Financial Q & A: Special Needs Trust

Posted by Patty Manko on Tue, Aug 06, 2013 @ 05:36 PM

family in field illus resized 600The establishment of a special needs trust can provide a false sense of security that you are all set. 

The money that funds the trust will secure the resources for your loved one to be cared for.

What is a special needs trust?

A Special Needs Trust (SNT) is a legal document and a very important part of your child's long-term financial plan.

The trust may be used to hold money:

  • that you save
  • that others give your child as gifts
  • that you receive from an insurance settlement

Funds in the SNT will not interfere with your child's eligibility for federal benefits like Medicaid and Supplemental Security Income (SSI).

Who are the parties involved?

The individual who funds the trust is the Donor. The individual who benefits from the trust is the Beneficiary. The individual who oversees the trust is the Trustee

When should families fund the SNT ?

 In most circumstances the SNT is funded at the death of the parent(s) or primary care giver, rather than during their lifetime. The term used for a trust that is funded at the death of an individual is a Testamentary Trust.

Reasons for not funding the trust during a donor’s lifetime include:

  •  Once a trust is funded, the money can only be used to meet the  beneficiary’s supplemental needs. 
  •  A separate tax return must be filed.
  •  Taxes on any earnings must be paid by the trust. Income earned in  the trust is usually taxed at a higher tax rate than an individual rate.
  •  Once a trust is funded, it becomes irrevocable. This prevents you  from making any changes to the terms of the trust.
  •  Overall, there is no flexibility in your plan.

Although funding the trust may reduce flexibility, the following are some of the reasons why one may consider funding a SNT during the lifetime of the donor as a planning strategy:

  •  If an individual has more than enough money to meet his/her  personal needs and will not jeopardize their personal financial  security.
  •  Provides the donor with the comfort of knowing that there will be a  certain amount of money available for the beneficiary.
  •  Parents who have taxable estates and are implementing strategies to  reduce their estate tax liability.
  •  Grandparents or others are trying to reduce their taxable estate by  gifting to your child – the SNT protects the child’s eligibility for  government benefits.
  •  Money in the trust can provide some protection from creditors. 
  •  Money directly received by the child either through an inheritance  and/or a legal settlement which would otherwise disqualify them for  benefits. This would be a “payback” SNT.

Regardless of the timing decision for funding the trust, it is important to do whatever you can to makes sure there will be adequate money in the trust to provide for your child’s security. There are two steps:

  •  identify what the anticipated needs will be
  •  assess what steps you can realistically take to provide what is  necessary in light of your other financial requirements and goals.

How to be sure you are all set: 

Review this checklist carefully. It is very important! If you have any questions, please feel free to email Cynthia and John.

1. What is my vision of the legacy which I wish to leave my child (or other family member) with special needs?

 2. Have I established proper Wills & Trusts that transform my clear vision into an absolute future reality?
 3. Does my Executor/trix or Guardian have a Letter of Intent which outlines my wishes for the future care of this person?
4. Will this Letter of Intent be passed to others who may eventually care for my child, should s/he out-live my second caregiver?

5. Is the Trust endowed with enough money to assure that distributions will not consume their principal throughout the beneficiary's lifetime?

6. Have I insured that caregiving survivors are financially protected from the future expenses in the care of my loved one with special needs?
 So...are you all set? If you answered "No" to any question, your plan is not complete. We encourage you to seek the answers to all these questions.

Contact us

Tags: Special Needs Financial Planning, Special Needs Trusts, Letter of Intent, Life Insurance

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