THE BENEFITS OF A SPECIAL NEEDS TRUST PLANNING
In general, a trust is created when property or assets are managed by a person or firm on behalf of another person’s benefit. The person or entity who manages the trust is known as the trustee and will be responsible for making decisions in the best interest of the person who benefits from the trust, known as the beneficiary. Trusts are advantageous because they provide the ability to place conditions on how and when your assets will be distributed when you die, reduce estate and gift taxes, and allow you to skip the lengthy and expensive probate process.
WHAT IS A SPECIAL NEEDS TRUST?
Special needs trusts are a class of trusts made specifically for the benefit of those with physical and/or mental disabilities. These differ from the typical trust due to the special conditions that often need to be in place to accommodate the specific needs and lifestyle of the beneficiary. A primary reason for having this type of trust is to ensure the beneficiary does not render himself or herself ineligible for government benefits due to an increase in assets.
HOW TO CHOOSE THE RIGHT TRUSTEE
Choosing the right trustee for a special needs trust is extremely important and the trustee must be someone you are certain will act in the beneficiary’s best interest after your death. Often, this takes place in the form of a trusted family member who knows the beneficiary and his/her needs. However, if your situation doesn’t allow for this, the court will appoint a third party to manage the trust according to your written wishes.
IMPORTANT FEATURES OF A SPECIAL NEEDS TRUST
One of the important features of a special needs trust is that the assets in the trust will not be counted toward asset thresholds contained in government programs such as Supplemental Security Income (SSI) and Medicaid. The trustee has complete control over the assets in the trust, instead of the beneficiary. For this reason, government programs such as SSI and Medicaid ignore assets in the trust when determining eligibility. Many people are unaware of this and make the mistake of distributing their assets to a loved one with special needs through a will. This could cause them to exceed the asset limits for SSI and/or Medicaid, thus losing their benefits from these programs.
A special needs trust may also be set up to take the proceeds from a legal settlement on behalf of the person with special needs. This is important for the same reason as mentioned earlier, to ensure a windfall does not preclude the beneficiary from receiving government benefits. Also, in the event, the person with special needs is the one being sued, the funds in the special needs trust are protected from being paid out in damages.
TRUST PAYBACK PROVISIONS
Some sophisticated trusts do convey tax benefits, but, for the most part, IRS considers revocable trusts to be invisible. You as a grantor/settlor/trust maker will still pay tax on the revocable-trust income, albeit at your individual rate and not at the prohibitive trust rate.
As for estate taxes, trusts have no effect – but, at least regarding federal estate taxes, those are currently moot for most people. They are not incurred until the value of the estate exceeds $11.4 million as of 2019. Some states do impose estate and/or inheritance taxes; for those states, please consult this website: https://taxfoundation.org/does-your-state-have-estate-or-inheritance-tax/
SHOULD YOU CONSIDER A SPECIAL NEEDS TRUST?
Even if you believe your loved one with special needs will never need government benefits, it is still prudent to consider a special needs trust. Special needs trusts can provide for the unique and specific needs of the beneficiary in ways that other types of trusts cannot. It may turn out that your loved one may require this government benefits one day in the future and they’ll be thankful that you provided them this option.
Special needs trusts are an excellent vehicle to ensure your loved one with special needs is taken care of in the event of your passing, however, they can be difficult to set up. We can examine your specific situation and make sure your loved one is taken care of for years to come. Contact our Redlands, CA office at (909) 888-7100 to discuss your trust needs and for more information.