Protect eligibility
Special Needs Trusts
A special needs trust — or supplemental needs trust — can provide funds to a disabled beneficiary without interfering with eligibility for government assistance.
If you have a loved one with special needs, you have to think about how they will be cared for after you are gone. Families often face four imperfect options:
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1
Disinherit them and hope the government will provide sufficiently for their needs.
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2
Make them your beneficiary, which can make them ineligible for government assistance.
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3
Set up an ABLE account, which may limit or reduce government assistance.
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4
Set up a special needs trust, or supplemental needs trust, which provides funds to a disabled beneficiary without interfering with eligibility for government assistance.
A trust is only as good as its funding
A special needs trust is a type of irrevocable trust. A trustee, usually a family member, is named to administer the trust assets. The terms of the trust are carefully worded to state that the assets are to be used only for the benefit of the disabled individual. With a special needs trust, a parent or guardian can make investments on behalf of a disabled dependent, and a trustee is named to assume the responsibilities of the trust.
A special needs trust is only as good as its funding mechanism. This can be accomplished with investments, cash, life insurance, or an annuity. Often it is a combination of these strategies.
Trusts are their own taxable entities
As an irrevocable trust, a special needs trust is considered its own separate taxable entity, with its own tax identification number. It is subject to compressed trust tax rates. It takes only $12,500 in earnings to trigger the highest federal marginal tax rate of 37%, any applicable state income tax, and the surtax on net investment income from the Affordable Care Act.
All assets in a special needs trust are nonqualified and subject to annual taxation on any investment gains. Finding a tax-efficient vehicle to lessen tax drag is one of many issues that the trustee, together with a financial advisor, will help determine.
Life insurance funded
Life insurance can play a role in a special needs trust because it provides a large lump sum at the exact time it is most needed — upon the death of the caregiver — for an amount that is greatly leveraged. If the insurance proceeds are then invested and managed correctly, they can provide needed funds in a manner that protects the beneficiary’s eligibility for government benefits, food, clothing, shelter, and transportation benefits.
Annuity funded
A properly titled annuity can help preserve capital in a tax-efficient manner while maintaining eligibility. There are many different kinds of annuities, and it takes diligence to find one that precisely meets the needs of the beneficiary.
Managed portfolios
A managed account is a personalized portfolio built for a particular investor and actively managed in a fiduciary capacity. The trustee may be given discretion to utilize those assets as needed — some years with no withdrawals, other years with large ones. Tax-efficient investing, including the choice of accounts and the timing of trades, is part of the work.
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