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Can I Prepare for My Son’s Future Using Income-Producing Real Estate?

January 26, 2024

Question: I am thinking about purchasing income-producing real estate to be owned by my son’s special needs trust to provide an additional income stream to support his lifetime needs. What do I need to consider?

Can I Prepare for My Son’s Future Using Income-Producing Real Estate?

Real estate is certainly an option to provide income within the trust to then provide for your son’s lifetime support needs. You will need to be aware of the costs and risks of managing real estate within a special needs trust.

  • You will need a property manager to manage the properties and consider those expenses when determining the amount of other assets needed within the special needs trust.
  • You will need to consider the amount of cash reserves necessary within the trust to pay for maintenance issues and upkeep of rental properties. You will need a considerable amount of available cash within the trust to ensure no financial hardship to the trust.

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  • If you use a non-family member trustee or a corporate trustee, you will most likely be charged an additional fee to manage real estate within the special needs trust, which you must account for as you are analyzing your future projections for the amount of money necessary to fund your son’s special needs trust.
  • If a family member is your trustee, please know he/she will have quite a bit of management work to complete, so you may want to consider some sort of payment for him/her.
  • Taxes are a major consideration when deciding on using rental properties within your special needs trust. Special needs trusts will require very specific tax planning due to the tax rates within special needs trusts. You will need to understand those rates and the income you are expecting from the Rental Properties in order to determine the net income (after taxes) your son will actually yield from those rental properties. (Unfortunately, you may be very
    disappointed with the after-tax income, especially for all the extra work and fees it will cost to own rental properties within the special needs trust).
  • Consider using LLCs to own each rental property that can then be owned by the special needs trust. This can be used to protect other assets in the trust from any liability issues or lawsuits that can occur surrounding each individual rental property. Rental properties always seem to be part of the conversation when considering the funding mechanism for a special needs trust; however, the constant management, cost, and tax issues can damper the positive impact on future support needs. Many times, other financial tools are simpler and more cost effective with less risk and less management than income-producing real estate when the goal is to provide for your son’s lifetime support needs within a special needs trust.

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This article was featured in Issue 109 – Attaining Good Health.

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