to the State. This is called “recovery” and the State recoups all of the monies that were spent on the beneficiary through government entitlement programs.  With this provision any remaining assets can’t go to other family members or to an entity the service member may have identified, but instead is given over to the State to recoup costs.

The most difficult question of all still remains after the passage of the act: Does the wording of the legislation leave a loophole? Some observers have noted that the language might allow income from these trusts to be counted for purposes of receiving Medicaid and other means-tested benefits. Military families interested in funding supplemental or special needs trusts with an SBP annuity should get professional advice before proceeding.

The Branch-MPTAC is closely monitoring emerging news on this situation, and will keep you up-to-date on what’s happening on the topic of military families and special needs trusts.


National Academy of Elder Law Attorneys: (external link)

Military Officers Association of America (supported passage of this legislation): (external link)

Consortium for Citizens with Disabilities: a number of notices on this topic (external link)