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Funding a Special Needs Trust – How Much is Enough?

February 09, 2023

As a parent or guardian, you want to ensure that your child with special needs will remain financially secure even when you are no longer there to provide support. Given the significant, ongoing expenses involved in your child's care and uncertainty about what needs may arise after you are gone or what public benefits may be available, determining how much a special needs trust (SNT) should hold is no small feat.

Fortunately, help in calculating your special need’s goal is available from attorneys, care management agencies and financial planners with expertise in disability issues.  With the help of a professional, you can begin making concrete plans for your child's future. Based on information you provide about anticipated income and expenses, they can calculate ball park realistic estimates of how much your child will need in lifetime financial support. Financial planners suggest re-running this type of calculation periodically, particularly as your child nears adulthood, to ensure the estimate reflects the most accurate, up-to-date information about needs and circumstances.

Getting Started

The first step in determining the amount you must set aside in an SNT is considering your goals and expectations for your child's future. If you haven't yet created a Memorandum of Intent, also called a Letter of Intent or a Life Plan, Request A Free Template.  This is the time to draft a document addressing factors such as your child's medical condition, guardianship needs, ability to work, desired living arrangements and what you envision for quality of life, all of which will drive your special needs calculation.

Once you've considered the "big picture", you'll need to identify your child's future income sources and living expenses. The calculators used in practice help identify relevant categories for you (e.g., public benefits income. transportation costs).

Next, you'll need to tackle the most arduous part of the process, placing a dollar value on each category. You can start by listing any current income or expenses likely to continue into your child's adult years. You'll need to consider income from sources such as life insurance proceeds, gifts, inheritances, and legal settlements, as well as from employment and public benefits such as Supplemental Security Income and Social Security Disability Income.

On the expenses side of the column, broad categories include, but are not necessarily limited to:

  • Housing: rent, a mortgage, utilities, insurance, taxes, maintenance.
  • Transportation: car payments, auto insurance, fuel, repairs, public transportation costs.
  • Medical care: doctor visits, therapy, prescription drugs.
  • Care assistance: respite, custodial, nursing home care.
  • Special equipment: wheelchairs, assistive technologies, durable medical equipment, computers, service animals.
  • Personal needs: grooming, hobbies, entertainment, vacations.
  • Education and employment costs: tuition, books, supplies, tutoring.
  • Future asset replacement costs: for a car, major appliances, electronics, furnishings.
  • Recreation: entertainment, camps, vacation, memberships

Request Disability Related Expense Worksheet

Running the Calculation

Part of the calculation will include your child's life expectancy, your life expectancy and the number of years remaining until your retirement. The analysis of your funding needs based on preset assumptions about the rate of inflation and your after-tax investment returns will include a capital amount needed to fund a special needs trust today and at future points.   

Considering "What If's"

Financial planners advise that running alternative calculations can help you plan adequately for worst- and best--case scenarios. One variable to consider is your child's ability to earn income. For example, if he or she is able to work more than expected, earned income may cover more expenses, but SSI payments will likely be reduced. As your child's disability advances, he or she may need to leave the workforce, potentially increasing SSI payments but also adding new expenses.

Another critical factor is the impact of higher or lower investment returns on the amount you must set aside. If your child is very young, you may plan to invest aggressively, pursuing a higher rate of return than if he were nearing adulthood. The reason - an investment rule of thumb - is that you generally can take somewhat greater risks with a longer-term investment because you have more time to recover from dips in the market. If you anticipate a lower rate of return for any reason, you will need to compensate by setting aside more in savings.

As you can see, to some extent this is more of an art than a science. You can make your best guess or work with a financial planner who specializes in this field and who can bring to bear her/her experience with many families in similar situations.

 

Finding the Funds

Once you have a realistic estimate in hand, you'll need to consider how to fund this need without sacrificing such financial goals as college and retirement. You may also need to balance the needs of your child with special needs with your wish to benefit other children as well as covering your current needs. You may not be able to completely fund the dollar amount resulting from the analysis, but having a target can assist your planning.

Many families find that life insurance is the most realistic option to fund an SNT because there can a set capital amount that will directly fund the trust when it is most needed, after both parents have passed away. In short, how much you fund your SNT and how large an insurance policy to purchase will be a question of balance among your current needs, your retirement funding, the needs of your other children, if any, and the anticipated needs of your child with special needs.

Finally, be sure to create or update an estate plan and determine which of your assets you'll leave to the SNT. Also advise relatives of the need to direct gifts and bequests to the SNT, rather than the child, to avoid the risk of disqualifying the child from eligibility for public benefits.




The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

 All investing is subject to risk, including the possible loss of the money you invest. 

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