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Special Needs Trusts

Special Needs Require Special Planning

Special needs trusts are set up for individuals with disabilities whether from birth, illness or as a result of an accident. These types of trusts, which are often created by the parents of a special needs or disabled child, can be used to help with finances, and even pay for “extras,” such as transportation, therapy, or daycare, often without affecting eligibility for government benefits. Typically, the parents act as the trustees. While there is no limit on how much money you can put into the trust, to maintain eligibility for Supplemental Security Income (SSI) and Medicaid, the funds have to be used only for extras, not for housing, clothing, or food.

Funding a Special Needs Trust 

There are no limitations on how much money or what type of assets can be put into a special needs trust. In this respect, a properly written and executed special needs trust can be used to receive inheritances and gifts. Usually, the parents of the trust beneficiary are co-trustees and actively manage trust assets. In general, income from trust assets is taxable to either the trust (if the income remains in trust) or to the trust beneficiary (if income is paid out).

Special needs trusts are typically funded with gifts made to the trust by parents or others. Under current tax law, a taxpayer can make a gift of up to $15,000 in 2019 to as many individuals as he or she so chooses ($30,000 for a married couple) without incurring any federal gift taxes. This is known as the annual gift tax exclusion. Although the annual gift tax exclusion normally cannot be used for gifts made to trusts, some exceptions may warrant further exploration. In addition, the applicable
exclusion amount, which is the amount that can be excluded from estate taxes, could be used by an individual to fund a special needs trust. However, using the applicable exclusion amount during one’s lifetime eliminates its usage at the donor’s death.*

Besides making gifts to a special needs trust, it is also common to have a life insurance policy (or policies) transferred to, or purchased by, the trust. When the  insured (typically a parent) dies, the policy’s death benefit proceeds become part of the trust and are used for the ongoing support of the trust’s beneficiary (the dependent with special needs).

Another benefit of a special needs trust is that it avoids probate if the parent/trust donor dies. If the parents are the trustees, they can also name a successor trustee(s) to manage trust assets, including any inheritance.

Financial Stability for the Future 

A special needs trust can help ensure that a child or an adult with special needs will be provided for beyond the limitations of government benefits. Parents and caregivers may feel more confident in knowing that their child or other loved one will be cared for in the years ahead. Remember that the laws affecting the usage of special needs trusts vary from state to state. Be sure to consult a qualified professional before making any definitive arrangements.

*Under current law, federal estate taxes in 2019 have an applicable exclusion amount of $11.4 million and a top tax rate of 37% until the end of 2025.

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