Special Needs Trusts: FAQs & Funding 🎧

Posted by Haddad Nadworny on Wed, Apr 22, 2020 @ 07:00 AM

The Special Needs Financial Planning Team John Nadworny, CFP, CTFA | Cynthia Haddad, CFP | Alexandria Nadworny, CFP,  CTFA

Tune In!

Our webinar 🎧 this Friday @ noon will feature an Overview Of Special Needs Trusts. Included will be a definition and description of trusts, types of trusts and options for funding the trust. 

RSVP to Alex Nadworny,  anadworny@affiniafg.com .   

Special Needs Trusts: FAQs & Funding

The establishment of a special needs trust can provide a false sense of security to parents that their child will be all set. It is important to understand that it is the money💰designated to fund the special needs trust that will secure the resources for their care.

To begin, what is a special needs trust?

blur-bracelet-conceptual-female-356319A 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 (1) you have saved or that others have given to your child as gifts or (2) your child receives in a 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. 

 

Reasons why one may consider funding a SNT during the lifetime of the donor as a planning strategy: 

  • If the individual funding the trust has more than enough money to meet his/her personal needs and funding the trust will not jeopardize their personal financial security.

  • The donor will have the comfort of knowing that there will be money set aside and available for the beneficiary.

  • Parents with taxable estates who are implementing strategies to reduce their estate tax liability.

  • Grandparents or others trying to reduce their taxable estate by gifting to your child – the SNT will protect 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:

  1. Identify what your child’s anticipated needs will be.
  2. Assess what steps you can realistically take to provide what is necessary in light of your other financial requirements and goals.

Learn about Special Needs Trusts

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. 

 

Financial planning and investment advice offered through Affinia Financial Group, LLC, a registered investment advisor. Securities offered through LPL Financial, Member FINRA/SIPC. Affinia Financial Group and LPL Financial are separate entities.

 

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