How to Make Gifts to Disabled Individuals in 2023: Thank You for the Gift, Rich Auntie!

Ah, the classic rich Auntie—she’s got a heart of gold and a wallet to match. She’s the family legend, the one who makes holidays brighter and achievements even more rewarding. But what happens when this generous soul encounters the 2023 gift tax limit and its complexities? Particularly when a loved one has special needs?

Surprisingly, even the rich Auntie’s seemingly straightforward act of giving can quickly turn into a complicated matter that requires some serious planning for special needs beneficiaries. 

In the following guide, we’ll explore the ins and outs of gift tax laws for 2023, and how these impact families with special needs individuals.

How to Make Gifts Without Impacting Needs-Based Benefits

The cherished tradition of gifting has been deeply embedded in the fabric of many families for centuries. It represents not just the exchange of material possessions, but also the love, care, and joy of sharing. While the very act of giving warms hearts, a smart financial strategy, such as making the most of the annual exclusion, can amplify its significance.

The 2023 gift allowance, called the ‘’annual exclusion,’’ allows one to generously give up to $17,000 each per year to multiple individuals without incurring any gift taxes. Form No 709 gift tax return is required, and, importantly, these presents won’t eat into your lifetime gifting allowance.

Now, imagine a figure like Auntie, who embodies the spirit of generosity in many families. Auntie has a longstanding tradition of showering her nieces and nephews with gifts. One year, brimming with excitement, she announces her intent to gift each of them $17,000, perfectly aligning with the 2023 tax-free gift limits. The news is met with joy and heartfelt appreciation.

However, the seemingly straightforward world of gifting takes a twist when financial planning for special needs beneficiaries enters the scene. One of Auntie’s beneficiaries, for instance, might be a niece or nephew receiving Supplemental Security Income (SSI). This program has strict financial constraints, including a $2,000 asset ceiling. Suddenly, Auntie’s generous present threatens their eligibility for these invaluable benefits.

Further complexities arise when we question whether a beneficiary with special needs can judiciously handle such a sizable amount. Not everyone is prepared or equipped to manage a sudden monetary boon. This can turn a well-meant gift into a potential financial dilemma.

What Should Auntie Do? Unlocking the Magic of ABLE Accounts

So, what should Auntie do? Well, the complicated rules surrounding the gift tax limit 2023 may make many generous souls like Auntie scratch their heads in confusion. Yet, among the various solutions available for navigating this maze, one stands out for its simplicity and effectiveness: the ABLE account. 

Let’s delve deeper into why this financial tool is nothing short of magical when it comes to receiving gifts for special needs individuals.

What is an ABLE Account?

Firstly, it’s crucial to understand that an ABLE account is more than just a typical savings account. Created under the Achieving a Better Life Experience (ABLE) Act, these tax-advantaged accounts specifically aim to aid those with disabilities. 

Not only do they offer a shelter for savings, but they also protect the account holder’s eligibility for crucial public benefits like Supplemental Security Income (SSI) and Medicaid.

The Nuts and Bolts of Gifting to an ABLE Account

While the annual exclusion under the gift tax limit 2023 allows Auntie to give $17,000 per individual without tax repercussions, an ABLE account adds a layer of benefit when the gift is intended for a niece or nephew with special needs.

How does this work? Auntie can directly contribute the $17,000 to the ABLE account, and this action is entirely in line with the tax-free gift limit 2023 rules. 

Unlike other types of gifts that you must report, there’s no requirement to file this one with the IRS. This means Auntie’s generous gift also falls neatly within the 2023 gift allowance without attracting any tax penalties.

The Added Perks: Flexibility and Control

One of the standout advantages of an ABLE account over other financial tools like Special Needs Trusts is its flexibility. Not only does the account safeguard eligibility for public benefits, but it also allows for a variety of uses. 

Funds in an ABLE account can be spent on “qualified disability expenses.” This can range from education and housing to personal support services and more.

Also, if Auntie is concerned about how well her niece or nephew can manage such a large sum of money, ABLE accounts offer the option of assigning a trusted individual to manage the account. This ensures that the funds are used responsibly and for the intended purpose, adding an extra layer of security to the financial planning for special needs.

The Best of Both Worlds: Generosity Meets Financial Prudence

To sum it up, an ABLE account serves as the perfect middle ground between Auntie’s generous intentions and the complex world of gift taxes and financial planning for special needs. 

It allows her to make a meaningful financial contribution to her special needs niece or nephew’s life. And, it allows her to stay well within the guidelines of the 2023 gift allowance.

Through this mechanism, Auntie can maintain her yearly tradition of generosity without jeopardizing her loved one’s access to essential public benefits. Now, that’s a win-win situation if ever there was one.

The Pitfalls of Gifting to a Special Needs Trust

So, let’s entertain another scenario. What if Auntie decides to go a different route and says, “Well, my special needs nephew already has a Special Needs Trust set up. I’ll simply gift the $17,000 to that trust.”

It seems like a logical step, especially since funds in a Special Needs Trust do not jeopardize public benefits. However, here’s the crux of the matter: While this move won’t interfere with public benefits, it doesn’t qualify as a completed gift for gift tax purposes, falling outside the umbrella of the gift tax limit 2023 regulations.

What Constitutes a “Completed Gift”?

For the $17,000 annual exclusion to be applicable under the tax-free gift limit 2023 guidelines, the recipient must have full control over the funds. In the case of a Special Needs Trust, the child does not have immediate access to the money, meaning it doesn’t meet the criteria of a completed gift.

Instead, a trustee manages the Special Needs Trust, and the child can’t directly access the funds. This control mechanism is precisely what safeguards the child’s public benefits. But at the same time, it disqualifies the gift from meeting the 2023 gift allowance criteria.

The ABLE Account: A Superior Alternative

Given these complexities, the ABLE account once again emerges as the superior choice for financial planning for special needs. Upon making a gift to an ABLE account, it is considered accessible by a beneficiary. This is the case even when it’s managed by someone else—a parent, sibling, or another trusted individual.

So, if Auntie has concerns about her niece or nephew squandering the funds, she can rest easy knowing that a responsible party can oversee the account’s management. 

This aligns perfectly with the 2023 gift allowance and tax-free gift limit 2023 rules, while also giving Auntie the peace of mind she needs.

The Bold Move: Gifting High-Value Stocks to a Stand-Alone Special Needs Trust

So, we’ve talked about how ABLE accounts are a viable option for Auntie if she wants to gift within the bounds of the tax-free gift limit 2023 and the 2023 gift allowance. But what if Auntie is thinking of a more substantial, long-term financial commitment?

Imagine she’s sitting on a goldmine—a whopping $1,000,000 of stock in a startup expected to go public soon and possibly increase substantially in value. She knows her disabled nephew will need financial support for life, as he can’t work or take care of himself. Her other nieces and nephews may not have the same lifelong needs. So, this presents an opportunity to make a truly life-altering gift.

In this unique scenario, the stand-alone special needs trust emerges as the optimal route for financial planning for special needs. It provides a way for Auntie to transfer this significant asset without jeopardizing her nephew’s Supplemental Security Income (SSI) or other public benefits.

The Ins and Outs of a Stand Alone Special Needs Trust

A stand-alone special needs trust is distinct from a testamentary trust that only comes into existence when the parents pass away. For this mechanism to work effectively, the trust needs to be established as a stand-alone entity, complete with its separate tax ID number.

Once set up, Auntie can transfer the $1,000,000 of stock directly into the special needs trust. This action necessitates the filing of a 709 form—a gift tax return—to stay in compliance with IRS guidelines. However, because the stock hasn’t gone public yet, its lower current value helps Auntie use up less of her lifetime gift tax exemption. This allows her to plan more strategically for future giving.

When the Stock Value Skyrockets, the Trust Benefits

Once the stock goes public and its value soars, all the financial gains accrue to the special needs trust. Auntie’s initial gift thus multiplies in value, offering her nephew a much-boosted financial safety net. And since the parents are still alive, they can oversee this fund, ensuring it serves its intended purpose.

Completing the Gift and Meeting Tax Guidelines

It’s worth noting that this kind of gift doesn’t fall under the annual exclusion or the tax-free gift limit 2023 guidelines. This is because it isn’t a “completed gift” in the conventional sense. However, it’s a powerful way of getting assets out of aunties taxable estate. In the meantime, Auntie’s can still achieve her goal of financial planning for special needs individuals.

The Importance of Open Communication in Estate Planning

Our “Rich Auntie” may be a fictional example, but the lessons here are universal. Whether you’re an affluent aunt, a wealthy grandparent, or simply someone who wishes to leave a legacy for loved ones with special needs, it’s crucial to open the channels of communication when it comes to estate planning.

Why Share Your Plans With Rich Auntie?

If you are a parent with a child who has special needs, and you’ve gone to the trouble of creating a stand-alone special needs trust, don’t keep it a secret. Share the details with “Rich Auntie” or anyone else who might be considering sizable gifts or an inheritance for your child.

For instance, Auntie might choose to amend her estate plan. She may voice that upon her passing, her wealth should be divided equally among all her nieces and nephews. However, for a particular niece or nephew with special needs, their share would go directly into the stand-alone special needs trust that you’ve set up.

By coordinating like this, families ensure that any monetary gifts—be it from grandparents, aunts, or any other relatives—are funneled into the special needs trust. Ultimately, fulfilling the stipulations of the tax-free gift limit 2023 and adhering to the 2023 gift allowance rules.

Get Professional Help When Needed

For families who have someone like our “Rich Auntie,” who can make a significant impact through their generosity, it’s crucial to consult professionals when amending their estate plan. A simple partial amendment to Auntie’s existing estate plan can often suffice, streamlining the process significantly.

Here at Cookman Law, we specialize in estate planning for complex family situations. From crafting customized trusts for special needs individuals to offering various estate planning solutions, our team of experts is ready to provide you with personalized, informed advice.

We hope you found this blog helpful. If you’re interested in going deeper into the subject of gift taxes, we recommend checking out our dedicated video. This elaborates on all the rules related to gift taxes—especially valuable if you’re in a unique situation like that of a “Rich Auntie” or any other generous family member.

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To discuss your unique family situation or to learn more, contact Cookman Law.