Can I add money to my child’s Special Needs Trust?
It depends on whose money it is and what type of Special Needs Trust (SNT) it is.
If the trust is a first-party Special Needs Trust (or Payback Special Needs Trust) and the money belongs to your child, then the answer is yes, assuming there is no language within the trust preventing this action. This type of trust is specifically designed to manage funds which are owned by your child, e.g., inheritances from a grandparent which went directly to the special needs child, a litigation award, savings bonds that accumulated over the years, college savings accounts that won’t be used for college, and so on. You cannot, however, add funds from another source. You cannot use your own money, or money from a grandparent, relative or friend to fund the trust. Only your child’s money can be placed into a first-party SNT.
A third-party Special Needs Trust – This type of special needs trust is funded with assets that belong to anyone other than the disabled individual, i.e., a parent, sibling, relative, grandparent or anyone other than the disabled individual can help fund this trust.
It is therefore extremely important that you know exactly what type of special needs trust your child has. It is also important to remember that Medicaid can access any funds remaining in a first party Special Needs Trust (or Payback SNT) after your child’s death. (This is not true of a third-party Special Needs Trust since there is no payback clause.)
Also note that funds placed into special needs trusts are considered to be an irrevocable transfer. This means that these funds won’t be available to you in the future should you need them.
How much should I fund the special needs trust with?
There is no simple answer to this question. The optimal amount would be enough so that the income generated by the principal would be enough to cover all distributions from the trust. The principal would never be invaded. Upon the death of the beneficiary, any funds remaining in the trust would be distributed to those people and entities you named in the trust. That amount of funding is not always possible, however. With that in mind, there are a few do’s and don’ts.
Don’t:
- Assume that the state or federal government will provide for all of your child’s needs. This is not true.
- Divide your estate equally between your children in an effort to be fair. Equal is not usually equitable. If an equal division of your estate is not enough to properly fund your disabled child’s trust–and it usually isn’t–he or she will be the one to suffer.
- Burden your other children with an inadequately funded trust. This is another reason for not defaulting to an equal split of your estate. If the trust runs out of money, the financial needs of your disabled child may very well become a source of friction among your other children.
Do:
- Deal with the financial issues now. Don’t leave a financial quagmire for your children to clean up. You won’t be around to mediate.
- Review the short, middle and long-term goals you have for your child. Then try to provide the funding for them.
- Have conversations with your other children so that they understand what you are trying to accomplish and that it is in their best interests to have the trust properly funded.
- Consider using life insurance to fund at least a portion of the trust. Unlike most of your retirement assets, life insurance is not subject to ordinary income tax, which could reduce your tax-deferred assets (Traditional IRAs, 401(k)s, annuities, etc.) by over 50%.
More FAQs regarding Special Needs Trusts next week.