Funding Strategies for Special Needs Trusts
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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. Unfortunately, creating a trust does not ensure that. 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 SNT.
Parents must keep a record of how much they spend on their child now and project the child’s expenses in the future. 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 require 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 SNT. At the end however, planning for the SNT 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 SNT. The parents may need their assets for their own retirement or long-term care and may not have much left by the time they pass away. SNTs 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 SNT. 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 SNT, parents may need to be educated on tax implications for 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 now need to be distributed in 10 years at the cost of expensive taxation.