Supplemental Security Income (SSI) is a federal program that helps people with disabilities and very low incomes pay for food, clothing and shelter. Unlike some other disability benefits, SSI is a “needs-based” program, which means that only people who meet very stringent income and asset standards can qualify for benefits. (For an overview of SSI’s rules, click here.) SSI’s asset requirement is particularly low. In order to receive benefits, an applicant must have less than $2,000 in her name. Most items that can be liquidated to provide food or shelter will count against this asset limit, but an SSI applicant is allowed to own a home and a car if it is used to transport her.
Because SSI’s asset limit is so low, it is very hard for most people to qualify for benefits. But what if an applicant is close to the limit? For example, let’s say that someone with a disability has $10,000 in her bank account. Why can’t she give away $8,001 to a friend in order to qualify for SSI immediately?
Prior to 1999, SSI applicants could transfer their resources away and immediately qualify for benefits. However, in that year Congress passed the Foster Care Independence Act which imposed a transfer-of-assets penalty on SSI applicants. Since that time, it has been almost impossible to give money away and easily qualify for SSI.
How does the transfer penalty work? In a nutshell, when a person applies for SSI he is asked if he has given away any assets for less than fair market value during the previous 36 months. This broadly worded question can encompass a lot of different scenarios that may not be immediately obvious at first glance. For instance, if an applicant owns a car worth $5,000 and he sells it to his sister for $1,000, he has made a transfer for less than fair market value of $4,000, which represents the difference between the market value of the car and what his sister paid for it. Of course, in most cases the transfers are a garden variety gift of cash to a third-party — most of the time, the applicant does not know that transferring assets can be a problem or he might not have even anticipated applying for SSI in the first place.
If an applicant has transferred assets, the Social Security Administration (SSA) will divide the value of the transfer by the available SSI benefit. The resulting number is called the “transfer penalty period,” and it represents the period of time during which the applicant will be ineligible for benefits. Let’s take another look at the transfer of the car discussed in the previous paragraph. In this case, the applicant made a $4,000 transfer. Now let’s assume that the SSI benefit in that applicant’s state is $800 per month (this is probably too high, but the numbers are easier to work with). The SSA will divide $4,000 by $800 and end up with the number five — this is the number of months that the applicant will have to wait before he can obtain SSI benefits and the accompanying Medicaid coverage that comes with them.
In 2011, Justice in Aging (formerly the National Senior Citizens Law Center) made the argument that this transfer penalty unfairly harms our poorest citizens because it can result in very large penalty periods. Justice in Aging points out that the SSI transfer penalty mirrors the transfer penalty provisions for Medicaid applicants who are seeking coverage for long-term care. Justice in Aging explains that while “the number of months of Medicaid ineligibility is determined by dividing the amount of the uncompensated transfer by the average monthly cost of private pay in a skilled nursing facility, the number of months of SSI ineligibility is determined by dividing the amount of that same uncompensated value by the much lower SSI monthly payment rate.” Therefore, “[a]n uncompensated transfer of $7,000 in the District of Columbia would result in one month of Medicaid ineligibility (based on skilled nursing costs of $6,300 6,800 per month), while the same $7,000 transfer would result in 10 months of SSI ineligibility ($7,000 divided by the DC SSI payment rate of $674 for an individual equals 10.39, which rounds down to 10 months).”
Despite Justice in Aging‘s pleas, it does not appear that Congress will even consider getting rid of the transfer penalty anytime soon. This means that potential SSI beneficiaries should be very cautious before making uncompensated transfers of assets prior to applying for benefits. Because some transfers are not penalized (like transfers into properly structured special needs trusts), anyone contemplating applying for SSI should talk with his or her special needs planner to discuss their options.