Chang: Hi. My name is Chang Chae, and I’m an ACTEC Fellow in Los Angeles, California. And I’m here today with Stuart Zimring, also an ACTEC Fellow in Los Angeles, California. And Stu is here to discuss – or help us better understand Special Needs Trusts (SNT). Thank you for joining us today, Stu.
Stuart: My pleasure, Chang. Good to see you again.
Chang: Can you refresh our memory regarding Special Needs Trusts, Stu?
Overview of Special Needs Trusts
Stuart: Sure. Special Needs Trusts are trusts that contain provisions that are designed to protect the assets in that trust in a way that continues to preserve public benefits that a person with a disability who is the beneficiary of that trust may be entitled to. We also use them sometimes when the person may not have the kind of disability that entitles them to public benefits but they are unable to handle their finances themselves and need some assistance in that regard.
And because of their situation, they may in the future become entitled to public benefits like Supplemental Security Income, SSI, or Medicaid. And we want to make sure that those benefits aren’t affected, at the same time, keeping these funds in the trust available to give them a better quality of life.
Chang: That’s very helpful, Stu. In basic terms, can you tell us about the differences between different types of Special Needs Trusts?
Types of Special Needs Trusts
Stuart: There are two basic types of Special Needs Trusts, and the difference is the source of funding for the trust. In what is called a “First-Party Trust,” the person who is the beneficiary of the trust, the person with a disability, has received a sum of money or an asset, stock, something like that, that is in such an amount that it may disqualify them from public benefits. For example, the level for being disqualified from Supplemental Security Income (SSI) is $2,000. If someone gets a personal injury settlement or a medical malpractice settlement that could be as low as $15,000, they’re going to be kicked off their benefits.
So, in order to preserve those, they have the right under the law to put those funds into a First-Party Special Needs Trust. It contains their assets. The government says if you do that, you will not lose your benefits. But there’s a quid pro quo; we ask for something in return. And that is, when you die, the trust must say that our state Medicaid agency gets whatever’s left in that trust as repayment for all the funds we paid on your behalf. That applies to first-party money, money that belongs to the person with a disability.
If Mom and Dad or Grandma and Grandpa want to give a gift to this person with a disability or leave an inheritance to that– to that person with a disability, they can set up what is called a “Third-Party Trust.” The funds are coming from a third party. They don’t belong to the beneficiary, but they are used for that beneficiary’s benefit.
In those cases, the government is not entitled to any kind of reimbursement because those funds never belong to the person with a disability. And, in a moment, we’ll talk about a way to handle the funds from those small settlements or gifts that come in in a way that doesn’t necessarily involve creating a full-blown Special Needs Trust.
Chang: Stu, are there practical tips for people in determining which Special Needs Trust they should use?
Tips for Determining Special Needs Trusts
Stuart: Sure Chang. The first basic thing is to make sure that you understand whether the money is first-party money or third-party money. You do not want to mix the two because the government is entitled to repayment for that first-party money, and Grandma and Grandpa or Mom and Dad certainly don’t want their money they’ve given into a Third-Party Trust to be paid back to the government unnecessarily. So, people should make clear when they’re talking to their estate planning attorney or their financial planner what is the source of the money that’s going to be going into this Special Needs Trust.
The second practical aspect of this is the cost. Special Needs Trusts are very technical, they’re very complicated. You usually need to have someone as a trustee who is experienced in handling these kinds of distributions and making sure they don’t adversely impact the beneficiary’s benefits. So, they can be very expensive. And, when you’ve got a relatively small first-party settlement or a third-party gift, you may not want to spend the money. It may not be practical to spend the money to create a full-blown Special Needs Trust.
Pooled Special Needs Trusts
So, in these cases, you have the ability to use what is called a “Pooled Special Needs Trust.” Pooled Special Needs Trusts work like savings and loan associations. They’re created by charities, as required by law, they are trusted by professionals. And, in these cases, a person with a small amount can open their own sub-account Special Needs Trust within the larger pool, and that’s how they get the name Pooled Special Needs Trust, and have all the same benefits at a fraction of the cost of setting up an individual Special Needs Trust. And these become extremely useful when you’re dealing with these smaller amounts.
Chang: Stu, what about retirement plans in light of the recent changes in the law?
Retirement Planning, Special Needs Trusts, and the SECURE Act
Stuart: Well, we saw, when the SECURE Act was adopted a couple of years ago, that there was a major change in how people who inherit IRAs or 401k plans from someone have to use the benefits in that plan. Under the SECURE Act, in most cases, the person inheriting that IRA has to use up all those funds within 10 years. There is an exception under the SECURE Act that applies to people with disabilities or to people with chronic illnesses that enables them to continue to use the lifetime payout.
So, this becomes an extremely valuable tool where you can leave the IRA to a Special Needs Trust for a person who has a disability and those funds will continue to be entitled to the lifetime stretch out, which can have great tax advantages. This is something that if you’re going to do that, you need to consult with your attorney and with your financial planner before going forward because crafting the beneficiary designation becomes a complicated task.
Chang: Thanks, Stu. This has been very informative and helpful, and I thank everyone for joining us. Thank you, Stu, for taking time out of your busy schedule today.
Stuart: My pleasure, Chang. Thanks for asking me. Have a great day.