Many couples consider using a life estate to protect their homes rather than transferring property into a trust. Creating a life estate requires executing a deed that transfers ownership of the property to the grantee, yet gives the owners the legal right to live on the property as long as either of them lives. This approach can ultimately protect homeowners from having the property taken to pay for long-term care, but can also create huge unnecessary problems.
If the children experience financial difficulty during the life of the parents, creditors may be able to put a lien on the residence. They could not force a foreclose on the lien while the parents were alive, but the existence of the lien would still cause problems for the children when the property transfers following the death of both parents. If a child gets divorced, the house in a life estate is considered a marital asset and the ex-spouse could get half.
Life Estate Creates Conflicts of Interest
A life estate also means that the parents cannot sell the home without the consent of all children that hold the remainder interest. A child that wants to keep the home in the family can stop the parents from selling.
Life Estate Creates Capital Gains Issues
If the parents sell after transferring the property to their children, the children would be assessed a capital gains tax. In 2013, the capital gains tax rate on real estate is 25%. The tax is based on the difference between the purchase price of the house and the sales price. Consider the hypothetical Massachusetts couple with two children and a house worth $500,000. Assume the property cost $100,000. If the parents transfer the property to their children, retaining a life estate, and later decide to sell, all four individuals are considered owners. The children would be assigned approximately 50% of the cost basis in the property and approximately half of the sale proceeds. That means that each child would be assumed to have earned income of $100,000 from the sale, minus $25,000 of the cost basis, which leaves a capital gain of $75,000. Each child would then have to pay approximately $18,750 in capital gains taxes on the parents’ home.
This unjust outcome becomes even more unfair when the capital gains tax exclusion is factored into the equation. The law allows a capital gains tax exclusion of up to $500,000 for a married couple on a person’s primary residence. That means, if the parents lived in the property and used it as their home for at least two years during a five-year period before the sale, they are allowed to exclude up to $500,000 of the sale’s proceeds from being taxed. Since each parent’s share of the sale proceeds is only $100,000, they pay no taxes – yet their children get a tax bill solely because the parents transferred the property to them before selling it. Also bear in mind that, had the parents not transferred the property to their children, their capital gains would have been $400,000, and no capital gains taxes would have been owed. When looking at these numbers, it is clear that transferring the property to the children and retaining a life estate may not benefit the children. It may also cause strife if the children refuse to sell because of the potential tax liability. Remember that the parents cannot sell without the children’s agreement.
Irrevocable Trust Benefits vs. a Life Estate
If the couple decided instead to transfer the home to an irrevocable trust, they could still retain a joint life estate. However, the remainder interest would belong to the trust. In this scenario, the parents could sell the home without their children’s consent and without facing the capital gains tax issues in the prior example. The couple would be considered the owners for income tax purposes and could take the full benefit of the capital gains exclusion following a sale. They would pay no capital gains tax. In addition, creditors of the children would have no access to the property during the parents’ lives and the trust would give the couple some protection against their own creditors.
Watch the video on 'Top 7 Differences Between an Irrevocable Trust and Revocable Trust'
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Irrevocable trusts and revocable trusts differences are critical and key to making an informed decision about the best device available for a family’s situation in estate planning. These two devices are very different in effect and each serves very different purposes. Here are some of the major differences between the two devices which can help in determining which type of trust is more suitable to an individual’s needs.
1. Ownership of the Property
Once assets are placed in an irrevocable trust, the property no longer belongs to the Grantor; it now belongs to the trust. That does not mean that one can no longer live in the house that they have lived for 30 years or that one can no longer drive the car owned by the trust, it just means that you don’t own it. Just like renting a house or leasing a car, the assets are still there for your benefit and a trust can sell the house and buy another that can be lived in. A properly set-up, implemented, and funded irrevocable trust can provide the best possible protection of assets from claims by creditors, as the assets have literally changed ownership. This is very different from a revocable trust situation where the Grantor retains completed ownership of the property.
An irrevocable trust agreement generally cannot be changed, amended, modified or revoked even with a court order, thus offering the coveted asset protection, whereas a revocable trust allows the instrument to be modified or revoked at the Grantor’s discretion; this means that the assets in a revocable trust are still available for anyone to take. The term ‘irrevocable’ generally implies that the trust cannot be changed under any circumstances, but this may not be the case: A special power of appointment in the trust document may allow the Grantor the freedom to modify the named beneficiaries at his discretion without affecting the benefits of the irrevocable trust.
3. Estate Taxes
With an irrevocable trust, since the Grantor no longer owns the property, it is not included in calculations of the total value of property at the time of death. With a revocable trust, since the Grantor still owns the property, the value of the property in the trust will be included in the calculation of the total value of property at the time of death.
4. Protection of Assets
With an irrevocable trust, since the assets in the trust no longer belong to the Grantor, they are generally protected from creditors or from other claimants. This serves to protect assets from the claims of creditors, Medicaid, and even divorcing spouses. This device has been used to avoid Medicaid restrictions which require an elderly person who is going into a nursing home to spend a majority of his own money before Medicaid provisions kick in (referred to as spend-down provisions). This advantage also comes into play for individuals seeking to shield assets from legal claims. In opposition, with a revocable trust, the assets are not protected: since the Grantor retains full control and power over the assets, he is still liable for legal claims against the assets.
5. Medicaid Planning Purposes
With an irrevocable trust, one of the prime benefits sought during elder planning is to enable the elderly Grantor to obtain Medicaid benefits if he moves into a nursing home: By placing assets into an irrevocable trust five years ahead of the actual need, the Grantor has secured his assets for the benefit of named beneficiaries. This does not work in the case of revocable trusts, where the Grantor remains ownership of the assets.
6. Appointment of Trustee
With an irrevocable trust, the Trustee generally is, and should be, an independent person chosen by the Grantor in order to create a fiduciary duty to protect the assets – family members as a Trustee does not offer this same benefit. The Trustee will manage the assets in the trust and is bound by its provisions. By having a Trustee who is a separate entity from the Grantor, it is apparent that the Trustee is exercising independent control over the trust assets. With a revocable trust, the Grantor often also serves as the Trustee, maintaining control over the assets in the trust.
7. Income Tax Return
With an irrevocable trust, generally, the trust has its own tax identification number (EIN), files a 1041, and then either pays the tax itself (not typical) or issues a K-1 to the Grantor (or the Beneficiaries if Grantor is deceased) for income which flows through to the recipient’s 1040 return through Schedule E. With a revocable trust, there is no such discrepancy, the taxpayer files everything on their 1040 as if they personally owned the assets that generated income – because they do own the assets if they are within a revocable trust!
After reviewing the major differences between irrevocable and revocable trusts, it is clear that the main purpose of an irrevocable trust is to protect assets: It prevents the property from being included in the valuation of total assets of the decedent at the time of death, thereby protecting the assets within the trust from estate taxes as well as the probate process, and it protects the assets from creditors because they no longer own the asset. In contrast, the main purpose of a revocable trust is to avoid the process of probate, thus simplifying the transfer of assets to named beneficiaries and removing the probate court from the process. Deciding whether one of these two devices will meet the needs of the Grantor depends upon the ultimate goals for the trust.
As with all estate planning, the laws can change, so a consultation with an expert is advised before determining which device is more appropriate for the individual situation.
Estate and Gift Tax Exclusion Historical High: $5.12 M till End of 2012
The estate tax and gift tax exclusions are at an all-time high at $5.12 million but only till the end of 2012. Plan your tax season with a LLC and an UltraTrust irrevocable trust because there may not be another opportunity after 2013.
Put simply, if you don’t act now, you will throw away at least half of every dollar in assets you have over 1 million.
Do you wish to pass on the majority, if not all of your assets to your family or do you want to donate millions to the United States government? If you picked the United States government, please stop reading. If you picked your family, you must act now to make sure that all of your estate planning is taken care of by the January 1st, 2013 deadline. 2012 is coming to an end and so are your estate planning options. Estate Street Partners of UltraTrust.com cannot stress enough the need to do your planning now. We don’t want to see anyone lose this opportunity.
Now is the Time to Make Gifts to Benefit from the Estate Tax and Gift Tax Exclusion Amounts
While asset values remain low due to current economic conditions. This combination of a high exclusion amount and a depressed economy provides an opportunity to shift a greater amount of wealth at a lower cost since the tax liability on transferred assets is assessed on the fair market value at the time of the transfer. It is imperative to take advantage of the exclusion amounts before the year is out, though, because unless new legislation is enacted, both exclusion amounts are slated to decrease back down to $1 million in 2013. Some planning options you may want to consider:
As we rang in the New Year at the beginning of 2012, the federal estate and gift tax exclusion amounts increased to a historically high level of $5.12 million dollars ($10.24 million for married couples).
You may want to consider making gifts, and even taxable gifts, during 2012 as the current gift tax exclusion and tax rates may not be extended. The lifetime gift tax exclusion amount is set to decrease to $1 million in 2013. Furthermore, the maximum gift tax rate during 2012 is only 35%, compared to the top rate of 55% in 2013 (see chart below). So, not only can you transfer a significant amount of assets (and any future appreciation) out of your taxable estate before incurring gift tax, but you can gift in excess of your available exemption amount and incur a much lower rate of tax.
How do I make these Gifts?
If you are like most people, you shudder at the thought of giving a large sum of money and assets to your children, grandchildren or other individuals. Furthermore, you may own business entities in which you still wish to remain involved. Estate Street Partners recommends a combination of Limited Liability Companies and the Ultra Trust® irrevocable trust in order to take advantage of tax savings, safeguard the assets from family temptation, and continue to grow the assets in the manner in which you are accustomed. Estate Street Partners has over 10 years of experience, the financial expertise and tried and true
Sales to an Ultra Trust® Irrevocable Trust
Using a sale to an Ultra Trust® can be an effective way to reduce your taxable estate and better protect assets for future generations. 2012 may be the best year to initiate this type of planning, especially in light of the new fiscal policies being proposed by the Obama administration for fiscal year 2013 (discussed in further detail below).
In an Ultra Trust® transaction, assets (typically LLC interests) are sold to an Ultra Trust® for fair market value in exchange for an installment note. At the end of the note’s term, the assets remain in trust for the trust beneficiaries and are outside of the estate of the seller. An Ultra Trust® generally requires a “seed” gift to fund the trust of at least 10 percent of the value of the assets that will be sold to the Ultra Trust®, and this gift may be subject to gift tax. But as I explained earlier, this is the highest gift tax exclusion year on record.
With the higher exemption amounts, not only can a greater amount be gifted to these types of trusts in 2012, but the gift tax on these gifts may be significantly reduced, or even eliminated.
Discount Planning with Limited Liability Companies (“LLC”)
Many individuals or families establish a limited liability company to centrally hold and manage their assets, receiving LLC interests in return for their contributions. If you have established an LLC, or are considering establishing an LLC, another tool to reduce your taxable estate is to gift LLC interests to your children, grandchildren or trusts established for their benefit. With asset values already low, LLC interests may be discounted in value even further due to lack of marketability or minority interest discounts. Gifting LLC interests rather than gifting the underlying assets may also allow an individual to maintain oversight over the underlying assets.
Looking Ahead to 2013 – the President’s “Green Book” budget proposals and the impact on Federal Transfer Taxes
On February 13, 2012, Congress began reviewing the President’s budget proposals for fiscal year 2013 (commonly known as the “Green Book”), including a proposal that would alter the benefits of planning with intentionally defective grantor trusts (“IDGT”) like the Ultra Trust®.
Selling assets to an Ultra Trust® is a popular way to reduce your taxable estate and it can be extremely beneficial, both from a transfer tax and an income tax perspective. An Ultra Trust® is structured so that the grantor is treated as the owner of the trust for income tax purposes, but not for transfer tax purposes. Accordingly, gain or loss on the sale of assets to the trust is not recognized, but the assets (including any appreciation) are excluded from the grantor’s estate upon death. The trust is “defective” in that it intentionally gives the grantor certain powers that cause the grantor to still be treated as the owner of the trust for income tax purposes. The grantor continues to pay the income taxes on the trust’s income, further depleting his or her estate. As discussed earlier, this planning technique can result in a significant transfer of wealth while minimizing the tax consequences.
The new proposals for 2013 seek to “coordinate income and transfer tax rules” that relate to grantor trusts, thereby completely removing the advantages of using grantor trusts, and in particular, planning with sales to an Ultra Trust®. In general, the proposal provides:
An Ultra Trust® would be treated as a grantor trust for transfer tax purposes, meaning that the assets of the Ultra Trust® would be included in the grantor’s gross estate for estate tax purposes upon death;
Any distributions from the Ultra Trust® during the grantor’s lifetime would be subject to gift tax; and
trust assets in the Ultra Trust® would be subject to gift tax during the grantor’s lifetime if the Ultra Trust® ceases to be a grantor trust at any time.
The proposal would be effective only for those trusts established after the date of enactment, so the Ultra Trust® remains a powerful planning technique to consider for this year.
Other relevant proposals being advanced by the Administration include:
Returning the estate and generation-skipping transfer tax exemptions to $3.5 million, and the gift tax exemption amount to $1 million, with a top tax rate of 45%;
Making portability of unused exemption amounts between spouses permanent;
Requiring basis consistency for transfer tax and income tax purposes;
Requiring a 10-year minimum term for grantor retained annuity trusts, and a maximum term of the life expectancy of the annuitant plus ten years; and
Limiting the duration of the GST exemption to 90 years (for additions to existing trusts and trusts created after the date of enactment).
If these proposals are enacted to take effect in 2013, it may be just that more important to consider implementing planning this year before certain tax advantages are gone.
Highest U.S. Estate Tax Exemption About to Expire
In several weeks, the unprecedented increase in the U.S. estate tax exemption amount is scheduled to expire. This increase presents an unique opportunity to transfer significant wealth tax-free. The decision whether to take advantage of this opportunity will have far flung effects into the future and ultimately will influence how your assets will be shared between your heirs and the U.S. government.
It typically takes at least three months to complete a well thought-out wealth transfer plan once a decision has been made to transfer some of your accumulated wealth. As only three months remain within this year and three months are needed to properly implement a wealth transfer plan, the window of opportunity to consider and take advantage of this unique tax-free wealth transfer period of time is towards its end.
Incentive Trusts offer the Settlor the ability to set conditions or clauses in a Trust Agreement for the protection of the wealth and to avoid abuse of any inheritances. We look at some examples with the children and spouses of when the Incentive Trust should be considered.
A Trust “Agreement” is a contractual obligation for the maintenance of health, support, and education of beneficiaries. The Agreement may have incentive clauses, the purpose of which is to encourage family members to achieve personal satisfaction in their lives and their dependents.
An Incentive Trust is an estate tax planning tool designed to encourage or discourage certain behaviors by the beneficiaries by using distributions of trust income and/or principal as an incentive or as the piece of cheese in a mouse trap to get the desired response. A typical Incentive Trust might encourage a Beneficiary to complete a college degree, enter a profession, or abstain from harmful conduct such as substance abuse. The Beneficiary might be paid a certain amount of money from the trust upon graduating from college, or the trust might pay a dollar of income from the trust for every dollar the Beneficiary earns.
Without being overly restrictive, trust documents can be written in such a way to cover beyond the basic needs of life, food, shelter, clothing, health, maintenance, education, and other guarantees to the well being of the beneficiaries. The trust document can include emergency clauses for the preservation of life of the beneficiaries to the full extent of trust funds. After all, what good is the money if beneficiaries are ill, disabled, or dead? Setting objectives and rewards for family members, not yet born is a way of anticipating an expectation of desired family values and assuring rules will be followed to produce the desired appreciation for the meaning of life.
Some incentive clauses and examples of Incentive Trusts:
Upon graduating a four year college of their choice (not basket weaving) the Trustee will write a check for the equivalent amount of the four year tuition plus 20% bonus for above average performance.
With proof of a W-2 or 1099 or other similar documentation, the Trustee will match the amount reported by 5 times the state earnings.
If a Beneficiary decides to go into business and the Trustee sees a reasonable chance of success, the Trustee will become the silent fund partner to the business plan.
Upon marriage, the Trustee will throw the wedding, the trust will buy the house, the trust may loan money to the spouse for business purposes, etc. at the sole discretion of the Trustee.
Other terms of the trust agreement may include staggered distributions over the ages of the beneficiaries, i.e. age 21 a distribution 5% of the Trust Corpus, 25, 30, 35, and so on in order to give anticipation of a new fresh start. We don’t know the maturity of the child, the acquired skill sets, the business acumen, spending habits, whether they marry, therefore Incentive trusts are a tactical way of saying that trust fund babies are not acceptable.
Other terms dictating distributions to wives, significant others, or other similar terms used to identify the Beneficiary’s relationship may be expressly excluded from ever becoming beneficiaries. This is to avoid potential threats to trust funds or unpleasant/ unwanted events.
The negative or con of an Incentive Trust:
This type of thinking within the trust agreements captures the imagination of the person who worked so hard to achieve success not to destroy those who he leaves behind without a lack of objectives, purpose, or meaning to their lives. The negative side of Incentive Trusts is that it becomes an inflexible instrument because the Settlor cannot foresee all potential problems, eventualities, and circumstances beyond the short duration of what was intended.
Incentive Trust example in action:
I was recently visited by a very successful business man who escaped Russia under extreme hardship, immigrated to the United States and became a very successful hard working entrepreneur. The business man expressed complete disgust in how his wife and children were performing. The wife was a blatant, out of control, spendthrift shop-aholic. The daughter, in her early twenty’s had taken-up with an ear, mouth, belly piercing jerk, adding tattoos to her body “embellishing the marks of slut.” Son number one just over the age of 21 was coming home all times of the night, receiving occasional calls from the police, putting his lawyer to work on keeping his son out of jail. Son number two was 180 degrees to the opposite, a star performer in a private school, quiet, reserved, but never came home or called, and kept to himself, I guess he was ashamed of his family.
Disappointed, the business man embraced the concept of an Incentive Trust, or better said, a revision to his existing Trust Agreement with incentive provisions, to take effect after his death. The key ingredient was the addition of the Trust Protector with powers to oversee the Trustee. He appointed his long time and good friend as the Trust Protector with specific powers to help his children lead more productive lives. Neither of his two older children had finished college, he had an incentive of a direct $350,000 distribution if either of them graduated. He made provisions for counselling and support payments for the duration of treatment and an improved lifestyle for his older son. To encourage his wife from aimless spending he would match and fund any business venture she actually participated. In addition, the Trust Protector took the immediate role of business wealth manager of Trust Assets and investment decisions. Additionally, he made provisions for direct distributions only to direct descendants to his children and grandchildren. If his wife remarried, none of the distributions would go for the maintenance of the new husband.
Please contact Estate Street Partners at (888) 938-5872 or (508) 429-0011 for more infomation on the Intentionally Defective Grantor Trust and how you can protect your assets with our top Ultra Trust® irrevocable trust plan.
The Ultra Trust® irrevocable trust asset protection plan is the best way to protect your assets without going offshore and without risking trouble with the IRS and government.
There are many ways of implementing an Intentionally Defective Grantor Trust (IDGT) that can provide ultimate benefits. Intentionally Defective Grantor Trusts can be used by any individual seeking to:
Asset protect real estate
Optimize taxes on the sale of any highly appreciated assets
Transfer assets in your estate in a way that will provide tax benefits and minimize estate and gift taxes
Buy and hold a life insurance policy within an irrevocable trust to help pay any additional estate taxes
In order to successfully utilize an Intentionally Defective Grantor Trust, we must completely understand what this type of trust is and how it can provide multiple benefits. The Intentionally Defective Grantor Trust is an irrevocable trust that is created with the intention of benefitting beneficiaries of the trust owner. The grantor’s children will receive the benefits from the trust. The trust is created in a specific manner so that it will provide benefits to the descendants of the grantor’s children later down the road.
An Intentionally Defective Grantor Trust is specifically designed to defect income taxes. Meaning the IRS has stated, for income tax purposes, the trust is tax neutral. The grantor or the irrevocable trust is required to pay income or capital gains taxes. While intentionally defective for tax purposes, Intentionally Defective Grantor Trust will also be an extremely effective tool for asset protection and estate taxes because the assets in the trust are owned by the trust and therefore it is not part of your estate. However, upon the death of the grantor, the assets in trust will stay in the trust or be passed to beneficiaries without any estate taxes.
By using tools to transfer assets into the irrevocable trust, assets can be put into the trust in a way that legally avoids gift and capital gains taxes. An individual can gift assets which will work like any other gifting situation in that the gift tax exemption will be elected on their gift tax return. With an Intentionally Defective Grantor Trust, there is a unique point to note. In regards to the estate taxes, the gifting of assets will be considered complete (i.e. the individual avoids paying estate taxes); however, it is a pass through or income tax neutral when it comes to the payment of income taxes (i.e. the grantor will have to pay incomes taxes on the income of the trust).
Sale of Assets to the Intentionally Defective Grantor Trust
These trusts are very often used when individuals want to sell assets to the trust instead of simply gifting the assets. You may ask why anyone would want to sell assets to the defective irrevocable trust. There are various arguments for selling assets to the trust, and the most common reason is because the individual is ultimately searching for a way to transition an asset in a way that is not gift taxable or they want to avoid a fraudulent conveyance. There are also ways one could exchange the assets into the irrevocable trust that are more tax efficient. Usually the asset is a business owned by the family and the individual wishes to pass this business to his beneficiaries. The owner of the assets usually also seeks to keep all income in order to meet the income taxes that will be due on income generated from the defective irrevocable trust. This will effectively result in the generation of an income stream in retirement.
There are occasional instances when it will be more beneficial to combine a family limited partnership with an irrevocable trust. Some individuals will try to find a way to maximize economic benefits of the trust and they will have the ability to use a family limited partnership at the same time. To describe family limited partnership can be used with an irrevocable trust to reduce the value of assets.
A portion of assets from the estate can be transferred to the Intentionally Defective Grantor Trust without incurring any gift taxes. The assets now in the Intentionally Defective Grantor Trust will pass on to heirs and beneficiaries without estate taxes.
When this is all planned correctly, the grantor will have the option of paying the income taxes that are due on the Intentionally Defective Grantor Trust with the money that has been gained from payments being made in accordance with the installment note. The income taxes that are being paid will be done so without gift taxes. This may not seem great from a tax perspective in the beginning, but it is an exceptional planning tool that can bypass gift taxes and can pass many tax blessings to heirs.
Please contact Estate Street Partners at (888) 938-5872 for more information on the Intentionally Defective Grantor Trust and how you can protect your assets with our top Ultra Trust® irrevocable trust plan.
Special Needs Irrevocable Trust with Life Insurance: Ultra Trust
By setting up a special needs irrevocable trust, parents of these children can create an account that will contain assets to be used to care for the special needs child after the parents pass away. One of the most beneficial ways to fund these accounts is through life insurance, using death benefits upon the passing of the parent to fund the trust for the child.
Watch the video on 'Special Needs Irrevocable Trust with Life Insurance: Ultra Trust'
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When trying to determine how to use life insurance in a Special Needs Irrevocable Trust, it is important to know what “special needs” entail. This is in reference to any child who has health-care needs, physical, developmental, or mental conditions that impairs their ability to function in a normal manner. Many of these special needs children will require additional assistance to perform daily tasks.
Special needs can be caused by different reasons, including physical and mental conditions. Common physical conditions can include heart defects, chronic conditions like diabetes, cerebral palsy, cystic fibrosis or dwarfism. Mental conditions can include retardation, ADHD, Tourette’s Syndrome and Autism.
Statistics of Special Needs
Based onstatistics gathered from Cornell University, more than 2.6 million children between the ages of 5 to 15 have a disability that qualifies them as being special needs. Out of those children, 30% have multiple disabilities.
Helping Parents with a Special Needs Child
The mentioned statistics may be truly unfortunate; however, there are many advisors who are able to give advice to parents and caretakers in regards to financial planning because there are special opportunities for these children and their parents. Most parents want to take care of the child the best they can even if they are not around to do so, and this includes financially.
Financial Aid for Children Over 18
If a child reaches the age of 18 and is unable to earn wages and support themselves in a financial respect, they may be eligible to receive funds from Social Security Income. They can also be eligible to receive health services through the state in the form of Medicaid.
However, it is also possible for these benefits to end immediately if the special needs child has any assets that total more than $2,000. This does not include the ownership of a home or vehicle. Each quarter, disabled individuals are only allowed to receive $60 of unearned income. This is a government regulation. The individual must also be unable to earn more than $500 a month. This is a harsh restriction preventing the special needs child to ever be able to sustain himself/herself and makes the child completely reliant on the parent(s) and government assistance.
When special needs children turn 18, Federal assistance can be applied for and for many parents, the amount that could be received will not offer much help. In these cases, parents will continue to use their own funds and assets to provide care for the child for the remainder of their life.
About gifting to special needs children
When gifting to a child with special needs, there are some common errors that are often made. These include:
Gifting money or assets to the special needs child directly. This could cause the financial aid to cease providing the child is more than 18 years old.
The identical problem could occur if money is gifted after the child’s parent or grandparent has passed away.
To protect this from happening, parents who have special needs children should change where the assets of the beneficiary are assigned to. These should be immediately changed to a special needs irrevocable trust, including assets and money in IRAs and 401(k) plans.
When planning for the well being of a special needs child, it is important to consider the child’s welfare after the passing of the parents or the caregiver. This is one of the main fears that parents face. They often wonder who will care for the child and if the level of care will be enough to enable the child to life a fulfilling life.
To make sure that the child is, in fact, cared for in an appropriate way, a special needs irrevocable Trust can be established. To ensure that the child will be able to continue receiving financial aid, all gifts must be made to a trust in which the child is the beneficiary.
Since the assets will then be the property of the irrevocable trust and not the actual child, the assets that are located within the irrevocable trust cannot be counted as assets when considering financial aid eligibility.
How to Fund a Special Needs Irrevocable Trust
Life insurance is one of the best tools to use when looking to fund an irrevocable trust for a special needs child. This is because when the parents die, the death benefit from the life insurance policy will be in the trust without any income, gift, or estate taxes. That money will later be used to care for the child with special needs until his or her death.
In short, these trusts are irrevocable trusts and the trustee will have complete discretion on how the assets are to be used. The trustee will handle and manage all distributions from the trust. When this is done properly, all assets in the trust will be used for the caring of the child and will in no way disqualify the individual from receiving financial assistance from the state.