When a special needs trust is created, liquid assets, such as cash, stocks, or bonds need to be titled to the special needs trust and a bank account must be started in the name of the special needs trust. An EIN or TIN must be obtained as the tax number for the trust. Then, all cash and equivalent must be put into that bank account for it to be used under the special needs trust.
What Happens If A Special Needs Trust Is Not Properly Funded?
If a special needs trust is not funded properly, the money cannot be used by the beneficiary. In fact, all of the money or other assets that were not properly put into the trust would be required to be used before Medicaid could be used, which defeats the purpose of the special needs trust.
How Can Parents Ensure That Their Child’s Special Needs Trust Will Be Funded Properly After Their Demise?
The most important thing any parent can do is to choose the successor trustee very carefully. The successor trustee takes over when the parents die and will be in charge of any additional funding, plus using the money that is in the trust.
Why Is The Accounting Associated With The Special Needs Trust So Important?
In a first-person trust, or a special needs trust that is funded by money of the special-needs person, the court will oversee that money. Every year, it will have to see an accounting. If the court finds irregularities, it could ruin the whole trust.
Who Is Responsible For Keeping The Accounting Of A Special Needs Trust?
The trustee of the trust has the duty to keep the funds. He or she will usually hire an accountant but must oversee that work. In a first-person trust, the court will oversee what the trustee does.
How Is A Special Needs Trust Taxed?
There are two types of special needs trusts and they are taxed differently. The first-party trust or self-settled trust is made with funds that are the special-needs person’s own funds, usually from a personal injury settlement. The trust will pay taxes on some of the money, but most of the money is passed through to the special-needs person, who will pay the taxes on that money. Usually, their parents or guardians will pay those taxes.
A third-party trust is one funded by someone other than the special-needs person. In this type of trust, any income that is earned is paid by the trust and the trust must file an income tax return for that. However, money that is paid out to the special-needs person is a deduction. If used properly, the trust should pay very little income tax.