Estate planning for people with special needs from a tax perspective

Abstract

When planning an estate for a seriously mentally or physically disabled person, it is crucial to plan for the person’s future financial security and care. The challenge that planning agents face when dealing with such a person is that the individual has the same wants and needs as someone without a disability, but cannot satisfy these needs without the financial and emotional support of a parent or guardian. This support is provided by using one of a variety of legal vehicles. One such vehicle is a trust. A trust is a structure to which property is transferred, where it is administrated and controlled by trustees on behalf of beneficiaries, in accordance with a trust instrument. The Income Tax Act (ITA) expanded the trust and established a special trust, which caters especially for people with special needs. Apart from trusts and special trusts, there is also the options of non-profit organisations (NPOs) and public benefit organisations (PBOs). These organisations usually are exempt from tax liabilities and in certain cases the estate planner can employ such a strategy to help ensure a financial future for a person with special needs. When planning an estate with a special-needs person in mind, there are, apart from the different types of applicable legal vehicles, certain other factors that should be taken into account. One such factor is the taxation of each legal vehicle. A trust, special trust, NPO, and PBO, all have different consequences regarding income tax as well as tax on capital gains. These factors can lead to advantages as well as disadvantages for agents planning an estate for a special-needs person. When deciding which legal vehicle will be best suited to a specific situation, the tax implications usually play a decisive role in the decision of the planner. In light of the above-mentioned outline of the problem statement, it was deducted that the most suitable solution to the research question, is that of a special trust.