Save A Penny, Lose Your Dollars?
By Rob Wrubel, CFP®, AIF®
Do you know that you could be savings pennies every day for your special needs family member, but setting yourself and family to lose thousands of dollars? If you do not fund your trust the right way, you could potentially lose expected Supplemental Security and Medicaid benefits.
Regular readers of my Blueprints newsletters know that I generally recommend a special needs trust be considered (and most families choose to use this technique) for families with a special needs member. The trust can be used to hold assets that can be used to improve the quality of life for our special needs family members while protecting available government benefits.
Funding the trust requires special care as tax and other government driven rules are complicated. My recommendation is to build a strong financial team to work with you to make sure the funding decisions are both best for you and do not create problems with the IRS or Social Security.
Saving a few hundred dollars a year or month the wrong way could cost your family thousands and even tens of thousands of dollars. There are several ways that families make mistakes that can lead to a loss of protecting government benefits and choice for passing along family assets. Take some time to make sure you are funding your trust the right ways.
No Trust
The biggest mistake made is not having a special needs trust in the first place. Any assets you accumulate can be used to provide additional benefits to your loved one with special needs. Unfortunately, the primary care programs do not allow that special needs person to have more than $2,000 in his or her name. For instance, if you leave an estate of $100,000 when you die to the special needs person, that person no longer qualifies. The special needs person will have several options at this point.
One is to “spend down” the money. The person, or their guardian, can use the money for food, shelter, clothing and medical care. The money can be used for many other purposes – buying a TV, magazine subscriptions, entertainment, iPads, and more uses. Once the money is gone, the person can apply for benefits. This money could have been preserved to spend over time if a trust had been used and properly funded.
One other option is to have the guardian work with an attorney to create a first-party funded special needs trust and move the inheritance into the trust. This trust must be approved by the Medicaid authority in your state and will have a crucial provision. Medicaid must be paid back for the money they spent to care for the special needs person from any money remaining in the trust when the special needs person dies. Any money left after that can go to a person or organization identified in the trust.
The surest way to avoid these issues is to work with your team today and get a special needs trust in place. The investment in legal work and financial planning today should more than pay off down the road.
Gifts To The Trust
Too often, I see what I consider to be poor advice from other financial planners, investment advisors and insurance salespeople. Generally speaking, the trust should not be funded today unless specific steps are taken to make funding comply with the IRS definitions of a gift. Current gifts to a special needs trust must be done with the full team involved as a gift to the trust done incorrectly can damage the planning and legal work you have done.
Often, I see an issue where a parent (or someone else) funds a trust with an “annual” gift. A person can make a gift to another person without any estate or income tax issues if the gift follows certain IRA guidelines. In 2011, a person can gift another person up to $13,000 without any tax issues (see IRS Publication 950 for more details by clicking here http://www.irs.gov/publications/p950/index.html ). The publication says that a gift tax return must be filed if: the gift is over the annual exclusion amount; you and your spouse are splitting a gift; or if you gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy or receive income from until some time in the future.
The last portion of the above paragraph is the one that impacts gifts to special needs trusts. The gift to the trust is often considered a gift of a future interest and is not considered a current or present interest gift. The beneficiary has not ability to demand or use the money without the trustee’s approval. Most of the estate attorneys and CPAs I speak to take this to mean that money put into a special needs trust without the proper tax filing can cause trouble.
Trouble means that there is potential for the gift to be considered a gift to the beneficiary of the trust – the special needs person. The whole point of a special needs trust is to keep money out of that person’s name. The wrong type of gift undoes your legal planning. The wrong type of gift could lead to a loss of benefits and a loss of family assets.
Gifts to special needs individuals become countable resources if not spent within the correct time frame. Gifts to the trust made today (often as a deposit) do not appear to meet the guidelines unless the proper tax documents are filed. Unfortunately, most of the time I see trusts with present interest gifts the filing has not been done.
The special needs trust is best used as a vehicle to direct assets towards when someone passes away. The trust can be funded by a parent or grandparent, sibling or spouse who has identified the trust in a will or in other estate planning documents.
Blueprints
Make sure the planning team works together to review each aspect of your intentions in putting together funding in the future for your special needs family member. My process is called Blueprints and designed to map out the future needs, the key foundational elements and how to build a strong financial future.
We are not tax or legal advisors. Funding of trusts is more complicated than putting money into an IRA or investment account. The consequences are big if done wrong. Make sure you review your trust funding techniques to preserve expected benefits for your family member.
Rob Wrubel, CFP,® AIF® is a Senior Investment Consultant with Cascade Investment Group, member FINRA & SIPC. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.
