FUNDING SPECIAL NEEDS TRUSTS

by Thomas D. Begley, Jr., CELA

Overview

Estate planning attorneys are regularly called upon to draft trusts for their clients’ children with disabilities. Typically, these children are determined to be disabled by the Social Security Administration and are receiving SSI, Medicaid, or other means-tested public benefits. The goal of the parent in establishing the trust is to maintain public benefits for the child with disabilities while providing an inheritance to enrich the child’s life. The inheritance is to supplement, not supplant, public benefits. There is an old adage that there are two ways to screw up a Special Needs Trust: (1) an error on the part of the attorney drafting the trust and (2) an error on the part of the trustee administering the trust. However, a third way is much more prevalent: inadequate trust funding.

Many Special Needs Trusts fail to accomplish the objectives of the parents because they are not properly funded. Most parents want to share their estate equally among their children but don’t realize that their healthy children will be able to work and support themselves, while their child with disabilities will never be able to work or will only be able to earn limited income and will be unable to provide self-support. Typically, a family with three children, two healthy and one with disabilities, will simply divide the estate into three equal shares, with one share going to the Third-Party Special Needs Trust. No one has made an effort to calculate the child with disabilities’ future expenses or to determine if the child with disabilities’ share of the estate is sufficient to satisfy those needs or even if it is more than whatever would be needed to satisfy those needs.

Calculating the Level of Required Funding

Many parents of children with disabilities assume that eventually their child with disabilities will move to a group home and will be cared for at public expense. Few give any thought to the danger that public benefits, as we know them today, may not exist for the remaining lifetime of the child with disabilities. There are three ways for the family to calculate future expenses for the child with disabilities’ future expenses.

Life Care Plan

One would be to retain the services of a life care planner. This is the best solution, but the most expensive. The life care plan could be updated periodically, say, every three years. The life care plan would anticipate all of the disabled person’s future needs and make cost estimates to satisfy those needs. An inflation factor would be built in. PLAN/NJ, a non-profit disability organization in Somerville, New Jersey, will prepare a Life Care Plan for a family for about $2,000 and will update the plan annually at a minimal cost. Other Life Care Planners can be found online.

Family Budget

A less expensive but less accurate way of calculating the child with disabilities’ needs would be for the parents to sit down with pen and paper and write out a lifestyle they want their child with disabilities to have and calculate the estimated cost themselves. Again, an inflation factor would be built in. Costs would include the child with disabilities’ expenses for shelter, food, clothing, transportation, medical needs not covered by private medical insurance, entertainment and recreation, and for other expenses that should be considered and quantified. Once these costs are quantified, an amount necessary to fund the Special Needs Trust to meet the parents’ objective for their child with disabilities can be established. The Estate Planning attorney should provide the family with a budget form. The parents can complete the form with the assistance of the planning attorney. A depletion schedule should then be estimated. Generally, in today’s market most experts advise that to ensure the money in the trust will last a lifetime, withdrawal should be limited to 3.5% to 4% per year. This means that the trust must be funded with 25 to 30 times the estimated annual withdrawals. Again, second-to-die life insurance is often the only solution for most families.

Merrill Lynch Calculator

A third way to calculate the sum necessary to fund the trust would be to visit the Merrill Lynch and Company website (http://askmerrill.ml.com/specialneeds). The Merrill Lynch disabilities group designed this website with a calculator to assist parents in estimating the costs of their child with disabilities’ future needs.

In most instances, once the parents have analyzed the future needs of the child with disabilities and the cost of meeting those needs becomes apparent, then equally dividing the estate among their children will not satisfy their goal of providing for their child with disabilities’ future lifestyle. In many instances, the solution would be for the parents to purchase a second-to-die life insurance policy to fund the trust. Then they might divide their remaining assets equally among their healthy children. The Special Needs Trust can be designed to own life insurance and to remove the policies from the parents’ estates for federal estate tax and state estate tax purposes. Appropriate Cristofani provisions will be included.

When to Fund

Grantors often inquire as to when they should start funding their Special Needs Trust. Generally, it does not make sense to fund a Third-Party Special Needs Trust during the lifetime of the grantor. Once the trust is funded, it has to be administered and tax returns must be filed. However, if the grantor wants to make a gift to reduce federal or state estate taxes, then funding an appropriately drafted Third-Party Special Needs Trust may make sense. Also, funds in the trust may receive some creditor protection.