A look at the different options & strategies.
Provided by Tiffany Valentine, CFP®
Vice President and Director of Financial Planning
If you have a child with special needs, a trust may be a financial priority. There are many crucial goods and services that Medicaid and Supplemental Security Income will not pay for, and a special needs trust may be used to address that financial challenge.
In planning a special needs trust, a pressing question must be answered. When it comes to funding the trust, what are the options?
There are four basic ways to build up a third-party special needs trust. One method is simply to pour in personal assets, perhaps from extended family as well as immediate family. Another possibility is to fund the trust with permanent life insurance. Proceeds from a settlement or lawsuit can also serve as the core of the trust assets. Lastly, an inheritance can provide the financial footing for this kind of trust.
Families choosing the personal asset route may put a few thousand dollars of cash or other assets into the trust to start, with the intention that the initial investment will be augmented by later contributions from grandparents, siblings, or other relatives. Those subsequent contributions can be willed to the trust, or the trust may be named as a beneficiary of a retirement or investment account.1
When life insurance is used, the trustor makes the trust the beneficiary of a life insurance policy. When the trustor dies, the policy’s death benefit is left, tax free, to the trust.2
A lump-sum settlement or inheritance can be invested while within the trust, inviting the possibility of growth and compounding. With a worthy trustee in place, there is less likelihood of mismanagement, and funds may come out of the trust to support the beneficiary in a measured way that does not risk threatening government benefits.3
The trust may also be funded with tangible, non-cash assets. Examples include real estate, securities, collections of cars or art or antiques, even a business. These assets (and others like them) can be left to the trustee of the special needs trust via a revocable living trust or will. Just remember that the goal of the trust is to provide the trust beneficiary with cash. Those tangible assets will need to be sold or liquidated to meet that objective.1
Currently, it costs about $2,000 to design a basic special needs trust. Given that initial expense and ongoing administrative costs, most families aim to place at least $100,000 inside these vehicles. The typical trustee is a bank – or more precisely, a bank’s trust division – and annual administration fees commonly range from 0.5%-1.5%. If the trustee is a relative of the child or a close friend of the family, administration may be done for free or at minimal cost.3
Care must be taken not only in the setup of a special needs trust, but in the management of it as well. This should be a team effort. The family members involved should seek out legal and financial professionals well versed in this field, and the resulting trust should be a product of close collaboration.
Tiffany Valentine, CFP® is a Registered Representative with and securities and financial planning offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC. CA Insurance License #0D73175
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 – nolo.com/legal-encyclopedia/how-special-needs-trusts-work.html [12/6/17]
2 – specialneedsanswers.com/how-life-insurance-can-be-used-to-fund-a-special-needs-trust-15968 [6/21/17]
3 – cnbc.com/2017/10/25/how-to-set-up-a-special-needs-trust.html [10/25/17]