Evaluating Your Specific Situation

The first step is meeting with your special needs planning attorney to review your assets. They will set up a special needs trust, transfer ownership of assets to the trust, and make your child the beneficiary of those assets. Understand that beneficiary designation accounts (think IRAs, 401(k)s, life insurance) and joint tenancy accounts pass through your will and outside of the trust. Also, be aware that if your special needs child is a direct beneficiary of these types of investment accounts, the money passes directly to the child upon your death, not to the special needs trust. Your estate plan requires coordination of your will, trusts, and beneficiary designations to ensure they do not work against each other.

Besides a special needs trust, you may opt to name your “estate” as the beneficiary of life insurance proceeds if you have multiple children. In this manner, the proceeds can divide conveniently into however many portions you need with the caveat that the share for your child with special needs will pass directly to their trust. Essentially, the only downsides of naming your estate as a life insurance beneficiary are any unwanted public exposure during a probate process, and claims by your creditors.

Changes in Legislation

For inherited IRAs and other retirement plans, the SECURE Act of 2019 updated distribution rules for inherited IRAs et al. by eliminating the idea of stretch IRA (expectancy payout) for most beneficiaries. Note that if there was a special needs trust inherited IRA prior to 2019, it is grandfathered under the old stretch rules, and the SECURE Act does not apply. The RMDs will still be based on the IRS Uniform Life Expectancy Tables. Any inheritable retirement plan since 2019 falls under the regulations of the SECURE Act.

A notice of proposed regulations regarding the SECURE Act distribution rules was issued in February 2022 by the United States Treasury. These regulations change how practitioners may interpret distribution rules for inherited IRAs by eliminating life expectancy payout structures and implementing for most beneficiaries a ten-year rule. The clarification by the Treasury Department means an annual track of distributions for years one through nine using life expectancy, but upon the tenth year, the remaining balance must be distributed unless you are an eligible designated beneficiary (EDB).

Eligible Designated Beneficiaries (EDB)

For inherited IRAs and other retirement plans, the SECURE Act of 2019 updated distribution rules by eliminating the idea of stretch IRA (expectancy payout) for most beneficiaries. Note that if there was a special needs trust inherited IRA before 2019, it is grandfathered under the old stretch rules, and the SECURE Act does not apply. The Required Minimum Distributions (RMD)s will still be based on the IRS Uniform Life Expectancy Tables. Any inheritable retirement plan since 2019 falls under the regulations of the SECURE Act.

A notice of proposed regulations regarding the SECURE Act distribution rules was issued in February 2022 by the United States Treasury. These regulations change how practitioners may interpret distribution rules for inherited IRAs by eliminating life expectancy payout structures and implementing a ten-year rule for most beneficiaries. The clarification by the Treasury Department means an annual track of distributions for years one through nine using life expectancy, but by the tenth year, the remaining balance must be distributed unless you are an eligible designated beneficiary (EDB).

We hope you found this article helpful. Contact our office at (740) 947-7277 and schedule a free consultation to discuss your legal matters. We look forward to the opportunity to work with you.

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Tax Form 1041

A disability attorney or special needs planning attorney may often collaborate with a CPA, tax attorney, or other financial professionals to help their client understand how special needs trust taxation works. Typically, beneficiaries of a trust pay taxes on income distributions they receive from the trust’s principal. When a trust makes a distribution, there is a deduction of the income distributed from the trust’s tax return. Tax Form 1041 is the form used to document taxable income distributed to a beneficiary.

Schedule K-1

The beneficiary then receives a Schedule K-1, indicating how much of the distribution received is interest income versus principal. The distinction between the trust’s interest income and the principal determines the taxable income to claim on the beneficiary’s tax return.

• Distribution from the principal balance of the trust has no tax consequences. The IRS assumes these funds were taxed before being placed into the trust.
• Income earned distributed from the principal funding carries a tax liability.

Overall, tax rules on special needs trusts can be pretty straightforward. However, the income tax rules become more complex depending on the type of special needs trust.

First and Third-party Trusts

A first-party or grantor trust’s funding comes from the beneficiary, typically from an inheritance, the proceeds of a personal injury settlement, retirement plan, divorce settlement, or life insurance policy. It is usually required to have a payback provision for repayment to the state upon the beneficiary’s death. The repayment covers Medicaid benefits the beneficiary receives during their lifetime. This trust is mainly funded by a donor-beneficiary under 65 years of age.

Because transferring assets into a first-party special needs trust permits an individual to qualify for government benefits such as Medicaid and SSI, most states don’t protect the trust’s assets from creditor claims to the beneficiary. Because all trust assets can satisfy the beneficiary’s debts and provide benefits, the IRS treats taxation as if there were no trust. So if the trust receives investment income, the taxes are assessed as income directly received by the beneficiary, even if the income is not yet distributed and remains in the trust.

A third-party trust receives funding from someone other than the trust’s beneficiary. This funding can be via life insurance policies, personal wealth, or other financial resources. However, third-party trust funding often occurs upon a family member’s death and is known as a testamentary trust. Assets transferring to a third-party trust during the funder’s lifetime, rather than death, may include trust language permitting the trust income to be taxable to the donor rather than the beneficiary or the trust. Sometimes referred to as an “intentionally defective grantor trust,” it can create advantageous situations, such as lowering the beneficiary’s tax bracket.

Complicated Interest, Dividends and Capital Gains

A typical third-party special needs testamentary trust is responsible for paying the income tax directly from the trust. Income tax brackets for trusts are subject to generally high rates, but the trust may deduct what it pays out to its beneficiary. However, the income to the beneficiary is taxable through issuing a K-1 showing taxable income to the IRS. The situation becomes more complex when treating interest and dividends as taxable income. Yet, capital gains distributions via mutual funds may not be treated as income, remaining trapped in the trust and taxable.

Before finalizing plans for a loved one’s special needs trust, it is critical to assess how the trust and its beneficiary will be taxed in the future. Understanding the tax laws regarding special needs trusts requires disability planning and tax law expertise. Collaboration with special needs and disability lawyers, including tax specialists, can help you craft a special needs trust and estate plan that will provide the best advantage for the future of your disabled loved one.

We hope you found this article helpful. Contact our office at (740) 947-7277 and schedule a free consultation to discuss your legal matters. We look forward to the opportunity to work with you.

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Who Qualifies as Special Needs?

The term “special needs” refers to the clinical and functional development of individuals requiring assistance for medical, psychological, or mental disabilities. For government benefits programs, special needs are a part of the larger category of disability. Special needs diagnoses are considered disabilities, but not all disabilities are special needs. Maintaining your child’s qualification for government disability benefits can be done through estate planning strategies. You do not necessarily need to disinherit your special needs child to preserve them.

How Does Inheritance Affect Government Benefits?

Directing assets to the child can result in their inheritable assets and income levels exceeding allowable levels, making them ineligible for public assistance. This problem can make parents decide not to provide the same level of inheritance as they would for other children. It is a painful decision to make. However, other methods exist to provide inheritance and protect government benefits with careful planning.

Estate Planning Solutions

The proper creation of a special needs or supplemental needs trust can help the child without jeopardizing eligibility requirements for government disability benefits. Public benefits have specific spending designations that cover shelter, food, clothing, and transportation. The monies from a special needs trust are designed to improve the child’s overall quality of life but are spendable only in certain categories.

The trust money can’t be used for housing, food expenditures, or other financial needs that government benefits meet. Instead, it is used to pay caretakers, out-of-pocket medical expenses, some transportation, educational expenses, recreation, vacations, and more. A disability planning attorney can design your special needs trust to comply with the specific rules of the beneficiary’s public benefits program.

How Does a Trust Work?

Determining how to fund a special needs trust depends on your financial situation. Life insurance policies are a popular choice, as are income-producing assets that increase the trust’s future bottom line. How much to fund the trust also depends on your financial situation. A broad list of your special needs child’s expenses to consider include:

• Housing
• Medical care
• Care assistance
• Special equipment
• Education and or employment costs
• Personal needs
• Future asset replacement costs like a car, furnishings, etc.

Some of these broader expense categories will fall to government benefits spending and others to the special needs trust. To avoid providing monies for categories that can affect eligibility for government benefits like SSI and Medicaid, do not pay for the following expenses with special needs trust funds:

• Rent or mortgage payments
• Essential food and groceries (the occasional restaurant outing is permissible)
• Direct gifts of cash to the beneficiary for any purpose
• Property taxes
• Condo or homeowner association dues
• Mortgage required homeowner’s insurance
• Utilities and other hook-up or connection charges

Who Owns or Controls the Trust

Often, the parents choose to be the trustee(s) of the special needs trust until they become incapacitated or pass away. An alternate or backup trustee with expertise in managing trusts who can pay bills and taxes, keep accounts, and make sound investments is crucial to designate. The parents may also choose to designate a professional trustee for the same purpose.

Sometimes, to alleviate any discomfort with an outsider managing their child’s needs, the parents opt for a professional and family member as co-trustees. A trustee can also hire a trust protector who is given the legal power to review accounts and fire and hire trustees, or a trust advisor who will inform the trustee of the beneficiary’s needs. A special needs planning lawyer can help you to assess if these additional oversights are necessary.

Parents and other decision-making individuals using a special needs trust have the means to treat their special needs child similarly to other children. While different types of trusts are unique to protect government disability benefits, the child will be able to inherit as a trust beneficiary. Once the special needs trust has served its purpose, any remaining assets can be divided among surviving family members and even fund the organizations instrumental in the special needs child’s care.

If you prefer, you can designate a charity to receive the remaining principle as a form of legacy gift, perpetuating your child’s memory. A disability or estate planning attorney knows how to create a special trust to meet your child’s needs and financial goals while protecting your child’s government benefits. There is no need to disinherit your special needs child.

We hope you found this article helpful. Contact our office at (740) 947-7277 and schedule a free consultation to discuss your legal matters.

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Making plans that address your special needs child’s lifetime of physical and cognitive impairments requires careful thought and planning. When looking toward the future, consider their ability to make decisions and make the necessary resources available. You can provide for them financially, allowing them to live as independently as possible using specific legal arrangements for their protection. When you are no longer around or able to help, the foundation for continued care you set today will ensure your child has the best possible chance for a successful future.

Special Needs Planning

Achieving your planning goals begins with understanding the financial implications of your loved one’s situation. The top priority is typically providing for your special needs child’s financial security. Much of this security will come from government services like Social Security Disability Insurance (SSDI), Social Security Income (SSI), and Medicaid. Supplemental family funds in a special needs trust or a life insurance policy can enhance their financial future further. When financial resources or gifts are carefully added to the plan, they will not disrupt government eligibility qualifications. A special needs or disability attorney is familiar with maintaining all possible avenues of support through legal techniques.

Creating a Team

Beyond securing their financial future, as a family, you need to identify the special needs child’s support team. You might select a guardian (and backup guardian) to make medical or life decisions for an adult child if they are unable. If there is a special needs trust, you must appoint a trustee to oversee the trust. Having a trustee different from the named guardian is an excellent checks and balances system. If possible, involve your special needs child in the discussions and planning process. Many special needs individuals are capable and want to provide input about who they want and don’t want to be involved in their lives.

These discussions can be difficult for parents as they may feel no one will ever match their ability to provide their special needs child with adequate care as they age. Each family must work out issues and make compromises, keeping the child’s best interest in focus. Professional personal care assistance can relieve the principal care provider, usually the guardian, and give families extra flexibility. Some care options to consider include:

• Family members – Many special needs individuals choose to remain with family members. Typically, the family best knows the child’s routines and preferences. However, this default arrangement often leaves family members as unpaid caregivers putting their earning potential and future at risk. Shared family responsibility and rotating caregiving may alleviate this problem yet may not be best for the special needs individual.
• Personal care professionals – Known as PCAs, these caregivers are the main method of non-family care. Duties include organizational or housekeeping tasks, bathing, dressing, ventilator or catheter care, transportation, and more. Although a PCA can be hired through an agency, many families opt to hire and train individuals directly. In either case, proper vetting and qualifications are a must.
• Community-based homes and supported living arrangements – Some special needs adults are capable of living in group homes that provide independence with support. Those care providers who live or work in these arrangements offer services ranging from medication assistance to decision making, even job applications for residents. This living arrangement is typically communal with shared activities, including meals and social groups.
• Independent living arrangements – There are many instances where a special needs adult can live independently with the aid of a PCA whenever additional support is needed. Some individuals may only require a few hours of PCA care daily to help with morning routines or mealtime, while others have several PCAs providing 24-hour care in rotation. Sometimes there is an arrangement with a housemate or roommate to provide backup support in exchange for a break on rent.
• Assistive technology – The digital age and the internet of things have given rise to many assistive devices providing independence options. Those special needs adults with severe mobility issues can use this technology to control their home environment, take and share their baseline medical readings, and use digital devices that access the internet.
• Day programs – Young adults with special needs may attend public schools until they turn 21. In years after 21, some day programs provide similar continued education and structure. These educational services and programs help adults enhance their life skills while maintaining social bonds with a community of their peers.
• Long-term care facilities – Current findings show that care specialists and special needs advocates regard institutional settings as the least preferable option. However, a residential facility may be the best option for some situations if there is limited access to other support types. The Association of University Centers on Disabilities (AUCD) finds evidence-based data that supports community and home living as the best practice for special needs or disabled individuals.

Letters of Intent

Create a letter of intent (LOI) to address family history, daily schedule, medical care, education, benefits received, possible employment, and a general overview of your child’s life to date. Also include employment hopes, residential social and religious environments, behavior management, foods (including any allergies), and your hopes for their future. You can also explain expectations for your special needs child’s final arrangements for funeral services and burial.

Some options for your special needs child’s future are only available with additional private funding. However, with the right planning, all children and adult children with special needs can qualify for appropriate life care. Discussing care options with the family and a special needs attorney or disability lawyer is the first step in creating the best plan possible for your special needs child. We hope you found this article helpful. Contact our office at (740) 947-7277 and schedule a free consultation to discuss your legal matters.

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Avoiding Probate

Special needs trusts have many benefits. For instance, in most places, they are not subject to the probate process. Aside from the public exposure of probate, the biggest benefit in is saving time. Probate can last for years, yet a life insurance policy in an SNT will provide funds immediately because of the death benefit. Ordinarily, this benefit payout is in one lump sum.

Preserving Government Benefits

More importantly than quick access to cash, a special needs trust can protect your child’s eligibility for government benefit programs. Millions of Americans with disabilities (including special needs) rely on Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) assistance programs. An SNT protects an insurance policy payout for the child’s benefit, whose assets generally should not exceed $2,000, thereby not affecting critically valuable government federal or state benefits. Although the regulations can get very complicated, a special needs attorney can assess and guide your situation when creating a special needs trust.

Why Fund and SNT with Life Insurance?

Funding your SNT can happen as often as you choose to place assets in the trust. However, younger families often lack the resources to save for retirement, college, home, and fund an SNT. Funding a special needs trust with a life insurance policy ensures there will still be money for your child even if you did not live long enough to grow savings. If parents live longer and assets are accumulated in an estate, the SNT frees them up to direct the remaining assets of their estate to other children. Assets inside of the SNT are only for the beneficiary’s supplemental needs. The rest of the family can’t access the trust’s benefits.

How Much Life Insurance is Adequate to Fund the Trust?

There is no one answer other than to be aware that the value you choose ties directly to your special needs child’s future quality of life. Financial help organization debt.org estimates the lifetime care cost for a child with special needs in 2022 runs between $1.5 to $2.4 million depending on their disorder or congenital disability. Speak with your child’s physician to accurately predict health care needs now and in the future because every child’s prognosis is different. As difficult as it is, you need to assess your child’s probable lifespan, whether their condition has a high mortality rate or perhaps their condition is deteriorating.

When you have a clearer idea of their medical situation, apply this information to considerations about where the child will live and the associated costs. Perhaps your child can live independently, but if they will require special care attendants, a special care medical facility, or a group home, these costs factor into your funding determinations. Remember that costs change over time and will never go down, particularly since medical care and housing tend to increase faster than other goods and services. Additionally, inflation degrades the dollar’s valuation. Major life transitions from school to adulthood also affect costs. Your special needs attorney can recommend a financial planner that makes these sorts of assessments.

What Type of Life Insurance is Best?

Clearly understand the purpose of the policy you want to fund the SNT. The insurance world is rife with sophisticated marketing, and agents understand how to inflate premiums and policy complexity by adding riders you may not need. A rider is an optional feature or coverage you can add to a life insurance policy, most often for an additional cost. It is easy to add the bells and whistles of riders that seem beneficial but may not suit the clear purpose of the special needs trust. It is best to consider purchasing insurance as a hedge against a loss and provide income replacement. Keep your purchase simple and focus on the basics.

Term life insurance is a straightforward insurance policy type. Coverage is a defined time period, normally the time in which premiums are paid. The term policy benefit pays when the policyholder dies within the period covered by the policy. Premiums tend to increase yearly as the insurer ages, or the policy has a level of 10, 20, or 30 years. If your child’s prognosis is poor or their life expectancy likely will not exceed the end of the term, term life insurance is an appropriate choice. You can explore a convertible term or return of premium term options if your financial professionals or special needs attorney advises it.

A permanent life insurance policy will last the policyholder’s entire lifetime and provides protection in the form of cash value and death benefits. Permanent life insurance has many subsets, including whole life, universal life, and variable universal life. Typically these policies are cost-prohibitive and have high lapse rates. Funding an SNT with permanent life insurance requires realistic plans to cover premiums through your remaining years of life, or you will waste the money.

Survivorship life insurance is ideal for funding a special needs trust. Survivorship or second to die policies are joint permanent life insurance paid out upon the last parent’s death, presumably when the child most needs the money. This insurance type is almost always less expensive than insuring the same two parents with individual policies. The downside is that a surviving spouse will not receive any policy benefit because the benefit is exclusive to the protection of your special needs child. A separate term insurance policy can help a surviving spouse, covering the difference in incomes, and maintaining their ability to support the child.

Types of survivorship policies can include:

• Survivorship guaranteed universal life (GUL) – This policy is a hybrid of term and permanent life insurance offering the best features of both and can be a good choice to fund an SNT. GUL pricing is similar to term life insurance as there is no cash value accumulation. A downside is inflation’s inevitable erosion of the death benefit value, which should factor into your determination of the insurance amount. Also, a GUL policy is inflexible. It may affect your guarantee if you do not pay the full premium after a grace period or skip a payment altogether.
• Survivorship whole life – This policy is more expensive than a GUL but has additional benefits and more flexibility. Part of the whole life policy has a cash value component that grows in time based on a dividend rate. In some cases, the cash value can become sizeable, which makes it attractive as an SNT funding mechanism. The cash value is one way to account for inflation eroding the death benefit’s purchasing power. The cash value can also help policy owners nearing retirement and needing the cash flow to continue paying premiums. Lastly, if you outlive your special needs child, a whole life policy will return the cash value to the policy owner to offset premiums paid throughout the years.

The insurance world is complex, and there is no short answer regarding the best way to fund a special needs trust with life insurance. Reviewing options with your special needs attorney and a financial planner with special needs expertise can identify the pros and cons of available options and how much funding your SNT needs. Your professional team can also help you find a reputable insurance agent so that the product you purchase will best meet the needs of your family and the trust requirements. Contact our office at (740) 947-7277 and schedule a free consultation to discuss your legal matters.

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