If you are the parent of a child or adult with special needs, you must be especially careful when creating your estate plan. You want to provide for your child, but leaving them money could interfere with any benefits they receive and result in tax liabilities. Setting up a qualified disability trust may help.
Qualified disability trust definition
When doing special needs planning, you may have heard the term “qualified disability trust.” A qualified disability trust must be set up before the person who is disabled turns 25. Furthermore, the person must have a disability as defined by the Social Security Act. The money in the trust must be used for the sole purpose of taking care of the individual. The trust must be irrevocable. Someone other than the beneficiary must fund the trust.
Tax benefits of setting up a qualified disability trust
There may be tax benefits to setting up a qualified disability trust. Generally, money in the trust can generate income up to the state and federal personal income tax exemption without paying taxes. If the income exceeds that limit, the person with a disability usually pays the taxes at their rate, which can be significantly lower than the person funding the trust.
Remaining qualified disability trust funds
The person establishing the trust can specify what happens to any money left in the trust after the person with a special need dies. Often, these individuals choose to have the remaining funds divided among family members.
If you love someone with special needs who has not yet turned 25, consider setting up an irrevocable qualified disability trust for them.