Broker Check

Funding Strategies for Special Needs Trusts

July 05, 2020

What is the Right Amount to Fund a Special Needs Trust? Funding Strategies for Special Needs Trusts

When parents start the planning process for a child with special needs, they usually work under the perception that if they create a Special Needs Trust, the child will be taken care of and the needs will be met.   Unfortunately, the action of creating a trust does not ensure that the child will be taken care of and funding the trust is just as important as creating it.  In addition, parents always have to be mindful of the stability and security of their own financial planning in the entire process of funding the Special Needs Trust.

Parents are recommended to keep a record of how much they spend on their child now and project what will be the child’s expenses in the future.  It is also important to weigh in on what expenses the child may have that will NOT be covered by the government.  Parents may take into consideration the aging process of the child, possible medical conditions that may requires special attention and the potential inadequate government resources.  This will provide a detailed picture of the child’s needs and the amount of money needed to fund the Special Needs Trust.  At the end however, planning for the Special Needs Trust funding should be done based on the parent’s ability to pay for it.   

For many families, it may not be practical to count on a portion of the remaining estate of the parents to fund the Special Needs Trust.  The parents may need their assets for their own retirement, a possible long-term care and may not have much left by the time they pass away.  Special Needs Trust may be funded during the parent’s lifetime but most trusts are generally funded after the parents pass away. Most families take care of the financial needs of their child with special needs while they are alive, the need to fund the trust is mainly after  the parents have passed on. Permanent life insurance is often used as a product that ultimately funds the Special Needs Trust. Life insurance is an asset that is created on a leverage basis and the death proceeds are tax -free.     

The asset mix for most families is a combination of retirement assets, non-retirement (after tax assets), and the family home. In determining the best way to divide their remaining assets between their children including the special needs trust, parents may need to be educated on tax implications on the assets at the time of distribution. Until recently, the retirement assets were typically recommended to be distributed to the family’s other children for their ability to stretch the assets based on their life expectancy. The Secure Act tax law change passed in December 2019, no longer allows the stretch to children inheriting the parent’s retirement assets. It will be needed to be distributed in ten years at the cost of expensive taxation.

A person with disability on the other hand, may be able to stretch an inherited retirement asset over their life expectancy. Since the person with disability will typically have their assets held in a special needs trust, the trust with the right language (See Through language), will be able to provide the stretch of the assets which may be more tax efficient, depending upon the income needs of the person with disability.

One of the most common assets to fund a special needs trust is a permanent life insurance on the parents. Life insurance allows creation of an asset on a leveraged basis, providing tax free death proceeds and is a practical approach to funding the trust.

  Revocable special needs trusts become irrevocable upon both parent’s death and. Irrevocable trusts are tax paying entities and are taxed at a higher rate. Investment management of assets in this trust has to be dome carehully to achieve maximum tax efficiency.   

Planning for the secure future of a person with disability requires a team of professionals. Periodic reviews are a must for best results to keep your plan current. Changes will continue to take place in the future such as tax laws, government benefits as well as in the family dynamics. Your wealth advisor, estate planning attorney, CPA have to be well versed on special needs planning matters for best results and a secure future of your loved one.  

Minoti Rajput CFP ChSNC

Minoti Rajput is the founder and principal wealth advisor of Secure Planning Strategies. She has been working with families with children of special needs for over thirty years and is a frequent speaker on various topics related to special needs planning. She is also the author of ‘Beyond a Parent’s Love.