Two of the most often-asked questions I receive is “How much money do I need to fund my child’s trust?” and “How can I fund a trust for my child when I don’t have the money now?” Let’s address each question individually, starting with the second.
Most people don’t fund their child’s Special Needs Trust (SNT) now, or even during their lifetime. They typically fund it after the last remaining parent is deceased. Your home is often your largest asset, and the sale and proceeds are not transferred to the trust until you have passed away.
Another reason people don’t fund an SNT during their lifetime is because many parents use life insurance to fund the trust. Again, this occurs after you have passed. Life insurance is popular because 1) it is a defined amount and 2) it is not subject to ordinary income tax which can be substantial in a trust situation, reducing tax-deferred assets such as traditional IRAs by as much as forty to fifty percent.
Addressing the first question, “How much do I need to fund the trust?” is a bit more difficult. It’s becoming harder to accurately factor in intermediate and long-term goals and expenses. Here are just a few of the issues you need to take into consideration:
Access to physicians and other medical resources
New York is transitioning to a Managed Care system. This may limit access to doctors and other medical professionals for your child. Since many individuals with special needs have higher medical needs, you may want to consider purchasing a private health care policy or funding the trust with enough assets to cover the cost of physicians outside the network.
Access to group homes has become extremely difficult and limited. It is hard to see this changing significantly for the better in the foreseeable future due to state and federal funding constraints. Parents hoping for a group home placement will need to look at other options. Parents are beginning to become more innovative, but most opportunities will come at a cost. More money in the trust will translate into more options and opportunities.
Whether your child is living in a group home, a self-directed setting, or some other type of non-certified setting, your child will require a strong advocate. Once you are unable to be that advocate, you (or the trust) should be prepared to pay someone to advocate for your child, even if that advocate is a sibling. Advocacy can require a great deal of time depending on the situation. As guardian for my brother, Scott, I can attest that advocating for him the past few years resulted in a loss of at least 25 percent of my working time, and that did not include weekends and personal time. This issue may also affect the division of your estate if one of your other children is expected to act in some type of guardianship or advocate capacity.
It is preferable to overfund a trust rather than underfund it. You can designate anyone you want as the ultimate beneficiary to receive any funds left in the trust after your disabled child passes away. It is better to have any remaining funds pass to someone you have designated, than having inadequate funds to take care of your child. Again, the more money, the more options and opportunities your child and his or her trustee will have.
Life insurance is often the vehicle used to fund the trust with additional money to help provide additional options for your child. It also helps the trustee and guardian/advocate to be more creative with possible solutions when working with other agencies and organizations as opportunities become available in the future. I will discuss various life insurance options in more detail in another blog.
In the meantime, one of the most prudent things you can do as the parent of a disabled child is to establish a Special Needs Trust and a funding mechanism as early as possible. The sooner you begin the process, the more options you will be creating for your disabled child in the future.
If you do plan to use life insurance to fund—or partially fund—your child’s future, then it is least expensive when you are young and healthy. You also avoid the risk of future health issues which may make insurance more difficult to afford or impossible to obtain.
As Abraham Lincoln said, “You cannot escape the responsibility of tomorrow by evading it today.” Good advice.