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
might not pay for, and a special needs trust 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.
Using a trust involves a complex set of tax rules and regulations. Before moving forward
with a trust, consider working with a professional who is familiar with these rules and
In planning a special needs trust, one of the most pressing questions is: when it comes
to funding the trust, what are the choices?
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 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 trust assets.
Lastly, an inheritance can provide the financial footing to start and fund this kind of
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.
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 to the trust.
With a structure in place that guides the trust, 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.
Several factors will affect the cost and availability of life insurance, including age, health,
and the type and amount of insurance purchased. Life insurance policies have
expenses, including mortality and other charges. If a policy is surrendered prematurely,
the policyholder also may pay surrender charges and have income tax implications. You
should consider determining whether you are insurable before implementing a strategy
involving life insurance. Any guarantees associated with a policy are dependent on the
ability of the issuing insurance company to continue making claim payments.
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 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.
Currently, it costs about $3,500 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% 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.
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 who are well versed in this field, and
the resulting trust should be a product of close collaboration.
Again, trusts are a complex financial construct. Have a conversation with a financial
professional to understand your next steps.