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Charitable remainder and special needs trust: combo: an example of a win-win-win situation for parent, child, with a disability and charity.

Say you're getting on in years and, anticipating the time when you're no longer able to do so, want to provide a lifetime of care for your adult child who has a serious disability. You'd also like to make a substantial financial gift to the charity that's been so helpful in providing advice and care for the child over the years. Is there any way you can achieve both goals, and do so in a tax-effective way?

One example, a Charitable Remainder Trust (CRT), when combined with a Special Needs Trust (SNT), creates a powerful combination that can result in a win-win-win situation for the child with special needs, the parent or other trust settlor, and the charity. If structured correctly, the CRT and SNT combo provides (1) the parent with a charitable contribution tax deduction and a reduced income and/or estate tax bill, (2) a steady funding stream to the SNT established for the child's benefit, and (3) a monetary donation to the charity or charities of the parent's choice.

Before you're able to enjoy the benefits gained by combining a CRT with a SNT, however, specific conditions imposed by the Internal Revenue Code and by the IRS must be satisfied.

How the Arrangement Works

If you want to make a gift of money or appreciable property to an IRS-recognized charity, while at the same time providing for a child with a disability or other special need, a 1969 change to the tax code allows you to set up a Charitable Remainder Trust and transfer the property to the CRT rather than directly to the charity. If the CRT qualifies under the tax rules, you'll receive an immediate income tax deduction for the present value of the remainder interest that will be transferred to the charity (IRS maintains tables to help you figure this interest), you'll remove the transferred assets from your taxable estate (and so avoid estate taxes on the assets), and you won't owe any immediate capital gains taxes on the sale of the appreciated assets. And because the CRT must have at least one "non-charitable" beneficiary-meaning a beneficiary that isn't an IRS-qualified charitable organization-reinvestment of the transferred assets can provide a steady stream of payments to a Special Needs Trust established for the child. Upon the child's death, amounts remaining in the CRT will be paid to at least one charitable beneficiary, and any amounts remaining in the SNT will be paid to the child's estate or to charity.

To qualify for these breaks, the CRT must be designed and set up as either a Charitable Remainder Annuity Trust or as a Charitable Remainder Unitrust. If the annuity format is selected, a fixed dollar amount-equal to a percentage of the initial trust contribution- is paid annually to the income beneficiary (in this case, the SNT for the child with a disability). Payments from a unitrust, on the other hand, equal a fixed percentage of the fair market value of the trust's assets, determined annually. In either case, the percentage selected cannot be less than 5%, nor more than 50%, of the contributed assets (in the case of the annuity trust) or of the annual fair market value of the trust (in the case of the unitrust). Note that, under the tax rules, qualified charitable organizations include, but are not limited to, federal, state, and local governments and organizations set up and operated only for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals.

IRS Removes Obstacle to Use of Lifetime special Needs Trust with Charitable Trust

In addition to the above requirements, the tax code requires a Charitable Remainder Trust's annual payments to an individual to be made for the individual's life. However, the same law limits the term of the charitable remainder trust's payments to 20 years if a trust, rather than an individual, is named as the CRT's non-charitable beneficiary. This 20-year restriction could have posed quite a problem for parents like you that want the CRT's payments to be made to a special needs trust over the lifetime of their child with a disability.

In 2002, the Revenue Service eliminated this potential obstacle, and ended a considerable amount of anxiety experienced by parents of children with special needs, by issuing Revenue Ruling 2002-20 [2002-1 CB 794]. The Ruling holds that a Charitable Remainder Trust may pay amounts to a Special Needs Trust for the life of an individual if (1) the individual is "financially disabled" (meaning they're unable to manage their financial affairs), and (2) the CRT and SNT combination conforms to one of the following three formats:

1. The Special Needs Trust provides that a specific portion of the amount it receives from the Charitable Remainder Trust will be paid to the income beneficiary (in your case, the individual with special needs) each month. However, if the trustee does not think the monthly amount is enough to provide adequately for the individual's care, support and maintenance, or for any other reason, additional amounts will be paid from the SNT for the individual. On his or her death, the amount remaining in the trust will be paid to the individual's estate. This is sometimes called a "flow through trust."

2. Under the second format, the trustee of the SNT has absolute discretion to pay trust income and principal to the individual with a disability or other special need so long as the payments supplement, but do not supplant, his or her available government benefits. Again, on the individual's death, the amount remaining in the trust will be paid to his or her estate. This is sometimes called a "discretionary trust."

3. Under the final format, a discretionary SNT is created (as in the second format, above). However, upon the child's death, the trustee reimburses the state for all Medicaid assistance to the child. The income beneficiary under this arrangement holds what is called a "testamentary general power of appointment" over the balance remaining in the SNT (meaning the beneficiary can, in his or her will, name who gets the balance). If the individual with a special need does not exercise the power, the balance is paid, in equal shares, to the individual's family and charity. This is known as a "discretionary power of appointment trust."


"Essentially, Rev. Rul. 2002-20 is limited to these three scenarios," says Larry Jones, an attorney in the Estate and Business Planning group and a Special Care Planner with the Massachusetts Mutual Life Insurance Company (MassMutual). He adds that "the devil is always in the detail," and says that a conservative approach is to "stay within the [IRS] model" rather than to deviate from the Ruling's scenarios and so "push the envelope."

This ruling-which applies if either a Charitable Remainder Annuity Trust or Charitable Remainder Unitrust names the SNT as beneficiary- represented quite a break from prior law which, among other things, required that a CRT's income be used for the trust beneficiary's support-a requirement that would have, in most cases, ended a beneficiary's eligibility for government benefits, such as Supplemental Security Income (SSI) and Medicaid.

The Structure of The Special Needs Trust

The Special Needs Trust that is named as the CRT's noncharitable beneficiary must be set up as an irrevocable trust by someone other than the income beneficiary (the beneficiary is the child with special needs, in your case) and should be funded with assets belonging to an individual other than the beneficiary. (If the SNT is funded with the beneficiary's assets, it would be considered "self settled" and would have to contain a "pay back" provision requiring that, upon the beneficiary's death, trust assets be used to repay Medicare benefits paid to the beneficiary during his or her life. If a self-settled trust lacks a pay back clause, it's deemed a "countable resource" and may end the beneficiary's eligibility for SSI and Medicare).

Additionally, the SNT trustee must have discretion over trust distributions, and the trust must limit such distributions to expenses that supplement, and do not supplant, SSI benefits for food and shelter and Medicaid health benefits. The SNT beneficiary cannot be the trustee of the SNT nor have the ability to compel a distribution. And it's best that the beneficiary not have the ability to change the SNT trustee, since such ability could arguably be interpreted as a round-about way for the beneficiary to require a distribution (the power to change the trustee is best given to a third party, such as the beneficiary's relative).

If these guidelines are followed, the SNT assets will remain a non-countable resource, SNT payouts won't generate countable income, and therefore the beneficiary's eligibility for public benefits won't be jeopardized. (Under the Social Security Administration's rules, your child could lose his or her SSI and Medicare benefits if the value of their assets top $2,000).

A Common Application

Eric King, a Trust and Estate Consultant with The MassMutual Trust Company, FSB, a wholly-owned subsidiary of MassMutual, says the use of a Charitable Remainder Trust in combination with a Special Needs Trust is actually quite common because "the only possible non-person recipient of a Charitable Remainder Trust income stream is a Special Needs Trust." He says that many clients find such combinations "very favorable arrangements" because they "supply an income stream to the individual with a special need and also support a charity--normally the charity that's helped out the individual [with a disability or other special need]."

Consequently, King says he's seen the technique most commonly used where an individual with a disability or other special need has lived in a group home which ultimately becomes the charitable beneficiary.


If the Charitable Remainder and Special Needs Trusts are designed as indicated in this article, and the adult child with a disability is financially disabled as required by the IRS, the CRT will be able to provide a steady stream of income to the Special Needs Trust for the child's life. The payments from the SNT to the child will supplement and not replace his or her SSI and Medicare benefits, and so will not jeopardize the child's eligibility for such benefits. And you, as the child's parents, will receive not only an immediate income tax deduction for the initial contribution to the CRT but, because appreciable assets are removed from your estate, you may enjoy a lower estate tax bill and will avoid capital gains tax on the sale of the assets. Finally, your favorite charity-often-times the charity that's helped your child-will receive a gift of the remainder interest in the CRT and perhaps in the SNT.

All in all, a win-win-win situation.

A Special Care Planner through MassMutual's SpecialCare[SM] program can assist parents in drafting Letters of Intent and can help make a difference in the quality of life for an individual with special needs, their caregiver and other family members. Through SpecialCare you will learn valuable financial strategies, identify financial strategy solutions, access vital information, and meet certified specialists who will work with you and your professional advisors--your banker, accountant or financial planner, lawyer, social workers and health care providers--to review your financial picture and offer options to fit the needs of each situation. For more details, visit MassMutual's website at, or call 1-(800)-272-2216.

About MassMutual

MassMutual Financial Group is the fleet name for Massachusetts Mutual Life Insurance Company (MassMutual) and its affiliates, with more than $450 billion in assets under management at year-end 2006. Assets under management include assets and certain external investment funds managed by MassMutual's subsidiaries.

Founded in 1851, MassMutual is a mutually owned financial protection, accumulation and income management company headquartered in Springfield, Mass. MassMutual's major affiliates include: OppenheimerFunds, Inc.; Babson Capital Management LLC; Baring Asset Management Limited; Cornerstone Real Estate Advisers LLC; MML Investors Services, Inc., MassMutual International LLC and The MassMutual Trust Company, FSB. MassMutual is on the Internet at

The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.
COPYRIGHT 2007 EP Global Communications, Inc.
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Title Annotation:SpecialCare[SM]
Publication:The Exceptional Parent
Article Type:Company overview
Date:Dec 1, 2007
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