06 Sep Will this special needs trust be subject to the inheritance tax?

Q. I am one of two trustees of a special needs irrevocable trust established in December 2009. All assets were transferred into the trust three years before the death of the trust’s disabled beneficiary. But after this person’s death, do the secondary beneficiaries of the trust have to pay the inheritance tax?
— Trustee

A. We’re sorry for your loss.

And the answer to your question? It depends.

Irrevocable trusts are often established for the benefit of a disabled beneficiary in order not to jeopardize such beneficiary’s eligibility for public benefits, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

“The funds or assets to establish such trusts can come from third parties or from the disabled person, such as if he or she obtains a personal injury award,” she said. “These trusts are in general referred to as Special Needs Trusts although when funded by third persons, the trust is more specifically referred to as a Supplemental Benefits Trust, whereas when funded by the disabled person it is referred to as a (d)(4)(a) Special Needs Trust.”

That’s a reference to the federal code.

Romania said if third parties funded the trusts, then regardless of when the disabled beneficiary dies, the assets would not be included in his or her estate and thus there would be no inheritance tax.

However, if the disabled beneficiary’s assets were used to fund the trust, it would not be considered a completed transfer because the trust assets and income could only be used for the disabled beneficiary’s benefit, she said.

“Therefore, the transfer would only be completed on the beneficiary’s death – notwithstanding that the trust was established three years before death – and the assets would be subject to inheritance tax if passing to non-Class A beneficiaries,” she said.

Consider working with the estate planning attorney who created the trust because that professional will be very familiar with the provisions of the trust and how it was initially funded.

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This story was originally published on Sept. 6, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.