Special Needs Trusts
Your attorney might recommend a “trust” in larger estates, estates with young beneficiaries and in situations with special circumstances. What is a trust? Many estate planners explain that a trust is like a box where you can place your property. A person places money in the box, the trust, and designates a manager, known as the “trustee,” to safeguard the contents of the box. The trustee then distributes trust assets to the beneficiaries you select, in such amounts and at such times as you direct. Of course the money is not really put in a box. The “box” is usually a brokerage account or a bank account where the funds are invested by your trustee.
For example, a grandparent may wish to set aside money for a disabled grandchild, but may be afraid to do so for fear of disqualifying that grandchild from certain government benefits. A grandparent could place the money in a carefully drafted trust, designate a trustee to invest and safeguard the funds and enable the disabled child to benefit from the trust while maintaining eligibility for government benefits such as Medicaid or Supplemental Security Income (SSI) payments. This trust is sometimes called a special needs trust, or supplemental needs trust.
There are many other types of trusts. Credit shelter trusts, also called “by-pass trusts,” are commonly used to help protect large estates from federal estate taxes. Trusts can also be used to set aside money for designated purposes, such as for education. Discretionary trusts and “income only” trusts can be written to protect spendthrift beneficiaries from squandering their inheritance through wasteful spending habits.
Trusts usually cost more money to create because they are more complicated and should be customized for each particular situation. In addition to the costs of drafting a trust, there are often continuing attorneys’ fees and trustees’ commissions over the years as a trust is administered. Many trusts require the filing of fiduciary income tax returns. Accordingly, an accountant’s services are often needed to help prepare and file these tax returns. You need to consider the ongoing administrative costs as you decide whether it makes sense to create a trust.