Special Needs Trusts and qualified fundsOften a person who wants to leave funds to his or her disabled child is advised to not leave the funds outright, as they may push the recipient over the threshold for assets and income and disqualify the child from receipt of governmental benefits. A better option is to have the funds left to a Special Needs Trust, where they are distributed at the sole discretion of a trustee, therefore, providing for continuation of governmental benefits without disqualification.

However there are complications to having a trust receive funds outright, such as tax implications, since in most cases, none of the funds have been taxed. Of course, this is not true for assets such as Roth IRAs and non-retirement benefits. 

It is important for a parent or grandparent to consider having funds distributed to a Special Needs Trust because, when a trust receives funds, a substantial portion of the money received may be in the highest income tax bracket, (35%,) since trusts and estates have significantly higher income tax brackets and lower thresholds of exemptions than individuals. It may also be preferable to have the funds distributed over a period of time, such as a stretch IRA, or using a conduit trust in order to allow the funds to be available for the beneficiary, but not have the funds taxed at the higher bracket. 

It is important to note that a Special Needs Trust must be properly drafted to qualify as a designated beneficiary under the current IRS rules and regulations. In many cases, the beneficiary must be an individual, the ultimate beneficiaries must be clearly enumerated and designated, and a Special Needs Trust may not include a charity as a potential beneficiary. Certain beneficiaries must be also named with life expectancies.

In some cases, it may be advisable to merely allow the trust to pay the tax and invest the net proceeds, but this decision must be identified and discussed prior to the naming of the trust as the beneficiary of this qualified plan.

 

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