Funding a Special Needs Trust: How Much Is Enough?

Last Updated: 9/24/2007

As a parent or guardian, you want = to ensure=20 that your child with special needs will remain financially secure = even=20 when you are no longer there to provide support. Given the = significant,=20 ongoing expenses involved in your child=E2=80=99s care and = uncertainty about what=20 needs may arise after you are gone or what public benefits may be=20 available, determining how much a special needs trust (SNT) should = hold is=20 no small feat.=20

Fortunately, help in calculating = your =E2=80=9Cspecial=20 needs goal=E2=80=9D is available from attorneys and financial = planners with=20 expertise in disability issues, as well as from special needs = calculators,=20 which are accessible free of charge on the Internet. Here are two = such=20 calculators:=20

MetDesk Special Needs Calculator: http://www.metlifeiseasier.com/metdesk/ = (Available on=20 the Special Needs Answers site at: htt= p://www.specialneedsanswers.com/resources/calculators.asp)=20

Merrill Lynch Special Needs Calculator: http://askmerrill.ml.com/tmp/marketing_centers/products/a= ap017_TheFamiliesofChildrenWithDisabilitiesProgram.asp?CPAO=3DSNEED. = (Click Special Needs Calculator.)

Using one of these calculators, = either on your=20 own or with the help of an advisor, is an excellent way to begin = making=20 concrete plans for your child=E2=80=99s future. Based on = information you provide=20 about anticipated income and expenses, the calculators offer a = realistic=20 estimate of how much your child will need in lifetime financial = support.=20 Financial planners suggest re-running this type of calculation=20 periodically, particularly as your child nears adulthood, to = ensure the=20 estimate reflects the most accurate, up-to-date information about = needs=20 and circumstances.=20

Getting Started=20

The first step in determining the = amount you=20 must set aside in an SNT is considering your goals and = expectations for=20 your child=E2=80=99s future. If you haven=E2=80=99t yet created a = Memorandum of=20 Intent, also called a Letter of Intent or a Life Plan, this is = the=20 time to draft such a document. It should address factors such as = your=20 child=E2=80=99s medical condition, guardianship needs, ability to = work and desired=20 living arrangements, all of which will drive your special needs=20 calculation.=20

Once you=E2=80=99ve considered the = =E2=80=9Cbig picture,=E2=80=9D=20 you=E2=80=99ll need to identify your child=E2=80=99s future income = sources and living=20 expenses. The online calculators identify relevant categories for = you=20 (e.g., public benefits income. transportation costs). For = additional=20 perspectives, take a look at the income-and-expense worksheet at=20 nichcy.org (http://www.nichcy.org/pubs/outprint/nd18txt.htm) or = ask=20 your attorney or financial advisor if he or she has one available. =

Next, you=E2=80=99ll need to tackle = the most arduous=20 part of the process, placing a dollar value on each category. You = can=20 start by listing any current income or expenses likely to continue = into=20 your child=E2=80=99s adult years. You=E2=80=99ll need to consider = income from sources such=20 as life insurance proceeds, gifts, inheritances, and legal = settlements, as=20 well as from employment and public benefits such as Supplemental = Security=20 Income and Social Security Disability Income.=20

On the expenses side of the column, = broad=20 categories include, but are not necessarily limited to:=20

Housing: rent, a mortgage, utilities, insurance, taxes, = maintenance.=20

Transportation: car payments, auto insurance, fuel, repairs, = public=20 transportation costs.=20

Medical care: doctor visits, therapy, prescription drugs.=20

Care assistance: respite, custodial, nursing home care.=20

Special equipment: wheelchairs, assistive technologies, = durable=20 medical equipment, computers, service animals.=20

Personal needs: grooming, hobbies, entertainment, vacations. =

Education and employment costs: tuition, books, supplies, = tutoring.=20

Future asset replacement costs: for a car, major appliances, = electronics, furnishings.

Running the Calculation=20

Prior to running the calculation, = you may need=20 to indicate your child=E2=80=99s life expectancy and the number of = years remaining=20 until your retirement. Once you=E2=80=99ve input all required = data, the calculator=20 automatically will run an analysis of your funding needs based on = preset=20 assumptions about the rate of inflation and your after-tax = investment=20 returns. Both calculators indicate the amount of annual savings = required=20 to meet your goal. The Merrill Lynch calculation includes a = lump-sum=20 savings goal that must be met by retirement, as well as a = year-by-year=20 cash-flow analysis indicating any shortfalls or surpluses for a = given=20 year.=20

Considering =E2=80=98What = Ifs=E2=80=99=20

Financial planners advise that = running=20 alternative calculations can help you plan adequately for worst- = and=20 best--case scenarios. One variable to consider is your = child=E2=80=99s ability to=20 earn income. For example, if he or she is able to work more than = expected,=20 earned income may cover more expenses, but SSI payments will = likely be=20 reduced. As your child=E2=80=99s disability advances, he or she = may need to leave=20 the workforce, potentially increasing SSI payments but also adding = new=20 expenses.=20

Another critical factor is the = impact of higher=20 or lower investment returns on the amount you must set aside. If = your=20 child is very young, you may plan to invest aggressively, pursuing = a=20 higher rate of return than if he were nearing adulthood. The = reason =E2=80=93 an=20 investment rule of thumb =E2=80=93 is that you generally can take = somewhat greater=20 risks with a longer-term investment because you have more time to = recover=20 from dips in the market. If you anticipate a lower rate of return = for any=20 reason, you will need to compensate by setting aside more in = savings.=20

As you can see, to some extent this = is more of=20 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=20 her experience with many families in similar situations.=20

Finding the Funds=20

Once you have a realistic estimate = in hand,=20 you=E2=80=99ll need to consider how to fund this need without = sacrificing such=20 financial goals as college and retirement. You may also need to = balance=20 the needs of your child with special needs with your wish to = benefit other=20 children as well as covering your current needs. You may not be = able to=20 completely fund the dollar amount resulting from the above = calculations,=20 but having a target can assist your planning.=20

Many families find that a = second-to-die life=20 insurance policy is the most realistic option to fund an SNT = because the=20 premiums are often lower and the trust is funded when it is most = needed,=20 after both parents have passed away. In short, how much you fund = your SNT=20 and how large an insurance policy to purchase will be a question = of=20 balance among your current needs, your retirement funding, the = needs of=20 your other children, if any, and the anticipated needs of your = child with=20 special needs.=20

Finally, be sure to create or = update an estate=20 plan and determine which of your assets you=E2=80=99ll leave to = the SNT. Also=20 advise relatives of the need to direct gifts and bequests to the = SNT,=20 rather than the child, to avoid the risk of disqualifying the = child from=20 eligibility for public benefits.=20

To find an attorney member of = the Academy of=20 Special Needs Planners near you, click=20 here.=20 =

<<=20 Previous Article | Next=20 Article >>