Crafting a Trust Catered to Special Needs

When it comes to establishing a Special Needs Trust (SNT), getting it right from the outset is crucial. This entails selecting the appropriate type of trust and ensuring proper funding, a process that necessitates careful consideration and expert guidance.

Choosing the Right Trust Structure
It is essential to determine the type of trust that aligns best with your special needs child or adult. Consulting with a specialized attorney in this field is paramount. They can help navigate the nuances between first-party and third-party SNTs(Special Needs Trusts), maximizing government benefits while mitigating future tax implications.

Establishing the Trust as a Legal Entity
Setting up the trust involves establishing a taxpayer ID number from the IRS in certain cases. This nine-digit Employer Identification Number (EIN) is akin to a social security number for the trust. While an EIN is typically necessary for an irrevocable trust, exceptions exist for living trusts, with an EIN obtained later upon the creator’s death.

Funding the Trust
Funding avenues for a special needs trust vary depending on individual circumstances. For a first-party SNT, funds from sources like personal injury settlements or direct inheritances can be utilized, though these may trigger pay-back provisions for Medicaid upon the beneficiary’s demise.

On the other hand, a third-party SNT can be established either during the creator’s lifetime or as a testamentary trust accessed posthumously. Contributions to an inter vivos trust by family members or friends are common, with funding typically comprising inheritances, savings, and financial gifts. Investments in stocks or bonds can facilitate growth and provide a hedge against inflation, rendering the trust self-sustaining.

Exploring Funding Sources
Beyond personal assets, other funding sources merit consideration:

Insurance: Various insurance products offer funding solutions. Survivorship life insurance policies, for instance, can be cost-effective, though they only pay out upon the second member of a couple’s passing. Term life insurance presents another option with lower premiums, while whole life insurance guarantees coverage for life, albeit with fixed premiums.

Real Estate: While transferring property directly to a special needs individual can impact government benefits, placing it within a third-party SNT safeguards against Medicaid liens. Renting out the property can generate income for the trust, ensuring ongoing financial stability.

Retirement Plans: Funding an SNT through retirement accounts requires careful planning to avoid tax implications and benefit disqualifications. Designating military survivor benefits or adopting an “accumulation trust” format for non-military retirement accounts are strategies to explore. Alternatively, drawing down retirement funds to purchase life insurance for the trust or leaving them to other heirs can align with long-term goals.

Seeking Professional Guidance
Given the complexity involved, consulting with a specialized attorney is indispensable. Their expertise in financial planning and special needs law can help navigate the intricacies of tax regulations, insurance options, and benefit laws, ensuring the trust aligns with the family’s vision for their loved one’s future security.

For personalized legal advice and assistance, feel free to reach out to us at (321) 729-0087.