If you are a parent to a special needs child, then I am sure this question has crossed your mind “How will I provide for my child after I am gone?” This was my first thought when my son, Liam, was diagnosed with down syndrome, 11 weeks in the womb.
I knew he would be taken care of as long as my wife and I were living, but what about when we’re gone? This is our first child, I am 42 and my wife is 38 years old. With the average adult who has down syndrome living well past their 50’s, I would be 92 when he turned 50. There’s a good chance I won’t be here to see 92!! So, the question kept popping into my mind:
How would Liam be taken care of when my wife and I have passed on?
After many hours doing my own research and consulting with a couple of lawyer buddies, it became evident that we needed a Special Needs Trust (SNT).
I will be honest, even though Tracy and I are in the financial industry, this task seemed a little intimidating. The average American has had no prior experience with a trust, much less a Special Needs Trust.
My first questions were:
How much is this going to cost to set up?
How are we going to fund the trust?
We are not wealthy by any means. After successfully getting our trust completed last week, I decided it was time to do an article on what a Special Needs Trust (SNT) is, what it can be used for, and how to fund. I hope this helps take some of the concern out of how to prepare for our children when we are no longer around to care for them ourselves.
What is a Special Needs Trust (SNT)?
A Special Needs Trust (SNT) is set in place and intended to supplement, but not replace, a disabled person’s government benefits by paying for non-covered services or equipment. Even though this trust can be complex for several reasons, the advantages far outweighs its complexities.
A third-party SNT is the most often used by parents of children with special needs. These trusts can hold any asset belonging to the family such as, life insurance, IRA, or real estate. Unlike the other trusts, the third-party SNT does not contain the “payback” clause. This means when the beneficiary with special needs dies, the remaining balance of the trust can pass to other family members and does not have to pay anything back to the government.
Who Needs a SNT?
It was a great surprise to learn that Social Security Income for a Special Needs Adult maxes out at $750/month. Of course, they are other programs that offset some of the cost of living but not nearly enough to live a happy and healthy life. We all know that government programs, while they help, do not come close to covering the cost to care for our special needs’ children.
A SNT can allow your child to still qualify for government benefits, while providing supplemental benefits from the trust for his/her care.
If your child is on Medicaid or any other governmental program and will inherit a substantial amount of money, a SNT will be needed to protect them from losing any benefits.
Since the passing of the Affordable Care Act (ACA), and its prohibition of denying benefits to consumers with pre-existing conditions, Medicaid may not be the coverage of choice for our special needs’ children. Since they qualify for regular health insurance policies a SNT wouldn’t be needed to protect any Medicaid benefits.
How to Prepare for a SNT
- Make sure to choose the right trust
- Choose the right Trustee (the person who oversees distributing the assets)
- Finding the right lawyer
The three main concerns after your trust is set up are:
- The management of assets
- Costs of Administration
Working with a lawyer can help alleviate these issues professionally. Your family should know exactly what your wishes are and how involved they will be.
Choosing the Right Trust
When it comes to a SNT there are two main types, First-Party trusts and Third-Party trust.
First-Party trusts are funded directly by the beneficiary who is disabled and are subject to Medicaid’s’ payback rules.
A Third-Party trust are funded by parents, grandparents, etc. which is not subject to Medicaid’s payback rules.
Knowing which type of SNT to choose will ensure your child receives the maximum benefit while still abiding by the laws.
Choosing the Right Trustee
First and foremost, you want to choose someone that will care for your child just as you would. Your trustee’s job is going to be primarily distributing funds as instructed in the trust, when they are used for services or needs.
Your trustee will have all the power, so you want to make sure they know and will follow not only your wishes but the needs of your child as well. This can be a family member or close friend of your choice.
When we did our SNT, we named two trustees that must agree on all distributions. This helps to ensure that our wishes and our child’s needs always came first. This also spreads out the work associated with a SNT which should lead to less administrative fees.
Be very specific in what you want your wishes to be when you are gone and make sure your Trustee is someone with willpower to stick with the game plan and will not deviate whenever faced with resistance of any sort.
Find the Right Lawyer
Technically, you do not need a lawyer to draw up a SNT, but we highly recommend using one. A SNT can be complex and if it’s not set up properly, could be void upon your death. It’s essential to get expert advice especially since you are dealing with your child’s future.
Ways to Fund a SNT
There are many ways to fund a SNT. You can use your family savings, real estate holdings, certificates of deposit (CDs), IRA, 401K, and life insurance to name a few. Anything with any value can be used to fund a SNT.
The easiest method to funding a SNT if you don’t have a large sum of money saved is life insurance. Most of us are not sitting here with a huge amount of savings. And let’s be honest, we would like to retire one day and not have to “pinch pennies” in order to make sure our SNT is funded.
Using life insurance to fund a SNT takes away the anxiety of having to fund the SNT now. Upon your death, the life insurance funds the trust along with any savings/retirement you have left. This also will alleviate any fees associated with the trust until you die.
What Type of Life Insurance Policy is Best?
Buying a term life policy would be cheaper, but also could expire if you live beyond the term period. This would be disastrous if it were to happen, since the very existence of the policy is to fund the SNT.
Always consult with someone who has experience dealing with estate planning and using life insurance to fund a SNT before making any decisions.
A SNT does have restrictions on what the trust can and cannot be used for. Here are a few:
- No cash disbursement of any kind
- No taxes can be paid unless asset is owned by the trust
- Groceries or food cannot be purchased by the SNT
- Utilities such as gas, water, electric
- Connection charges for utilities
The SNT cannot be used for any basic needs or you risk losing benefits.
Any assets obtained (home, car, etc.) should be in the name of the trust and not the beneficiary (your child). Here are some acceptable distributions:
- The SNT can purchase and own a home
- Car, Car Insurance, and Maintaining the vehicle
- Travel Expenses
- Entertainment Expenses
- Lawyer and Accounting Bills
- Any type of medical equipment, therapy, or medication
- School tuition and books
- Funeral Expenses
- Household Furnishings
A trustee’s biggest responsibility will be determining what the SNT can and cannot pay for. If there are any doubts, consult with the attorney who helped set up the trust.
Advantages and Disadvantages of a SNT
- Keeps your child or loved one eligible for government benefits while being able to pay for services and care over and above what is provided by the government
- Any money put into the SNT is tax-deductible
- Guarantees that money will be used to care for your special needs’ child. This provides comfort knowing your child cannot be influenced when it comes to matters pertaining to money.
- Creditors are not allowed access to a SNT. It can only be used to care for the person disabled.
- The biggest disadvantage is the cost to set up a SNT. With that said, it cost us $2,000 to set up Liam’s SNT. That’s a small price to pay to ensure Liam will be cared for long after we are gone.
- Lack of independence is another disadvantage. The beneficiary (your child) is at the discretion of the trustee when requesting a disbursement. This gives very little to no control over how the money is dispersed. Therefore, it’s important that your trustee fully understands your wishes.
- Medicaid payback is also a major drawback to some SNT. Always make sure to choose the right SNT in order to maximize your child’s benefits. This also will ensure any remaining funds left in the trust after the beneficiary death are distributed to remaining heirs.
It can difficult to think about planning for your child’s wellbeing after you are gone. A Special Needs Trust, if set up properly, can take away the anxiety you feel anytime you think about your child’s life without you. A SNT gives you the peace of mind knowing you have done all you can to ensure your child has the best care possible after you pass.
A SNT can be a detailed outline of how you want your child cared for when you are no longer able to. I believe in order to ensure your child has the best life after you are gone, a SNT is a must.
Don’t put this off another day. It’s important and it’s the best thing you will ever do to protect and provide for your child.