As the year comes to an end and the holidays approach, many people consider making gifts to their loved ones. Not only is passing assets on an excellent way to show your love and consideration for your family members, but it is also a great strategy to reduce the risk of taxes. This is because current federal tax law allows taxpayers to gift amounts of up to $15,000 each year to a recipient without this being counted against a person’s lifetime gift exemption of $11.4 million.
There is also no better time than the present to make these distributions because the $11.4 million threshold will reduce to $5.49 million in 2026. This article reviews some special considerations that you should remember to follow, however, if you decide to transfer assets to a loved one with special needs.
Anticipate the Risks
If not properly navigated, passing on assets to loved ones with special needs can end up interfering with that person’s eligibility for government benefits. This is not the only risk involved with transferring assets, though. Even if a loved one does not receive Social Security Insurance or Medicaid, directly transferring assets might still not be a good idea if one is not prudent with money.
If either situation is a possibility, it is a good idea to consider the creation of a special needs trust, which will pass on assets to the loved one in a protected and controlled manner.
Consider Transferring to a Special Needs Trusts
Special needs trusts can be created simply and quickly. Provided that they are properly established, these trusts can hold an unlimited amount of assets that can be distributed to an individual with special needs.
Consider Transferring to an ABLE Account
There are some nuances to special needs trusts, though. For example, transferring assets to a special needs trust does not automatically constitute a gift. To make sure a transfer is classified as a gift, it is a good idea to pass on assets through the loved one’s ABLE account.
An ABLE account lets family members set money aside for the care of the relative while also protecting that person’s eligibility for government benefits. ABLE accounts, however, have restrictions that do not apply to special needs trusts.
Consider Third-Party Special Needs Trusts
If you establish a trust for a family member with your own money, this is referred to as a third-party special needs trust. The trust, rather than the loved one, will then hold the assets that are placed into the trust.
Provided that the beneficiary does not receive assets directly from the trust, the person’s eligibility for government assistance is not sacrificed. Many people use third-party trusts to pay for things that government assistance does not cover like transportation and vacations.
Contact an Experienced Estate Planning Lawyer
The estate planning process is complex and several challenges can end up impacting your end goal if not properly navigated. To make sure that your estate plans end up achieving your goals, it is a wise idea to speak with a knowledgeable estate planning attorney. Contact lawyer Jim A Lyon today.