How to structure a special needs trust?


Setting up a special needs trust involves several key considerations:

  1. Funding: Special needs trusts are usually funded upon the grantor's death rather than during their lifetime. This is primarily to ensure the trust's funds are not taxed at high rates prematurely. It's recommended to plan how to populate the trust as part of executing your will 1.

  2. Tax Implications: Income within a special needs trust is subject to compressed tax brackets, meaning it can reach high tax rates quickly (e.g., over $10,000 may be taxed at the highest bracket). Careful planning to minimize tax liability is crucial 1.

  3. Legal and Financial Expertise: Engaging a lawyer who specializes in special accounts is important because these trusts are complex and subject to specific legal requirements. This helps to avoid common pitfalls 2.

  4. Guardianship vs. Trusteeship: It's beneficial to separate the roles of financial management (trustee) and daily caregiving (guardian). The trustee handles the trust’s assets while the guardian takes care of the individual's everyday needs 2.

  5. Optimization strategies: Converting assets like IRAs to Roth IRAs before they are transferred into the trust can be beneficial. This optimizes the tax benefits for beneficiaries, who might still face high tax brackets 1.

For a detailed guide on these factors, engaging with specialized financial planners and attorneys is highly recommended. They can provide tailored advice based on individual situations and changes in law.

Special Needs Trusts

William explains the importance of setting up a special needs trust and how to structure it to maximize tax benefits. He recommends having all assets outside of the trust until it's absolutely necessary and funding it as part of executing a will. He also shares his optimization strategy of converting his IRAs to Roth IRAs to benefit his children's special needs trust.


108 | Setting up a Special Needs Trust