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Gregory S. DuPont Aug. 29, 2019

Caring for a child or an adult with special needs can be emotionally challenging for parents, family members, and other caregivers. In addition, the economic issues that result from providing special care often strain current and future family finances. This is further complicated by the potential loss of government benefits if finances are improperly managed. Therefore, families must plan carefully, for both present and future care. Often, an important part of such a plan is a special needs trust.

A special needs trust can be invaluable in providing care for a child or other dependent with special needs, and can be used to help with finances, often without affecting eligibility for government benefits. However, in order to maintain the individual’s eligibility for Supplemental Security Income (SSI) and Medicaid, trust assets can be used only for “extras,” such as transportation, therapy, or day care—not for essentials such as 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 $14,000 in 2013 to as many individuals as he or she so chooses ($28,000 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, there are exceptions that 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.

Providing 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 2012 have an applicable exclusion amount of $5.25 million and a top tax rate of 40% until the end of 2013.