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Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

Special Needs May "Need" A Special Trust

Transferring wealth to a loved one who is disabled is a gesture filled with wonderful intentions, but in some cases it can cause problems that were not foreseen and certainly never intended.

What do I mean by that? Perhaps an example will help explain.

Suppose for purposes of this example that a family has a minor child who is permanently disabled and is receiving SSI and Medicaid benefits because the family has limited assets and income and cannot afford the child's monthly medications and treatment. A kindly relative wants to leave the child a rather large inheritance to help with their needs and care.

This would seem to be great news. However, without proper planning, the government provided benefits the child receives could be stopped, and the family forced to use the inheritance to pay the medical expenses for the next five years. After that time, the benefits would resume, but the inheritance will likely be gone.

The problem is that receipt of an inheritance can disqualify a disabled person from government needs-based aid programs, including the following:

-Supplemental Security Income (SSI), a Social Security Administration program that pays extra cash to people with limited assets and income;

-Medicaid, which provides far-ranging medical assistance including doctors' visits, home health care services and nursing homes;

-Other assistance plans for the disabled, some of which require enrollment in SSI, Medicaid or similar programs. Losing those benefits can mean the loss of other essential help.

But there is a potential solution to this problem ñ a special needs trust. Creating a "special needs" or "supplemental needs" trust can preserve benefits while at the same time provide amenities for a disabled individual who inherits valuable assets or receives proceeds from a personal injury settlement or lawsuit.

A special needs trust can supplement government benefits by providing, among other benefits, amenities such as:

  • Entertainment;
  • Electronic equipment;
  • Trips and vacations;
  • Computer equipment;
  • Athletic training;
  • Companion services;
  • Home health aides; and
  • Transportation, including the purchase of a vehicle

The trust can hold cash, stocks, investments, and personal and real property. It can own life insurance and be used to hold money from personal injury settlements or judgments.

One possible way to establish a special needs trust is to set up a charitable remainder unitrust , or CRUT, which can provide lifetime income to the beneficiary, and eventually distribute the remaining assets to a charity or charities chosen by the creator of the trust.

A CRUT also offers upfront income tax deductions, estate tax advantages, and deferral of capital gains if appreciated assets are contributed.

An IRS Revenue Ruling (2002-20) allows a special needs trust to be the beneficiary of a CRUT if it meets these four criteria:

  1. The trust is solely devoted to caring for a disabled beneficiary.
  2. The beneficiary has a physical or mental impairment a doctor can describe.
  3. The condition is expected to last for at least a year.
  4. No one else manages the individual's financial affairs.

Typically, the CRUT makes payouts to the special needs trust at a fixed percentage of the assets, with a 5 percent annual minimum. The trustee then makes distributions for the benefit of the disabled person. If due care is taken, distributions can provide a desirable lifestyle without jeopardizing government benefits.

A word of caution - trusts are governed by state law and special needs trusts in particular should be drafted only by professionals who specialize in this area. Costs involved include professional fees to establish the trust, costs associated with transferring assets to the trust and expenses of continuing administering of the trust.

Still, special needs trust are a significant tool worthy of consideration for those who wish to help care for disabled family members or friends.

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