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To the level that income is dispersed to the recipients, the beneficiaries, not the trust, undergo tax on that earnings. Income dispersed to an unique needs beneficiary does not generally lead to a big tax consequence, because beneficiaries generally have restricted taxable income. Frequently, the special needs beneficiary's income is below the limitation topic to earnings tax.

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When the SNT maintains trust income, nevertheless, special tax guidelines apply that frequently result in significantly greater income tax obligations. Under present law, the tax brackets for trusts and estates are compressed, which means that a trust reaches the highest earnings tax rate (39.6 percent in 2013) once it has $11,950 of income (in 2013).

Using the 2013 tax tables, a trust will be subject to earnings tax rates of 25 percent (the next tax bracket over 15 percent) on income over $2,450, while a single person (for example, the SNT recipient) would reach this tax rate just if the beneficiary had income over $36,250.

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To make matters worse, SNTs with undistributed income in excess of $11,950 also will be subject to the 3.8 percent financial investment income surtax imposed by the Patient Protection and Affordable Care Act of 2010, increasing the overall tax rate paid on income over $11,950 to 43.6 percent. Obviously, these high tax rates impose pressure on trustees to make circulations, even when circulations may not be prudent given the distinct situations of the unique requirements recipient.

To repair the problem, the invested properties within the trust would need to be shielded from current earnings tax (by being tax-deferred or tax-exempt), while still being readily available for the trustee to distribute to the unique needs person when essential. Life insurance coverage may be an ideal funding automobile for SNTs, particularly in light of the 2013 earnings tax increase and the imposition of the financial investment income surtax.

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Like the case with SNTs, the sponsors of executive delayed settlement plans seek to prevent existing income tax on accumulations while maintaining access to the underlying financial investment assets so that distributions can be made as defined in the strategy. As a funding car, life insurance offers tax-deferred development (or tax-free development, if the policy is in force at the death of the guaranteed), yet permits the owner either to withdraw funds up to the amount of the basis in the policy, or borrow from the money worth without earnings tax effects.

When SNTs are produced as inter-vivos trusts, life insurance coverage can be acquired on the life of the grantor, the grantor's spouse, or as a joint life policy on the couple. During the grantor's life, a number of the beneficiary's financial requirements can be paid for directly by the grantor, thereby allowing the policy money worth inside the trust to collect while still being available for use if needed.

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If the special requirements specific is insurable, an alternative method is a life insurance coverage policy acquired on the life of the recipient. This approach offers tax deferral on the underlying financial investments while permitting access to those investments for distribution when necessary and changing the wealth taken in by the special needs recipient with a tax-free life insurance death advantage for the rest recipients of the SNT.

Although scenarios will vary, utilize of a maximum-funded, low-death-benefit variable universal life insurance policy normally will be suitable, specifically when the predicted time frame and the grantor's financial threat tolerance are consistent with equity-based returns. Regardless of the type of policy, life insurance funding permits SNT grantors to make the most of the benefits readily available to special needs children by depriving the federal government of high earnings tax payments from the unique needs trust.

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This problem of The Voice is composed by Ken W. Shulman, Esq. who is a partner in the Boston, Massachusetts, office of Day Pitney LLP. Ken focuses his practice on estate preparation and associated problems for families who have children with disabilities and on elder law. He has served as a board member for several human service companies including the Greater Boston ARC and currently serves as a board member for the Asperger's Association of New England.

He is a co-author of Managing a Special Needs Trust, People with Disabilities Press (2010 ). Ken frequently functions as a trustee of special needs trusts at his customers' request. Ken is a member of the Unique Requirements Alliance, a nationwide, non-profit organization devoted to assisting people with disabilities, their households, and the professionals who represent them.