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Can a Special Needs Trust help with tax deductions?

By January 14, 2020 No Comments

Can a Special Needs Trust help with tax deductions?

In our past articles, we outlined the extensive medical deductions are allowed by the IRS. Medical deductions can also include special services for the elderly as well as special needs children and adults. While an extensive amount of medical and related services can be deducted, some people may not get the benefit of the deductions because of the income threshold and the need to itemize deductions. This means that if a married couple is filing taxes jointly, and they have a joint income of $150,000, they need to have over $11,250 of medical or special needs expenses in 2019 to make it worthwhile for tax deductions. In addition, they should be itemizing their expenses which means that they should have a total of over $24,400 in mortgage interest and state and property tax expenses. What this adds up to, is that often people who do pay a lot in medical and special needs expenses lose out on the tax deductions that are meant to help pay for it.

In addition, a family member with special needs or an elderly individual may be eligible for receiving state benefits like Medical or SSI. In this case, there are severe limitations on the amount of money that this person can receive either as income or gifts. Nevertheless, the family may still want to pitch in for creating a better quality of life for this person with some additional resources.  A dedicated sum of money may be set aside for this person in a vehicle called a “special needs trust” (SNT). Income generating rentals and real estate can also be set aside in this type of trust. Expenses that are deductible as medical expenses on your tax return can also be deducted out of the SNT. In addition, there are no income thresholds for deductions out of the SNT, leading to potential tax free benefits that you pay for your loved one. The assets such as investments or rental property that are being used to generate the income, can remain in the trust and can pass on to other members of the family after the special needs person passes away.

Additional expenses that can be deducted from SNT income include legal and advocacy fees and reasonable trustee and fiduciary fees. It is important to remember that the SNT cannot deduct expenses like rent and food.  Deductions can be for medical care, custodial care, support services, and similar care not provided by public benefits programs. In most cases the payments should be made to the care providers against their invoice and not be distributed to the beneficiary.

The benefits of having a SNT are many and taxes are only a part of it. Other benefits include the ability to keep needs-based public benefits, appropriate financial and asset management,  and identifying individuals and/or corporate fiduciaries to administer the assets and advocate for the benefit of the special needs person. Identifying the need for a Special Needs Trust, administering it correctly is a complex process and should always be done under the guidance of an experienced attorney.