0:02 Who are you? And where are you going? What do you want? Hello and welcome to Trust and Estates weekly. I'm your host Kevin Bemel and we are here every Monday at 10:00 a.m. Pacific time to talk about estate planning and trust and uh probate administration both from the standpoint of handling
0:39 your own financial affairs and from that of professionals like me who help you do it or who help people do it. So uh today we're I'm going to go more deeply into a subject that I covered um sometime ago. So back in um I'll give you the exact date. October of um uh 16th of 2023, I did a I did a show called ensuring care for disabled loved ones in which I talked about a vehicle called a special
1:14 needs trust. So like all trusts um it it is a it I'm not going to go into the the details of it cuz you can watch um the the uh the October 2023 episode. Basically, it's a vehicle for providing a benefit uh to somebody. Now in this case, uh a special needs trust is um an an irrevocable trust meaning once it's set up, that's it. It's done. You can't change it. Uh and it's it's done so in order to
1:51 preserve the ability of the beneficiary typically someone who's disabled um from uh to protect to protect their ability to get uh government benefits like uh Medicaid or SSI supplemental um security income while still uh getting some private funds as well. Okay? And and and because the uh the special needs trust is a separate entity than
2:28 the beneficiary so they don't own that money. They can't direct how the money is distributed from the trust so they have no control over it. And so therefore, it doesn't impede for the most part um their ability to um receive government benefits while at the same time uh benefiting from being a beneficiary under the special needs trust. So that's the basic idea behind a special needs trust. If you want to know more about um those those details and and and the
3:04 parties and such, so there'll be a link in the show notes to the show that I did back in 2023 and I would I would recommend that you you do take a look at that. And if some of the things that I mentioned in this don't quite make sense and even though you've seen the show before, um you know, take take a minute and and and uh you know, go back and review it. It's it's I think about I want to say 25 30 minutes. So it's it's not um a particularly long show. Um but it this is a um an excellent estate planning vehicle um
3:41 especially if you have children um or uh just family members in general who um have a a a chronic uh disease or a chronic condition and they need uh um you know, they need ex- extraordinary care um and and you want to be able to provide that to them or at least help provide it to them while at the same time not putting them in a situation where as I said they'll lose their whatever government benefits they're getting. So Okay, so
4:17 what I'm going to talk about are is the difference between what's called a first-party and a third-party special needs trust. Okay? And um the the the diff the primary differences lies in um who funds a first-party versus a third-party special needs trust and and their purpose. Okay? So let's look at a first-party special needs trust first. So in a first-party special needs trust the
4:54 disabled individual himself funds the trust with his own assets. Okay? So um it could be an inheritance, could be some sort of lawsuit settlement, could be savings. It it could even be money uh you well, uh savings money that was earned you know, through working and now has been invested and and and and that money now you know, is is you got kind of a pot of money there. Okay? Um and the purpose of the first-party
5:33 special needs trust is to shield the individual individual's assets the the as- you know, the person who this first party, the person who creates the trust is to shield their assets while still maintaining eligibility for needs-based government programs like Medicaid and SSI. Okay, now notice not Medicare. Medicare is not needs-based. Everyone at at age I believe it's 65 is um eligible for Medicare no matter what they make. Okay? But um
6:10 Medicaid is a needs-based health health insurance plan. It's administered by each state although it's essentially a federal program. It's a a good deal of the funding comes from the federal government. SSI uh supplemental security income is is um administered by the Social Security Administration. It's a federal program. Um but it's funds that go to individuals that have some sort of disability. Okay? And again, it's a needs-based or a means-tested program. Okay, so the
6:47 requirements for a first-party special needs trust are first of all, the beneficiary has to be under 65 years of age at the time the trust is established. Okay, second it must include a Medicaid payback pro- provision meaning that any funds remaining in the trust at the time the beneficiary dies must be used to reimburse Medicaid for services provided
7:23 during the beneficiary's lifetime. Okay? So if the beneficiary dies um and there's let's say $100,000 in the trust and over the beneficiary's life the beneficiary received $200,000 in Medicaid benefits, that $100,000 is going to go to reimburse Medicaid for those benefits received. Okay? And finally, a first-party special needs trust needs to be managed by a trustee. Okay? And the beneficiary
8:01 cannot be that trustee. A trustee who uses the assets for the sole benefit of the disabled individual. Now typically, that trustee will have very broad authority. Okay? Um there may or may not be a trust protector um which that'll vary jurisdiction by jurisdiction because uh trusts are created under state law so those laws do vary state to state. Okay? Um but the the the primary idea is the
8:36 assets in the trust are used for the sole benefit of the disabled individual not for anyone related to that individual, not for the trustee of course. The trustee is acting as a fiduciary etc. Okay? So that's a first-party se- uh special needs trust. Now the other type is a third-party special needs trust. And in a third-party special needs trust excuse me. Uh a little bit uh uh sneezy today. So the it's funded with assets that belong
9:12 to someone other than the disabled individual. Could be a parent, could be a grandparent or another relative. In fact, it doesn't even the person doesn't have to be related to the the the beneficiary at all. Okay? The it's just notice the difference in a first-party special needs trust, the beneficiary himself is providing the funds to create the trust. In a third-party special needs trust, it's someone other than the beneficiary. Now typically, it will be a
9:48 parent or a grandparent. I mean that that's certainly what I've seen in in the special needs trusts in which I've been involved. Um I've never seen an unrelated third party uh use money, but just because I've never seen it doesn't mean it can't happen, okay? Now, it's the purpose of a third-party special needs trust is to create additional financial resources for the disabled individual, again, without jeopardizing their eligibility for government benefits. So, let's say
10:24 there's a parent and and let's say I'm so let's say the third-party funder is a parent, right? And if they give the money directly to the beneficiary, their child, their child's uh um net worth may rise above the level at which they would be eligible for Medicaid or supplemental uh security income. So, instead of doing that, the uh the parents set up a special needs
10:59 trust into which these funds flow, and that that trust is again, it's a separate entity, okay? So, it doesn't impede the their child from continuing to receive government benefits. And and that's typically the case. Typically the case uh at least in the cases I've seen, the beneficiary is already receiving government benefits, okay? And if they were to get this, you know, chunk of money, they would lose those benefits. And if and if you can imagine for someone who has a chronic illness,
11:34 um and, you know, the the uh health care costs can be immense, frankly. And so, the ability to get government assistance to pay for that um is is is important, okay? It would it would break uh you know, all but the, you know, wealth most wealthy among us. And keep in mind, we pay taxes to support these programs, and so, uh you know, that they're they are there to be used. Okay. So, key features of a third-party special needs trust. First
12:11 of all, there is no Medicaid payment payback required. So, upon the beneficiary's death, the remaining in funds in the third-party special needs trust can go to other designated beneficiaries, okay? So, um it it it it it's the the wealth can be passed on, in essence. Okay, now, it can and and it can be set up really at any time during the beneficiary's lifetime or as um um part
12:47 of a a will, so it's a testamentary trust that'll come into existence at the time uh the funder uh passes away, not unlike a pour-over will, although it's it's this is uh it's not strictly a pour-over will in that sense, okay? Um similar to a first-party special needs trust, a third-party special needs trust has to be managed by a trustee who is not the beneficiary, okay? Um um but it gives more flexibility
13:24 to the beneficiary, okay? So, let's let's sort of look at these um a comparison of these uh side side by side. Let me let me try something here. No, I'm not going to be able to do that, okay. Well, I was going to try and bring up the little um comparison uh I I have here on the uh on on the screen. Actually, I just thought of a way to do it.
13:59 Hold the phone here. I'm going to create a um um um a PowerPoint slide. We'll see how quickly this thing comes up. Uh okay, here we go. Create. There you go. Close. Um and we want a new slide. We just want a You know, we just want a blank slide. And let's put in a text box.
14:34 And we'll go ahead and copy this here. Oh, wow. It turned it into its own This is This is pretty cool. It turned it into its own uh uh uh oops. Just wanted to do it. Okay, no problem. So, All right. So, now let's go ahead and um oops.
15:10 Here it is. Okay. And uh now, I'm going to go ahead and upload this. There we go. Should just take a moment. And and this way you'll have you'll have a visual in front of you, so you can really see uh you know, the differences. It's It's churning. It's churning. It's churning. It It is a PowerPoint, after all, and
15:45 and so, uh you know, it has to take its its sweet little time to upload. Come on now. You know you want to upload. Uh Well, or maybe it's not going to. See, I get these bright ideas on the fly, and uh and and and they uh you know, they they they they stymie me. Up, there it goes. Okay. And here we are. Okay, so, here you go. So, you can see, okay, this is a comparison of the two. First-party
16:20 special needs trust, third-party special needs trust. So, funding source, first party, beneficiary's own assets. Third party, third party's assets, okay? Medicaid payback is required under a first-party special needs trust. It's not required under a third-party special needs trust, okay? Age restriction, uh must be under 65 at creation for a first-party special needs trust. No age restriction to a third-party special needs trust. Okay, remaining funds,
16:55 okay? Reimburses Medicaid after death. That's the Medicaid payback we saw under point number two. Now, um I I I haven't looked into this, but if the trust had such huge assets that it paid back everything that Medicaid had spent, and then there were still assets left over, so then I suspect that those remaining assets could pass to other heirs, okay? But that's rarely ever going to be the case, because of the cost of health care, okay? And um in the in the case of a
17:30 third-party special needs trust, since there is no Medicaid payback, so remaining funds pass to other heirs. And then finally, um it the it it really the the purposes are really the same. They they they, you know, voice them they're voiced differently here. Um and and this was this was a uh summary that I asked chat GPT to put together, but it's really to preserve government benefits um while providing um well, I guess they're slightly
18:05 different. So, in the case of the first-party special needs trust, it's to preserve preserve benefits um while um the first party not having to give up their wealth to, you know, some un you know, where can still benefit from from whatever uh assets they have, okay? Just not directly. In the case of a third-party special needs trust, it's to provide extra resources without risking government benefits. So, so there's a a slight difference between the two. But
18:41 in the end, the idea is with a special needs trust is um a someone with a disability is being provided with benefits in a way, pri- private benefits, in a way that doesn't uh risk losing government benefits, okay? So, um you know, kind of a kind of a short show today, um and um uh I'll go ahead and There we go. Um and so, uh but wanted to cover that so you could understand in in a little bit more depth um about special needs trusts. Um
19:19 as So, I don't know if you've been following this, but as medical care gets better and better, uh people who might have died as as children or as teenagers are living longer and longer lives, and they're living lives that give them a lot more opportunity to do things. Um however, the health costs uh their health costs are much greater as a result um because although
19:54 they may survive an illness that otherwise would have killed them, there are ongoing health challenges from which they suffer, and so they need resources in order to deal with those various uh you know, health matters. And so I think, you know, more and more special needs trusts are going to be created in order to help uh people in that situation live out their full lives better than they otherwise might have. And so I encourage you um to i- i- i- if you have
20:32 a child, God forbid, or or other relative um who is disabled, consider a special needs trust to help them. And if you are, you know, doing estate plans, hopefully you know about this vehicle, but uh dig into it and and really see how it can benefit your your clients. Um so um that's that's kind of my message for for today. If you have any questions, comments, uh thoughts about the show, good or bad, um always uh please feel
21:07 free to drop them in uh our social media. Links to all of them will be in the show notes, um and always happy to hear them. Um I also want to invite you. Um I have a LinkedIn group called Trust and Estates Experts, and it's where where you can go to get questions answered from other people in our field. So especially if you're a a practitioner helping other people, um it's a great place to go if
21:43 you have a question about something or just want to get input on something. So just go to LinkedIn, and under groups search Trust and and and Estates Experts, um and and and request to join, and I'll I'll or or one of the other admins will admit you to the group. And then also it's a place where if you if you've written an article, or maybe you've you're doing a podcast like like like mine or on the same subject as mine, I should say, um you know, consider posting your content there as well. It'll broaden your
22:18 audience and help out more people. So um again, that's Trust and Estates Experts on LinkedIn. And let's see. Okay, so coming up this week uh tomorrow, Tuesday, at 10:00 a.m. is my show Business Lessons from the Military, and I'm going to be talking about the Tet Offensive, um which uh um celebrates its um uh anniversary um in the in the next few days. I believe it's on I want to say
22:53 the 31st of January. And my topic is Tactical Loss, Strategic Victory. So if you do not know the history of the Tet Offensive, which happened during the Vietnam War, um I invite you to tune in. I think you will find it quite interesting. On Wednesday of this week at 10:00 a.m. uh is my show People Making Money, and I'm my topic is Adapt or Founder. So you can always see you can always hear the the navyness in in my shows. Founder in the sense of a boat running ashore. I'm going to talk about three ways you can
23:30 use AI to save time. And then on Wednesday at 5:00 p.m. Pacific time is my every other week show Jiggers Is Place. We're going to have a cocktail and talk about a great book, Ivanhoe. So if you've if you've never read the book, or for that matter seen the movie, uh join us to talk about one of the great adventure tales e- ever written. So thank you so much for joining me today here at the beginning of the week. Wishing you a wonderful rest of the day,
24:05 and signing off as I always do, Marie Darling, you are my bell. Courage at all times, my friends.