The Annual Exclusion and Special Needs Trusts

Beginning in 2009, the annual exclusion amount increased to $13,000 per person. The annual exclusion is the amount that each person can gift to anyone each year without any gift tax or use of the $1 million gift tax exclusion.

In order to qualify for the annual exclusion, the recipient must have a present interest in the gift. A present interest means that the recipient receives the gift today and not in the future. Trusts can be drafted in such a way to qualify for the annual exclusion by giving the trust beneficiaries the right to withdrawal up to the annual exclusion amount each year. Any amounts not withdrawn will stay in the trust. This right of withdrawal is often referred to as a "Crummey" power, named after a court case of the same name.

Special needs beneficiaries cannot have Crummey powers because having the right to withdraw this money could disqualify them from governmental benefits they may be entitled to. Therefore, generally, gifts to special needs trust will not qualify for the annual exclusion amount and instead, will use part of the donor’s $1 million gift tax exemption.

One way to use annual exclusions with special needs trusts is to add additional beneficiaries to the special needs trust. The grantor’s spouse or siblings of the special needs beneficiary can be added to the trust, and thus, given Crummey powers, so that annual exclusion gifts can be made to the trust using annual exclusion amounts available to these additional beneficiaries.

For example, if a father creates a special needs trust for his son, the father can include the mother as a discretionary beneficiary under the trust. The mother would also have Crummey powers, thus allowing donors to give up to $13,000 per year to the trust using their annual exclusion amounts towards the mother.

If tax planning is important to you, make sure you are maximizing tax planning opportunities by creating and funding a trust for your children with special needs using available annual exclusions.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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