This trust may benefit special needs individuals

May 1, 2016

Is there a way to establish a special needs trust that doesn’t reduce potential government assistance?

 

Is there a way to establish a special needs trust that doesn’t reduce potential government assistance?

Ongoing medical advances, an aging population, and the increase of conditions such as autism are combining to produce a growing need for a particular type of estate-planning tool: the special needs trust. 

Related: Can life insurance be used to pay estate taxes?

The aging couple whose adult child has severe autism might want a special needs trust because they are worried about how the child will survive after the parents' deaths. Or a group of siblings may want to set up a special needs trust for their young sister, who is now a teenager but is expected to need supervision for the rest of her life.

Many people depend on government benefits such as Social Security, Medicaid, rehabilitative care, and transportation assistance available for children and adults with special needs. However, these benefits can be dramatically reduced if an individual's assets exceed a certain level. If loved ones give the individual too much money or provide assistance in a way that breaks the rules, the person could lose benefits. This is a trap many families fall into.

Also see: Legislation renews IRA charity tax break

A special needs trust allows parents (and others who care about someone with a disability) to comply with government regulations yet invest and save money to meet a disabled individual's financial needs throughout their lifetime.

Next: "In most cases, a special needs trust is a "stand-alone" document, but it can be part of a will."

 

In most cases, a special needs trust is a "stand-alone" document, but it can be part of a will. Assets in a special needs trust are not considered countable assets for purposes of qualifying for government benefits based on need. (Disqualification from government benefits could occur if an individual's assets hit $2,000 and their annual income reaches $10,000.) Parents and others can bequeath assets to the trust rather than directly to the individual.

Read - The 529 plan: Save for college and reduce taxes

Funds in a special needs trust provide for supplemental care beyond what the government provides, including expenses such as utilities, medical care, special equipment, education, job training, and entertainment. A special needs trust does not belong to the person with the disability, but is established and administered by someone else. The person with the disability is simply nominated as a beneficiary and is usually the only one who receives the benefits. The trustee is given discretion to determine when and how much the person should receive. Many factors must be taken into consideration including assets and debts, estimated spending, life expectancies of the parents and children, and costs of care.

The trust must be carefully worded and show clearly that it:

  • is established by the family (persons other than the individual with the disability)

  • is managed by a trustee (and successor trustees other than the person with the disability)

  • gives the trustee the absolute discretion to provide the assistance required

  • never gives the person with the disability more income or resources than permitted by the government.

The trust wording should also define what is meant by "special needs" and list terms related to the unique needs of the disabled person, provide instructions for the individual's final arrangements, determine who should receive the remainder of the trust after the person dies, provide choices for successor trustees, and protect the trust against creditors or government agencies.

Overall responsibilities of trusteeship include:

  • understanding the beneficiary's situation and needs, doing inventory of trust assets, maintaining records for income and principal transactions, and preparing periodic accountings

  • filing federal and state fiduciary income tax returns, obtaining Internal Revenue Service tax registration for the trust, and establishing accounts for the management of trust assets

  • monitoring disbursements, hiring and regularly monitoring agents and service providers, communicating with the beneficiary and service providers, and assisting in emergency situations to preserve the beneficiary's lifestyle.

Have you read: Minimize estate taxes with a bypass trust

Consult with your estate-planning attorney about how a special needs trust might benefit your situation. Knowledgeable advisers are vital in making sure a trust complies with all regulations.

Next: Is the 10% early withdrawal penalty from an individual retirement account waived in the event of death?

 

Is the 10% early withdrawal penalty from an individual retirement account waived in the event of death?

Amounts withdrawn from an IRA after the IRA owner's death are always free of the 10% penalty. However, this exception isn't available for funds rolled over into a surviving spouse's IRA or if the surviving spouse elects to treat the inherited IRA as his or her own account. If the surviving spouse needs some of the inherited funds, they should be left in the inherited IRA (in other words, the one set up for the deceased spouse). Then, the surviving spouse can withdraw the needed funds from the inherited IRA without a 10% penalty.

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