On December 3, 2014, the House of Representatives passed legislation that would allow qualifying disabled persons to establish tax-free savings accounts similar to 529 plans to pay for a host of expenses, including, but not limited to, housing, transportation, and medical expenses.  The Achieving a Better Life Experience (ABLE) Act of 2014 is expected to be approved by the Senate, and would be effective for tax years beginning after December 31, 2014.

Similar to 529 Plans, each state could elect to establish an “ABLE” program.  Contributions to the ABLE account could be made by any person.  Such contributions would not be tax deductible and would be limited to $14,000 annually.  Income earned by the account that is either reinvested or distributed to an eligible disabled individual would not be subject to income tax.  The account could hold a balance of up to $100,000 without being considered an asset for eligibility under means-based benefits programs, such as Social Security Income (SSI) and Medicaid.

Similar to 529 Plans, the law would contain provisions dealing with distributions for non-qualified expenses and provisions dealing with what happens to the ABLE account funds on the disabled individual’s death.

This legislation presents an invaluable planning opportunity for families with disabled children, as parents would be able to establish a tax-exempt ABLE account for their disabled child without such an account being considered for SSI and Medicaid.  Under current law, people with disabilities are generally disqualified from eligibility for SSI and Medicaid if they have more than $2,000 in assets.

The Individuals with Disabilities Education Act (“IDEA”) requires public schools to develop an Individualized Education Program for every student with a disability who is found to meet the federal and state requirements for special education.  IDEA requires that when an Individualized Education Program team is deciding where a student will receive his or her special education services, the team must first consider placement in the general education classroom before removing the child to a special education class or program.

New Jersey has been notorious for having one of the most segregated special education settings in the country.  New Jersey ranks 1st in the nation when it comes to placing our special needs students in self-contained classrooms for the majority of the day and in public and private special education schools.  Roughly half of all special-needs students are educated outside the general education classroom and one in ten special needs students is educated in an out-of-district school.  In addition, New Jersey ranks as the 5th highest in the nation when classifying its students as disabled.

Earlier this year, federal District Court Judge Mary Little Cooper approved a settlement agreement between a coalition of disability rights advocates and attorneys, including New Jersey Protection and Advocacy, the Education Law Center, the ARC of New Jersey and Statewide Parent Advocacy Network, and the Christie administration.  The agreement brought to close the 2007 federal lawsuit, Disability Rights New Jersey et al. v. New Jersey Department of Education, et al.  The Plaintiffs argued that “children with disabilities in New Jersey schools are not being educated in the least restrictive environment, in violation of IDEA and the New Jersey Special Education Statute.”

The settlement agreement requires “needs assessments” and “corrective plans” for the 75 New Jersey school districts with the highest rates of segregation, both in K-12 programs and preschool, encompassing roughly one-quarter of the state’s school children.  These districts must “determine the impact of their policies, procedures and instructional programs on the placement of students with disabilities.”  The goal of the program is to “inform district actions and address those areas that limit the district’s ability to educate students in less restrictive settings.”  Once the data from a district is collected, the New Jersey Department of Education, Office of Special Education Programs staff will meet with the school district’s staff to develop a training and assistance plan.

The Settlement Agreement can be found here.

In New Jersey, child support payments are considered an asset of the child, despite the fact that such payments are typically paid directly to the custodial parent.  For a child with special needs, direct payment of child support to the parent could disqualify the child for means based government benefits.  For this reason, some parents include as part of their divorce settlement agreement that child support payments be made to a First Party Special Needs Trust instead of to the custodial parent directly.

In a recent New Jersey Supreme Court case, the Court considered for the first time the role of a First Party Special Needs Trust for the benefit of an adult child who was unemancipated and to whom there was a continuing child support obligation.  In J.B. v. W.B. (A-111-11)(069972), the father who had been paying yearly child support payments to the mother, petitioned the court to allow him to instead pay the child support to a First Party Special Needs Trust.  He argued that this was in the best interest of the child because the child would not otherwise be eligible for means based government assistance if payments continued to be made to the mother.

 Although the Court denied the father’s petition because it did not set forth a specific plan and demonstrate how the trust would benefit this particular child, the Court did affirm the importance of First Party Special Needs Trusts in the child support context and described the circumstances under which a parent may modify a support agreement to pay child support to a First Party Special Needs Trust instead of to the custodial parent. 

Specifically, the Court noted that a “special needs trust in conjunction with a thoughtful plan to gain eligibility and receipt of government benefits. . . permits a family to provide health care, income, housing and vocational services for their disabled, dependent child.  The redirection of a child support obligation from a parent to a trust designed to meet the present and future needs of the dependent, disabled child should not be considered exceptional or extraordinary relief, if such plan is in the best interests of the unemancipated child.”  At a minimum, the Court stated that the trial court judge must have a complete understanding of the needs of the disabled child, the cost of those needs, and the current resources available to fund those needs.  If part of the plan is to depend on government assistance, then the judge must be presented “with a specific plan that addresses, among other considerations, eligibility rules, the time it will take to gain eligibility, and how long it will take to access benefits once eligibility is established.”

The Court also addressed the question of whether a guardian ad litem must be appointed for the disabled child who is the beneficiary of a proposed special needs trust.  The Court ruled that this decision is in the trial court’s discretion, but stated that in certain circumstances, appointing a guardian ad litem with specialized knowledge of special needs trust would be appropriate.

A recent New Jersey Appellate Division opinion determined the limits of a lower court’s jurisdiction with respect to deciding Medicaid eligibility.  The Appellate Division in In re A.N., 430 N.J. Super. 235 (2013), found that the Chancery Division exceeded its jurisdiction in making a Medicaid eligibility determination, holding that only the Division of Medical Assistance and Health Services (“DMAHS”), the designated state Medicaid agency, is authorized to determine Medicaid eligibility.

A.N. is a seventeen year girl old suffering from quadriplegic cerebral palsy who resides with her parents in the family home.  In 2000, her parents established a special needs trust (the “Trust”), funded with the proceeds of a litigation in which A.N. received a monetary award.  Bank of America is the corporate co-trustee of the Trust, along with A.N.’s parents.   No application for Social Security or Medicaid benefits have ever been made on A.N.’s behalf.  In 2006, A.N.’s parents’ sought to have the Trust purchase their home and also sought to receive compensation from the Trust for the care they provided for A.N.  In January 2010, BOA filed a Verified Complaint in the Chancery Division seeking instructions for purchasing the home and approving prior and future payments related to A.N.’s care and for maintenance of the home.  The Verified Complaint also sought instructions regarding A.N.’s Medicaid eligibility with respect to each payment.  Specifically, Bank Of America sought a determination that the subject transactions would not result in a loss of reduction in Medicaid benefits should A.N. seek them in the future.

DMAHS submitted a response to the Verified Complaint stating that it took no position on the relief requested by Bank of America, however, it maintained that “the court lacked jurisdiction to ‘make administrative determinations with respect to a person’s future Medicaid eligibility . . .’ [DMAHS] concluded it possesses the sole authority for making such determinations . . .” 

The Chancery Division held A.N.’s parents could be compensated from the Trust, authorized the Trust to purchase the home and despite DMAHS’ contention, ruled that the subject transactions would not deprive A.N. from receiving Medicaid benefits in the future.  

On Appeal, New Jersey Appellate Division overturned the portion of the Chancery Division’s decision addressing A.N.’s future Medicaid eligibility and determined that the Chancery “court went too far in purporting to render a binding and final Medicaid eligibility determination.” The Appellate Division held that “only the designated Medicaid agency is authorized to determine Medicaid eligibility.”  If A.N. applies for Medicaid benefits in the future and receives an adverse ruling, she would have the right of administrative review, including a fair hearing through the Office of Administrative Law and an appeal of the final agency decision, as of right, to the Appellate Division.   Interestingly, the Appellate Division also found that despite the fact that the Chancery Division does not have jurisdiction to make final Medicaid eligibility determinations, the lower court is permitted to “provide advice that the proposed transaction is consistent with those statutes and regulations and is unlikely to adversely affect Medicaid eligibility.”  There would, however, be no basis for an “advance final and binding Medicaid eligibility determination.”

Accordingly, any determinations regarding Medicaid eligibility made by a Court without a prior final agency determination may be viewed as instructive, but not conclusive or binding on Medicaid.