Parents and grandparents often feel relieved to know they can set up a trust and appoint a trustee to look after their family members who have special needs if they are not able to support themselves.
You can contribute to the care of your most vulnerable loved one by establishing a third-party special needs trust with the help of our team at Anderson Estate Planning in McKinney, Texas. Read on to discover what a third-party special needs trust does and the benefits it offers.
What Is a Third-Party Special Needs Trust in Texas?
A third-party special needs trust is a fiduciary relationship established for the benefit of someone who cannot or should not manage their finances. In most cases, a relative or close friend of the beneficiary will establish the special needs trust as a third-party grantor. The designated trustee must manage the trust funds according to the terms of the trust document.
What Are the Benefits of a Third-Party Special Needs Trust in Texas?
A carefully crafted third-party special needs trust offers a few advantages over other types of trusts. We explore some of the main benefits of a special needs trust below.
Maintain Eligibility for Government Programs
One of the advantages of a special needs trust involves the beneficiary’s eligibility for government programs. The direct distribution of inheritance to the beneficiary could make the beneficiary ineligible for Supplemental Security Income (SSI), Medicaid, and the Children’s Health Insurance Program (CHIP).
With a special needs trust, the beneficiary may continue to qualify for government benefits to cover their basic needs and the trust can supplement the beneficiary’s lifestyle to a higher level. However, the third-party trustee remains in control of the assets to keep the beneficiary’s net worth and income below the maximum thresholds for government programs.
Trustee Discretion Regarding Distributions for a Beneficiary
In many cases, it is unwise for a trustee to distribute funds directly to a beneficiary with special needs. This might be the case if the intended beneficiary:
- Lacks the mental capacity to make sound financial decisions
- Suffers from a drug or alcohol addiction
- Exhibits wasteful (spendthrift) behavior
In such instances, the trustee may distribute income and principal from a special needs trust to:
- The beneficiary’s guardian, conservator, parent, family member, or another person who has assumed responsibility for the beneficiary’s care.
- Any person or entity as custodian for the beneficiary under the Uniform Transfers to Minors Act, or similar statute.
- Other persons or entities for the benefit of the beneficiary.
- An agent authorized to act for the beneficiary under powers of attorney for property.
Others Can Contribute
Grantors sometimes worry trust assets will be insufficient to sustain the beneficiaries. One of the best features of a third-party special needs trust is it remains open to outside funding from other family members and friends. Anyone can make annual gifts to the trust that do not exceed the maximum allowed by law without the imposition of a gift tax.
When and How Do You Fund a Third-Party Special Needs Trust?
A special needs trust usually exists as part of a comprehensive estate plan. The grantor can fund a trust immediately after creating it or upon the death of the grantor. Many grantors fund special needs trusts with the death benefit from a life insurance policy (for married couples a second to die policy is the most economical way to do this). Special needs trusts may be funded with any type of asset. If a retirement plan will be used to fund the special needs trust, it would be wise to speak with an attorney to ensure this is done in the most tax-efficient way.
Anderson Estate Planning: Special Needs Trusts for Special People
Give yourself peace of mind by putting your affairs in order with the assistance of our team at Anderson Estate Planning. Call us at (469) 207-1529 to consult with our attorneys regarding first-party and third-party special needs trusts in the Dallas-Fort Worth, Texas area.