Effective Planning & Funding Strategies for a Special Needs Trust

The Importance of Strategic Funding 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 (SNT), the child will be taken care of and the needs will be met.”

Understanding the Child's Needs and Projected Expenses

Funding a Special Needs Trust is just the start of the planning process for families with a family member who has special needs. Strategically planning how to fund the trust, so the parents and child’s needs are met, is as important as the creation of the SNT, says the article “Funding Strategies for Special Needs Trusts” from Advisor Perspectives. Parents need to be mindful of the stability and security of their own financial planning, which is usually challenging.

Evaluating Parental Ability to Fund the Trust

Parents should keep careful records of their expenses for their child now and project those expenses into the future. Consider what expenses may not be covered by government programs. You should also evaluate the child’s overall health, medical conditions that may require special treatment and the possibility that government resources may not be available. This will provide a clear picture of the child’s needs and how much money will be needed for the SNT.

Ultimately, how much money can be put into the SNT, depends upon the parent’s ability to fund it.

Funding Options for a Special Needs Trust

In some cases, it may not be realistic to count on a remaining portion of the parent’s estate to fund the SNT. The parents may need the funds for their own retirement or long-term care. It is possible to fund the trust during the parent’s lifetime, but many SNTs are funded after the parents pass away. Most families care for their child with special needs while they are living. The trust is for when they are gone.

Asset Mix of Retirement and Non-Retirement Assets

The asset mix to fund the SNT for most families is a combination of retirement assets, non-retirement assets, and the family home. The parents need to understand the tax implications of the assets at the time of distribution. An estate planning attorney with experience in SNTs can help with this. The SECURE Act tax law changes no longer allow inherited IRAs to be stretched based on the child’s life expectancy, but a person with a disability may be able to stretch an inherited retirement asset.

Utilizing Whole or Permanent Life Insurance

Whole or permanent life insurance that insures the parents, allows the creation of an asset on a leveraged basis that provides tax-free death proceeds.

Tax Implications and Efficient Asset Management

Tax Implications of Asset Distribution

Since the person with a disability will typically have their assets in an SNT, a trust with the correct language—“see-through”—will be able to stretch the assets, which may be more tax efficient, depending on the individual’s income needs.

Maximizing Tax Efficiency in Irrevocable Trusts

Revocable SNTs become irrevocable upon the death of both parents. Irrevocable trusts are tax-paying entities and are taxed at a higher rate. Investing assets must be managed very carefully in an irrevocable trust to achieve maximum tax efficiency.

It takes a village to plan for the secure future of a person with a disability. An experienced elder law attorney will work closely with the parents, their financial advisor, and their accountant.

Reference: Advisor Perspectives (April 29, 2020) “Funding Strategies for Special Needs Trusts”

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