September 24, 2019

Financial Security for Special Needs Children

A Suresh
Executive Director, PropSevaⓇ

Financial Security for Special Needs Children

Financial security for self and family members is of paramount importance in one’s life and people work hard to create wealth and provide for safeguarding the welfare of their family.

The need to provide such financial security becomes a little more complex for parents of children with special needs. Such children require greater financial support to meet not only their regular living expenses, but also the medical expenses, attendant expenses, special education needs and other expenses to provide comfort to such children.

Though parents of such children may have adequate financial resources to provide financial support, one of the concerns for such parents is to ensure the financial security for the special needs child especially after their life. Bequeathing the estate through “WILL” to a special needs child is not a suitable option as the child is not capable of managing the estate due to disability.

The other option for such parents is to leave the estate with a family member (brothers/sisters)with a direction to use such estate for the wellbeing of the child. But the flipside of such arrangement is that there could be change of mind of such person or legal impediments in management of estate or a void due to death or disability of the relative.

Setting up a private trust with an objective of wellbeing of the child and leaving the legacy to the trust is perhaps a suitable option in ensuring the financial security of a special needs child.

A trust is a relationship where property is held by one party for the benefit of another party. A trust is created by the owner, also called a “settlor”, “trustor” or “grantor” who transfers property to a trustee. The trustee holds that property for the trust’s beneficiaries.

The person who transfers the property to trustee/s is called the “author” or “settlor” of the trust; the person who accepts the trust is called the “trustee”, the person for whose benefit the property is accepted is called the “beneficiary”; the subject matter of trust is called “trust property”; the “beneficial interest” of the beneficiary is his right against the trustee as owner of the trust property; and the instrument, if any, by which the trust is declared is called “instrument of trust” or “trust deed”.

Under the Indian Trust Act, a settlor can create a trust with his or her own personal property and can officially appoint one or more trustees and lay down the terms and conditions benefiting the identified beneficiary or beneficiaries including one’s spouse, own child, relative or any other individual or group of individuals.

A Private trust could be created for the benefit of one specific beneficiary which is also known as 100% specific beneficiary trust. In such a case, the entire benefit of the trust would go to the specific beneficiary named in the trust.

In the event of financial difficulties for the parents to provide for well being of special child, while seeking financial support from family/extended family members or other members of society, it may give confidence to such members to contribute to the Trust as their contributions are applied judiciously for the welfare of the special child.

All incomes (other than the exceptions) of a minor child, whether direct or through a trust would be clubbed or added with the income of the minor child’s father or mother who has a higher taxable income. (U/s 64 (1A) of Income Tax Act).

As per Sec 64 (1A) of Income Tax Act, any income of a minor child who is suffering from disability of the nature specified in section 80U like physical disability, blindness etc. will not be clubbed with the income of the parents.

The specified disease u/s 80 U :-

  • Blindness
  • Low vision
  • Leprosy-cured
  • Hearing impairment
  • Loco motor disability
  • Mental retardation
  • Mental illness
  • Autism
  • Cerebral palsy

A specific beneficiary private trust with adequate provisions provides substantial safeguards to protect and provide the funds for the wellbeing of a special needs child. And, as per the current Income Tax provisions (FY 2019-20) the income arising to special needs children either directly or indirectly is exempted from clubbing with the income of the parent who has a higher taxable income.

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