Specialty Trusts

Trusts can be an effective estate-planning tool, if they are used properly. There are many specialty trusts designed to meet specific needs. Here is a general overview of a few of the types of specialty trusts available today.

Special Needs Trusts – This type of trust was originally authorized by the Omnibus Budget Reconciliation Act of 1993. It allows disabled or mentally ill people to keep assets without affecting government benefits. For the purposes of SSI and Medicaid eligibility, the assets in the trust are not counted. Often the assets for the trusts come from an inheritance. Although the trustee cannot disperse money directly to the disabled beneficiary, funds can go to a wide variety of purposes such as out-of-pocket medical expenses, educational materials, personal care attendants, or recreational activities. One feature of a special needs trust is that when the beneficiary dies and if the trust still contains assets, the state will need to be paid back up to the amount that Medicaid paid in medical expenses.

Educational Trusts – College tuition rates have risen exponentially over the last few decades. Families may be tempted to transfer assets to children to begin preparing for future educational expenses, but there are possible tax disadvantages to this plan. An IRS rule referred to as the “kiddie tax” mandates that, for children under the age of 19 and certain young adults age 19 through 23 who are full time students, all net unearned income over $2000.00 will be taxed at their parent’s highest income rate. IRS Section 2503(c) provides an important exception to this tax rule by allowing parents to contribute the annual gift tax exclusion ($14,000 for the year 2013) into a trust for educational purposes. The income earned from the trust will be taxed to the trust as opposed to the parents. There are some specific requirements this type of trust must meet in order for it to offer tax advantages.

Travel Trusts – These are specialized trusts that give beneficiaries a specific travel experience. Perhaps grandparents who live abroad would like to ensure that money is not an obstacle for visiting. Or perhaps you want your heirs to inherit money designated for trips to visit the homeland of your ancestors or to meet extended family overseas. These trusts can be as specific or general as needed. Unlike other types of trusts, these trusts can be started with a relatively small amount of money.

Pet Trusts – Pet trusts can be used to provide for the care and maintenance of a pet after the owner’s death. Although this type of trust was originally invented to care for high value animals such as racehorses, they are now being used for frequently for household pets. Pet trusts are recognized in a majority of states, North Carolina included. There is no official limit on the amount of money that can be left in pet trusts, but some case law suggests that if the amount of money is too high then you run the risk of having your will contested.

There are complex legal factors and financial implications you should consider before setting up any type of trust. If you are interested in a trust, consult an attorney who specializes in estate planning to discuss your unique situation.

*Clement Law Firm, Asheville, NC  
www.eclementlaw.com  *  828-281-8160*