Pooled and Special Needs Trusts: What are they and how are they used?

Pooled and special needs trusts are often discussed together because they serve the same goal: both are authorized by the Social Security Act to allow disabled and/or low-income people coming into money to set it aside in a way that preserves their access to public benefits. These benefits, such as Medicaid and Supplemental Security Income, or SSI, are unavailable to those whose income exceeds certain thresholds. Using a pooled trust or a special needs trust ensures that should an individual otherwise qualified for benefits inherit money or receive it through some other source (for example, an award of money in a lawsuit), he or she will not become ineligible as a result.

A pooled trust, also called a "(d)(4)(C)" trust in reference to its location in the Social Security Act, is unique in that it is established and managed by a non-profit organization. As indicated by its name, a pooled trust consists of contributions by various individual participants combined for purposes of management; however, each participant maintains an individual account within the pooled trust umbrella. These accounts can be either self-settled, meaning funded with the beneficiary's own assets, or third party-settled, meaning funded with assets of another party. Distributions from a pooled trust to each individual are used to supplement the person's public benefits, and can be used for a wide range of expenses. A pooled trust has no age restrictions, and may be created by the beneficiary in addition to various other actors, including certain relatives and the court.

One important thing to note about pooled trusts is what happens to the funds in a beneficiary's account when he or she passes away. The organization operating the trust is permitted a portion of this amount to manage for the benefit of its other beneficiaries. Next, Medicaid is entitled to any amount that was expended for medical assistance received by the decedent account-holder during his or her lifetime. The remainder is the property of the beneficiary's estate and/or his or her designated recipients. For a listing of pooled trusts in each state, click here.

A special needs trust serves the same general function as a pooled trust; however, it is a stand-alone account. This type of trust is also referred to as a "(d)(4)(A)" trust. If the trust is self-settled (funded by the beneficiary), it may only be used by individuals under age 65. If the trust is third party-settled, or funded by someone other than the beneficiary, there is no age restriction. In any event, the special needs trust may not be established by the beneficiary; instead, that individual's parent, grandparent, guardian, or a court must set up the trust for the individual.

In addition to these restrictions, this type of trust has the potential disadvantage of cost: a trustee, either a person or an entity, must be selected to manage the trust for the trust beneficiary, which can prove expensive. (In a pooled trust, since administrative costs are spread out among many individuals, these expenses are often lower.) On the other hand, this arrangement could be preferable to a person who desires a more personal approach to trustee management of his or her assets. Moreover, with a standalone special needs trust, there will be fewer third party claims to the amount remaining in the trust after the beneficiary's death. If the trust is self-settled, Medicaid is similarly entitled to reimbursement for medical services rendered during the decedent's lifetime - but there is no amount owed to any organization, as with a pooled trust. If the trust is third party-settled, Medicaid has no claim to the assets at all.

The type of trust selected will vary by individual needs and circumstances. When used properly, a pooled trust or a special needs trust can serve as an important estate planning tool to ensure continued access to important public benefits.

Basics of Estate Planning: Critical Care/Critical Illness Riders: What are they and why are they currently surging in popularity?

One of most confusing area of people's finances revolves around insurance, particularly life insurance. There are numerous types of products from whole to term to long-term care and that doesn't even count the varying overlap between the various products. One product that operates in the overlap of various insurance products is a critical care rider.

A critical care rider (also called a critical illness rider) is an increasingly popular option among Americans of all ages that can be purchased as part of a life insurance policy. The purpose of this type of rider is to accelerate the payment of life insurance policy death benefits to the policyholder in the event that the person is diagnosed with one of a number of critical illnesses. These include cancer, stroke, heart attack, major organ transplant, and others. These riders are attractive as part of the overall life insurance plan because they provide the potential for asset distribution in the event that the funds are needed during life for certain medical emergencies, as opposed to only being paid out after death. Not only are the riders flexible in this regard, but there are no restrictions on the way the account disbursement may be spent, which makes them an even more desirable option (although it is important to note that daily distributions over a certain threshold amount, currently $330, will be considered taxable income).

In most cases, in the event of a critical illness trigger, the insured has the option of accelerating all of the allowed benefit amount or a part of it. If he chooses the former, the life policy terminates at that time and the full amount he is allowed under the rider's terms is paid out. If, on the other hand, the policyholder takes only a portion of the accelerated amount, the policy will continue on as before, but with a smaller face amount. As a third option, if the account-holder does not wish to accelerate his benefits under the policy, he can choose to keep the entire amount in the account to be paid out to its beneficiaries upon his death as originally envisioned. (This would also obviously be the case if the insured is fortunate enough never to trigger the rider provisions in the first place.)

Some things to note: firstly, the terms of the rider will vary somewhat between insurance companies, although the basic premise remains the same. For example, some policies may require that the rider have been purchased a certain amount of time before the illness trigger actually occurs. Secondly, the actual amount offered upon a critical illness trigger will vary by individual and be based on various factors, most importantly the insured's life expectancy at the time of diagnosis and the diagnosis itself. The accelerated amount is typically a fraction of the ultimate sum of death benefits that would have been paid out had the acceleration not occurred. Thirdly, depending on what stage of life the would-be policy-holder is in, he or she might consider purchasing a life insurance policy with various provisions for acceleration: for example, a critical illness acceleration element in addition to a long-term care element. The rider described here may increase the overall cost of the policy by around 15%. However, for many, the flexibility and utility of the critical care rider may far outweigh its costs.

Estate of the Month: Donald Sterling

Last month's estate was about on of the most beloved Hollywood actors, May's estate of the money is about one of most hated professional sports owner of all time. If you have not been living under a rock and have turned on the TV, surfed the web or picked up a newspaper (I know I am dating myself there) recently, you'll probably recognize the name Donald Sterling instantly. He has been splashed across the front pages for the last month or so. Sterling, the L.A. Clippers owner, caused a media frenzy when his derogatory comments toward African-Americans in a conversation with his girlfriend were leaked to the gossip website TMZ.com. The NBA took swift and decisive action in response to Sterling's choice words: NBA Commissioner Adam Silver fined Sterling $2.5 million, banned him from the NBA for life, and indicated that he would do everything in his power to force a sale of the team.

Silver's display of strength as NBA Commissioner was followed by a fair amount of uncertainty. Questions arose about the extent of the NBA's power to compel a sale under the circumstances of the Sterling situation. Further complicating the issue is the fact that Sterling does not own the Clippers outright - instead, the team is owned by the Sterling Family Trust, of which Sterling's estranged wife, Shelly, has a 50% interest.

Over the last two days, news has come out to greatly change the dynamics of Sterling's ownership of the Clippers. Yesterday, May 29th, news reports had been issued that Shelly Sterling had agreed to sell the Clippers to Steve Ballmer, the former CEO of Microsoft for $2.0 billion dollars. How could she take such action without Donald Sterling's approval? Well, just this morning media outlets are reporting that Donald Sterling has been declared mentally incapacitated under the terms of the family trust the couple owns the team through. Under those terms, Shelly would be the sole acting trustee.

Outside of the rapidly changing news of the last 48 hours, many commentators have spent the last month debating the effect of potential ambiguities in the NBA's governing documents that Sterling could possibly exploit to avoid, or at least drag out, the process of terminating his ownership. The NBA's Constitution provides for this process in the event that an owner "fail(s) or refuse(s) to fulfill its contractual obligations to the Association." It allows for removal of an owner in the event that three fourths of the other league owners vote for termination. However, this vote must be based on, in relevant part, a willful violation of the league's constitution, bylaws, or other documents. The word "willful" could be argued both ways in a dispute between Sterling and the league, as Sterling made the comments of his own accord but did so in a private conversation that was not intended to become public knowledge or have any effect on his team. While likely moot given the last 48 hours, a possible alternate route for the NBA in the event that Sterling takes the league to court, some news outlets are reporting that upon purchasing the team in 1981, Sterling agreed to separate contracts holding him to the highest moral and ethical standards in his management of the Clippers. If this strategy were in fact a realistic option, it likely would be a lost cause for Sterling for obvious reasons.

If the news reports are wrong but Sterling still decides to sell the team of his own accord. Commissioner Silver has indicated that Sterling has this option if the sale occurs before the league-scheduled June 3 termination hearing.

While many people have focused on Sterling's belief that he did nothing wrong, as he stated in a recent CNN interview, one of the overlooked aspects of Sterling's reason to fight to retain the team relates to taxes he would have to pay. Sterling originally bought the team for $12.5 million in 1981. If Steve Ballmer purchases the Clippers for $2.0 billion, Sterling would have a capital gains tax hit of approximately 33% ⁱ on the difference between his original purchase price plus improvements and the sales price. Ignoring any sophisticated tax planning that could be used to minimize any taxes and ignoring any improvements he made to the purchase to increase his basis and that Sterling owned the entire team that would mean he would pay approximately $660 million in capital gains tax. Now, if he died in the near future, the remaining portion of the proceeds from the sale of the Clippers would be part of his estate and liable for federal estate taxes. At a 40% rate, the remaining proceeds owned by the Sterling estate would mean approximately another $532 million in taxes, via the federal estate, would be paid by Sterling. From a $2.0 billion sale, almost $1.2 billion would go to taxes. Channeling my inner Kenny Anderson and Patrick Ewing and say that is not "walking around money!"

However, if Sterling had died prior to being forced to sell the team, and assuming the sales price was $2.0 billion, there would only be federal estate tax liability to the tune of $800 million. Further, his heirs would get a step-up in basis to the value of the Clippers at the date of Sterling's death. So, Sterling had 400 million reasons to fight being forced to sell the Clippers.

Even with the latest news, I don't think this is over. Stay tuned!

ⁱThe 33% capital gains tax is a combined rate determined from the federal capital gains tax and California state capital gains tax rates