Insights + Resources

Ways to Fund Special Needs Trusts

Jan 27, 2020

If you have a child with special needs, special needs trusts may be a financial priority. There are many crucial goods and services that Medicaid and Supplemental Security Income might not pay for. It may be used to address those financial challenges. Most importantly, a special needs trust may help provide for your disabled child in case you’re no longer able to care for them.

In planning for one, one of the most pressing questions is: when it comes to funding the trust, what are the options?

There are four basic ways to build up a  trust.

One method is simply to pour in personal assets, perhaps from immediate or extended family members. 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 assets. Lastly, an inheritance can provide the financial footing to start and fund 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. 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.

When life insurance is used, the trustor makes the trust the beneficiary of the policy. When the trustor dies, the policy’s death benefit is left, tax free, to it.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. The funds may also come out to support the beneficiary in a measured way that does not risk threatening government benefits.

The trust may also be funded with tangible, non-cash assets.

Examples include real estate, securities, collections of cars or art or antiques, or even a business. These assets (and others like them) can be left to the trustee of the special needs trust via a revocable living 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 $3,500 to design basic special needs trusts.

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% to 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 special needs trusts, 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 who are well versed in this field. The result should be a product of close collaboration.

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