William Rothrock, CSSC, Rothrock Settlement Consulting
| April 23, 2021
The Tax Cuts and Jobs Act (TCJA) of 2017 altered the tax regime for those who utilize special needs trusts (SNTs) or any trust after Jan. 1, 2018. CPAs who have clients that have SNTs in place for a dependent should be aware of some options that can mitigate that impact.
Impact of the TCJA
At the outset, it’s important to understand the following:
- Special needs trusts’ available assets are usually not sufficient to meet 100 percent of a client’s long-term needs.
- Special needs assets are for the sole benefit of the disabled client.
- The benefits provided by government agencies must be protected and accessed to maintain the client’s life.
With these in mind, we can explore the impact of the TCJA on SNTs and other trusts. The TCJA eliminated the deductibility of two major expenses — administration and asset management fees no longer receive above-the-line deductibility as they had in prior years. This profound shift in tax regime instantaneously reduced the long-term survivability of the SNTs and demands a re-evaluation of how SNTs should be funded in the future.
The TCJA essentially placed all fees incurred by an SNT under review. Any action that does not assure the long-term survival of the SNT lacks fiduciary footing. What can be done prudently to guarantee the SNT lasts the full life of the client given the current tax regime?
Strategies to Mitigate the Impact
To sustain the portfolio, you must mitigate the taxes and fees absorbed by the special needs trust. There are two potential avenues to address this. First, you could place the assets in a standard investment and reduce the fees incurred to zero. Second, you could fund with a structured settlement and leave fees at customary levels. A structured settlement incurs no taxation or fees, provides guaranteed lifetime income with the added benefit of matching cash flow to needs.
It satisfies all the requirements necessary to mitigate TCJA’s tax change and permits the disabled party to concurrently receive federal and state assistance. The special needs trust’s assets exist for the sole support of the disabled client and any remaining assets flow to Medicaid for repayment of services they rendered the client. Medicaid’s ownership of residual assets of the SNT mandates that the only fiduciary goal should be guaranteeing the assets are available for the life of the client.
Thus, only by reducing non-deductible fees which now act as a drag on asset appreciation, can the lifetime availability of the SNT be assured.