It is only wise to choose the tools of estate planning that help you get the most from your finances after a lifetime of earning and saving for your family. Trusts vary wildly, particularly across state borders. Each type of trust has a unique purpose and requirements from the granters as well as the beneficiaries.
Special needs trusts are meant to provide the agreed financial support to beneficiaries with psychological or physical disabilities. Typically, the benefits are used as an indispensable tool for a comfortable life, pursuance of education, or access to medical amenities. There are two primary categories of trusts across all states in the USA; revocable and irrevocable trusts.
What are Revocable and Irrevocable Trusts?
When creating a trust, you get to specify whether it will be revocable or irrevocable. Both types of trusts have various benefits as well as drawbacks and should be reviewed with your family’s needs in mind before landing on a decision.
Revocable Needs Trusts
If a trust is revocable, you have the right to revoke (subtract) or add assets to the trust agreement at any time. Revocable trusts offer a higher degree of flexibility to the beneficiaries, allowing them to manage the trust depending on the changes in life circumstances for your family.
Nevertheless, with a revocable special needs trust, the government assumes the assets added to the trust as part of your estate. The implication of this law is that every asset in your special needs trust will be subject to property tax and, in some instances, lawsuits.
Irrevocable Special Needs Trusts
Irrevocable special needs trusts, on the other hand, are considered by the government as separate assets from your own estate. However, you do not have the right to add or subtract assets from an irrevocable special needs trust. For irrevocable special needs trusts, the assets are exclusively designed to benefit the included individuals.
You cannot use the assets included in an irrevocable special needs trust for any other purpose, however immediate they may be. While many may view this as a setback, it does offer a few benefits. A good example would be the fact that creditors of any outstanding debts or taxes cannot have access to the assets included in the trust.
Choosing a Special Needs Trust
All special needs trusts are meant to offer financial support to the beneficiaries. Unlike wills, special needs trusts include government benefits such as Social Security Disability Insurance (SSDI), Supplemental Security Income (SSI), and Medicaid.
Through a special needs trust, the beneficiaries of a special needs trust continually receive public benefits income while also getting funded by the trust with limitations on usage. The purposes of the trust funds are often limited to education costs, medical expenses, life insurance policies, self-support amenities, home furnishings, and the cost of repairing or purchasing a car or home.
Choosing between a revocable and irrevocable special needs trust is driven by several factors, all of which should be in consideration of the current and likely future life circumstances of your family members. Generally, if you feel that you or someone in your family ought to manage the assets you intend to include in your trust, then you should opt for a revocable trust.
Which is More Recommendable Between Revocable and Irrevocable Special Needs Trusts?
The law that regulates the revocability of a special needs trust is identical to the law that regulates other trusts: All trusts feature revocable and irrevocable trusts options. Nevertheless, no one knows the life situation that their family will be confronted with in five to twenty years from now.
As such, you can effectively choose between having the right to revoke the special needs trust and having your hands tied regardless of your opinion on the trust’s effectiveness. Irrevocable trusts also often include irreversible material terms that may have a significant impact on your family’s life quality.
While most clients are advised to subscribe to a revocable special needs trust, getting the aid of a special needs trust consultant could be of great assistance in deciding which option is best for you and your family.
Being able to revoke or unable to revoke a special needs trust is a critical decision you have to make for the sake of your beneficiaries. The choice is not entirely based on your intentions for your family but also on the current and predictable life circumstances of you and your family. Regardless, you will have to make a decision based on whether or not your assets should be altered in any way or left as is for your beneficiaries.
It is often a complex process to create an effective special needs trust for your loved one. That’s essential because you have to consider factors such as tax implications, allowed public benefits, and the impact of the trust on your family’s overall financial and estate plan.
Frequently Asked Questions
Should I be concerned about changes in special needs trust laws?
There are limited responses that your special needs agent has if an aspect of the law is changed. However, you need to get in contact with them to know which specific ramifications a change in the law has.
Are social needs trusts deductible in my taxes?
Any contributions made to a special needs trust are not deductible. However, you need to refer to a tax professional to know which states offer tax freedom.
Do I need to fund a special needs trust right away?
Depending on your special needs trust agent, there is flexibility in the timing of deposits. The people funding a trust are referred to as grantors. Grantors may put money into a trust setup, even though they won’t be using it immediately. Nevertheless, there is often a monthly or yearly maintenance fee for those who fail to put money into the trust after creating it.