“Exceptional care must be taken when considering how and when your inheritance is distributed to most children with special needs, because of the public benefits they may be receiving and the tax consequences involved”
As parents, it’s hard to treat all children fairly, despite their different personalities and capabilities. Most try to ensure that one child never feels less loved than another. Some will carry that over into their estate planning. However, there are times when inequity may be a better choice. A recent Tickertape article is appropriately titled “Estate Planning for Special Needs Children: Trying to Be Even-Steven?” The article says that one instance when fair is not always equal, is when you’re planning the future for a special needs child after you die.
Children with special needs are typically eligible for state and federal benefits to provide them with assistance for their long-term support. Among the most common are Supplemental Security Income (SSI) and Medicaid. In many states, SSI may qualify children for Medicaid, or Medicaid comes automatically with SSI. These are need-based benefits that are means-tested. SSI recipients have a strict assets threshold of $2,000 for an individual. If a special needs child gets an inheritance, it might push him or her, above that ceiling. This could result in ineligibility for the program benefits that might be used to cover medical, therapeutic, or housing needs.
When money is paid directly to the child as beneficiary, it can cut SSI benefits. The same is true, if the special-needs heir disclaims the inheritance.
Government benefits may be retained, if an inheritance is set up in a Special Needs Trust (SNT), which is designed to help a beneficiary with special needs and preserve government aid while protecting assets. The trust allocates inheritance assets to the child with special needs, but it’s via a third-party.
However, there might be tax implications. While the inheritance itself isn’t taxed, the income that it generates in a special trust is typically taxable at trust tax levels. Creating an SNT can be complicated, and the rules can vary from state to state. Speak to a qualified trust attorney to be sure that all income is reported properly and there are no deductions left on the table.
Treating children equally when one has special needs, may result in creating an inequality. Because of the government program eligibility requirements, you must consider the net tax implications when dividing your estate. Be straightforward with your children as to your intentions, especially if one child will be needing long-term care. Knowing the plans will help everyone prepare for the future.
One of the main goals of our law practice is to help families like yours plan for the safe, successful transfer of wealth to the next generation. Call our office today to schedule a time for us to sit down and talk about your estate plan, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
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Reference: Tickertape (June 14, 2017) “Estate Planning for Special Needs Children: Trying to Be Even-Steven?”