As the End of the Year Approaches, Remember Those Gifts to Special Needs Trusts

The end of the year is approaching and the holidays are in full swing, which means that many people are getting ready to make gifts to their family members. As we discuss in a separate article, giving gifts of cash or certain gift cards to a person who receives government benefits can compromise their receipt of those benefits. Even if your loved one does not receive benefits like SSI or Medicaid, in many cases direct gifts of cash to a person with special needs may not be the best idea, especially if the recipient is not very adept at handling money. In many cases, the best way to provide monetary assistance to your loved one during the holidays is through contributions to a special needs trust. As an added bonus, a strange glitch in the tax code may make 2010 the year for more affluent families to make larger gifts before gift tax rates rise in 2011.

Special needs trusts are important tools that help family members protect their loved ones with special needs from fluctuations in government benefits. Almost anyone can establish a special needs trust for a loved one, and in most cases, a trust established by one family member can receive funds from other family members, which is ideal around the holidays when relatives would like to give cash gifts. As long as it is properly established, a special needs trust can hold unlimited funds, and the trustee or trustees can use their discretion to make payments to, or for the benefit of, the person with special needs who is the beneficiary of the trust.

If your family member already has a properly established special needs trust, then it could not be easier to make a gift to the trust: simply make your check payable to the "John Doe Special Needs Trust" (be sure to ask your special needs planner for the exact name). If your loved one does not already have a trust, then what better gift to give than the trust itself? Although trusts not are simple documents, there is still time to put one into place before the end of the year, and creating the trust now will protect your loved one (and your gifts to your loved one) for years to come. And remember that in most cases once one family member has established the trust, others can contribute to it without having to set one up themselves.

Now the part about the added bonus for gifting this year: In most cases, gifts to special needs trusts do not count for the annual gift tax exemption, which means that you cannot gift up to $13,000 to a relative's special needs trust without having it count against your lifetime gift tax limit, which is currently $1 million. (There are some complicated exceptions to this rule; talk to your special needs planner for the details.) What this means is that you can give away $1 million during your lifetime without having to pay any gift tax on the gifts. Once you have exceeded your $1 million in lifetime giving, you have to pay a tax on gifts moving forward, and this limit includes most gifts to special needs trusts. While most families don't have to ever worry about the gift tax, for some wealthier families, 2010 presents a great opportunity to give because the gift tax rate has been lowered to 35 percent, and, absent federal legislation, it will increase to 55 percent in 2011. So if you make a large gift, or a series of gifts, to a special needs trust before the end of the year, you could save quite a bit of money. Your special needs planner has all of the details and will have the latest information about what the federal government is planning to do about gift taxes next year.

The end of the year can be a hectic time, but it is also a wonderful season of giving. If you are thinking about helping a member of your family, or a special person in your life, take some time to speak with your special needs planner first. In most cases, giving your gift in trust will make the gift even more useful.

Article Last Modified: 12/06/2010