Funding a Special Needs Trust: How Much is Enough?

Fortunately, help in calculating your “special needs goal” is available from financial planners with expertise in disability issues, such as Evan Farr, who besides being a Charter Member of the Academy of Special Needs Planners and a Certified Elder Law Attorney, is also the Founder and President of Lifecare Financial Services, LLC, which is dedicated to helping families with life insurance, long-term care coverage, and other financial services needed by families who are worried about aging and retirement planning and/or who have a child with special needs.

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 our proprietary Long-term Care Directive® for your child, this is the time to draft such a document. The Letter of Intent or Long-term Care Directive® 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. There used to be two free online calculators: one by MetDesk and one by Merrill Lynch, but both of those were for some reason discontinued many years ago. Now the only one I’m aware of is one created by a special needs financial planner who charges for the calculator.

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.

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.

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.

Once you have a realistic estimate in hand, you’ll need to consider how to fund this need without sacrificing financial goals such 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 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.