Since finding out your child has special needs, you may have heard someone say, “You need a special needs trust.” But what is a special needs trust and why do you need it? Where do you go to get one done and how much does it cost? I will answer these basic questions below, but ultimately,you need to consult with both an attorney and financial advisor who have training and experience in planning for someone with special needs to find out the best way to create and fund a special needs trust for your child.
Trusts and Special Needs Trusts
A trust is an arrangement that allows a third party (called the trustee) to hold assets on behalf of a beneficiary or beneficiaries. The trustee can be a friend, family member, or institution (it is often recommended that you select co-trustees). The trustee is responsible for controlling and managing the assets, but all of the assets must be used to benefit the beneficiary (i.e., your child).
The trust assets can be used for almost anything, as long as they are not used for “health and maintenance,” which generally means that they cannot be used for food, shelter, or distributed to the beneficiary in cash.They can, however, be used for vacations, home furnishings, recreation, and soon. This makes them more flexible than ABLE accounts, which can only be used for expenses related to a person’s disability.
There are many types of trusts, but a special needs trust is one for the benefit of someone with an intellectual or physical disability.Although not its only purpose, the primary purpose of a special needs trust is usually to ensure that the special needs individual does not lose access to government benefits. Anyone that owns $2,000 or more in assets is ineligible for Medicaid or Supplemental Security Income(SSI). That means that if your child receives an inheritance or gift, he or she could lose access to health, income, housing, work assistance and training, and other public benefits. With a properly structured special needs trust, the government ignores the value of the trust assets in determining your child’s eligibility for assistance. Thus, your child can maintain access to government benefits, while also benefiting from the assets in the trust.
Another important benefit of a special needs trust is that it protects assets from yours and your child’s creditors (as well as predators!). Let’s say that as an adult, your child is not financially responsible and has to file for bankruptcy. The special needs trust will be inaccessible to your child’s creditors.
Living or Testamentary?
If you want to take steps to set up a special needs trust,you can either draft a trust that takes effect while you are still living(i.e., a living trust) or you can put instructions in your will for your executor to create a special needs trust upon your death (a testamentary trust). A living trust has certain advantages, but can be more expensive to establish and maintain. A testamentary trust, however, just involves some additional instructions in your will and is typically less expensive.
Funding the Trust
If the trust is going to help your child, it is going to have to be funded in some way. If you are receiving a court settlement, large inheritance, or have significant private wealth, funding a trust with a lump sum may be an option for you. Another option is to fund the trust by establishing a systematic savings plan for contributing monthly or annually to the trust.
However, one of the most common and efficient strategies for funding a special needs trust is through life insurance on the life of the primary caregiver(s). After a person’s primary caregivers pass away, there is usually a need for significant resources to help the person with a disability maintain their same style of living. Life insurance can be a cost-effective way of creating the funds needed at this critical time.
Choosing the type of life insurance that is best for your trust is something you will need to discuss with your financial advisor. Depending on your situation, you should consider permanent insurance, either universal or whole life. In addition, you will need to consider which spouse to insure or if you want to purchase what is known as a “survivorship” or “second-to-die”life insurance policy.
Special needs trusts are complex and you will need the help of professionals to draft and fund it properly. Living or testamentary,third-party or self-settled, pooled or private, ongoing, lump-sum, or life insurance funding are among the many choices you will have to make.
If you are interested in creating a special needs trust,reach out to us today. We will help connect you to an attorney with an expertise in special needs trusts and we can work together to make sure it is set up and funded in the best way for your child.
Garrett East is a Certified Financial Planner Professional and Chartered Special Needs Consultant® with LongView Planning Partners. As a parent of a child with special needs, Garrett is passionate about helping other families like his. You can contact Garrett directly at firstname.lastname@example.org or 901-322-9113. CRN202104-246007
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