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Parents who have a son or daughter with disabilities may find it inadvisable to leave that child a large inheritance. Adverse consequences might include:
• Disqualification from eligibility for various types of government assistance;
• Inability of the child to manage the inherited assets properly.
Government programs are needed for many disabled people, but government funding typically is not available for such items as over-the-counter medications, transportation costs to visit family members, reading material or even toiletries. Parents take care of these items during life, but worry about what will happen after they are gone.
Professional advisers often suggest such parents establish a “special needs” trust that will benefit the child but safeguard qualification for government assistance. The trust typically would allow the trustee discretion to provide nonessential services and items to the child, such as piano lessons or recreational equipment. These trusts must be carefully drafted to comply with state law.
• The trust must be specifically drafted to be supplemental, providing only “extras” for the son or daughter. Inclusion of words such as “health, education and support” will cause the Social Security Administration to view the trust as “primary” – and eliminate or postpone government benefits.
• Family members can serve as trustee, but parents often turn to commercial trustees – some of which have social workers and private care managers on staff.
• Funding for a special needs trust can be accomplished through investments or, commonly, life insurance – especially a cost-effective second-to-die policy that pays out at the death of the last parent to die. If estate taxes are a concern, the trust can be established during life as an irrevocable life insurance trust that is structured to avoid gift and estate taxes.
• Trustees must be careful as to how they distribute funds. For example, direct payments to a child may reduce Supplemental Security Income (SSI) payments (a recipient can receive only $60 of unearned income in any calendar quarter; anything more reduces benefits). Trustees, therefore, should keep money out of the hands of the beneficiary by making payments directly to providers.
• Parents should write a “letter of intent” to the trustee explaining the child's history, setting priorities for care and services and stating their own hopes and expectations for the child.
• The IRS has approved charitable remainder trusts that pay income to an incompetent child for life, but with payments going to a special needs trust established for the child. The IRS also has approved a plan where the charitable remainder trust was payable to a trust for the lifetime of a child for life who was merely “financially disabled.”
Note: Consult with experienced legal counsel to ensure that any trust you establish will not eliminate or postpone availability of government benefits to a child or other family member.
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Copyright © 2008 by R&R Newkirk. All rights reserved.
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