Funding a Special Needs Trust: How Much is Enough?

In This Issue:

1. Funding a Special Needs Trust: How Much is Enough?
2. About the Firm

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Funding a Special Needs Trust: How Much is Enough?

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 needs goal" is available from financial planners with expertise in disability issues, as well as from special needs calculators, which are accessible free of charge on the Internet. Here are two such calculators:

MetDesk Special Needs Calculator: click here

Merrill Lynch Special Needs Calculator: click here

Using one of these calculators, either on your own or with the help of an advisor, is an excellent way to begin making concrete plans for your child’s future. Based on information you provide about anticipated income and expenses, the calculators offer a realistic estimate 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 to consider your goals and your expectations for your child’s future. If you haven’t yet created a Letter of Intent or an Advance Care Plan for your child, this is the time to draft such a document. Sample forms and software for this task is available through our office. The Letter of Intent or Advance Care Plan should address factors such as your child’s medical condition, guardianship needs, ability to work and desired living arrangements, 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 online calculators 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.

Running the Calculation

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

Considering "What Ifs"

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 experience with many families in similar situations.

Finding the Funds – Using Life Insurance

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 for your other children and retirement for yourselves. You also need to balance the needs of your special needs child with your wish to benefit your other children, as well as cover your current expenses. You may not be able to completely fund the dollar amount resulting from the above calculations, but having a target can assist your planning.

Many parents find that a second-to-die life insurance policy is the easiest option to fund an SNT because the premiums are often lower. However, a joint first-to-die policy might make more sense for many parents, especially if one parent is the primary wage earner and one parent is the primary caregiver for the disabled child. With a first-to-die policy, if the wage-earner parent dies first, the policy will provide funds needed for the caregiver parent to be able to continue providing the care; if the caregiver parent dies first, the the policy will provide funds needed for the wage-earner parent to hire a replacement caregiver.

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 special needs child.

Finally, be sure to create or update your 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.

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About the Firm

Evan H. Farr, CELA, CEA, has been in private practice in Fairfax since 1987, is a Charter Member of the Academy of Special Needs Planners, and is the only attorney in Virginia who is both a Certified Elder Law Attorney and a Certified Estate Advisor.* Since 2007, Evan has been named by Virginia Super Lawyers Magazine as one of the top attorneys in Virginia, and in 2008 Evan was named by Washington, DC Super Lawyers Magazine as one of the top attorneys in DC. The Super Lawyers designation is bestowed upon the top 5% of lawyers in each state as chosen by their peers and through the independent research of Law & Politics.

The Farr Law Firm helps protect individuals with special needs and their families. For those with a disabled family member, proper estate planning often dictates the use of a Third-Party Special Needs Trust. For a disabled person who inherits money, a First-Party Special Needs Trust is typically required. We also help personal injury claimants and attorneys in connection with settlements received by a disabled child or adult.

*Certified as an Elder Law Attorney by the National Elder Law Foundation and Certified as an Estate Advisor by the National Association of Financial & Estate Planning. Virginia has no procedure for approving certifying organizations.

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