retirement

How Much Should Go into Your Special Needs Trust?

Anyone with a child with special needs understands the need to prepare for the future. A trust is always a good place to start, and figuring out a savings goal for that trust is a key part to your planning.

One of the most difficult challenges in planning for a child with special needs is figuring out how much money it is going to cost to provide for the child, both while the parents are alive, and after the parents pass someday.

All too often, it seems, I meet with someone who has done some estate planning but not their special needs estate planning nor have they given much thought to how much should fund that trust someday and which assets would be the best to use.

Before diving into the latter financial side, what is special needs estate planning? The crux of it is a special needs trust, which if properly established and managed, allows an individual with a disability to still receive certain public benefits. Typically, ownership of assets in excess of $2,000 would cause the individual to become disqualified from certain public benefits. Assets held in a special needs trust do not count toward this amount.

Even if the child is not receiving benefits, families may still want the money protected from the child’s financial choices or those who may try to take advantage of them. A trustee of the parent’s choosing can help manage the assets and make distributions to the child with special needs to supplement their lifestyle beyond what public benefits provide, as we’ll see in the hypothetical budget below.

As parents know, a child with special needs can generate multiple expenses. Exactly how much will depend on the needs and lifestyle of the family and the child's capabilities. The biggest unknown I find is the cost of housing. If the plan is for the child to live in a private group home-type situation, there are a couple of options. Some involve the purchase of a condo unit, which could range from $200,000 to $300,000, give or take, in a building with services for those with special needs. In addition to this, there is a maintenance fee of roughly $2,000 a month that covers food, utilities and staffing. Many families also may want to build into the budget eating out once a week or so, electronics (a new iPad every few years for example), a gym membership, etc. (See budget sheet below for a full budget example.)

When the parents pass away, this budget is naturally going to need to increase, because we now need to monetize the things the parents did. For example, "care coordination" and advocacy are huge undertakings that parents perform. Of course, no one will be able to replace the parents, but we can do our best to make sure the essential tasks are covered.

Typically, the trust isn't funded until the parents' passing, after which the trust would need to file a tax return each year and pay taxes (at higher trust levels). There are also legal and trust administration expenses to consider. (Even if a family member is the sole trustee, it may be wise for the trustee to consult an attorney each year to make sure nothing is done that could jeopardize benefits.)

Fortunately, public benefits can usually offset many of the above-mentioned costs. For example, the child may be eligible for Supplemental Security Income (SSI), as well as a Section 8 housing voucher and SNAP food assistance. When the parents retire, SSI is typically replaced with Social Security Disability Insurance (SSDI), which is one-half the parent's payment*.

When the parent passes away, this payment becomes three-quarters of that amount. Adult Family/Foster Care may be available as well, depending on the group housing situation. It's also possible that the child is working and bringing in additional income (minus whatever benefits may be offset by this income).

In the budget example below, we are trying to determine the lump sum needed to fund the trust of a fictitious child, "Sarah," upon her parents' passing. Once we calculate the gap each year between income and expenses (adjusting for future inflation), we pick a hypothetical life expectancy for the child. In this example, we have the mother, "Christine," passing away after her husband, at age 90 (when Sarah is 60), and Sarah living 30 years beyond that. Assuming the money grows at a net 6% and there is 1.9% inflation, Sarah's family will need to make sure that there is at least $583,492 left in the trust upon both parents' passing.

This is just one example, and there are countless other possible scenarios. For example, if the child needed a higher level of care, such as 24/7 supervision, the housing cost could be closer to $60,000 a year for around-the-clock staffing, plus the cost of an apartment or condo that is large enough to house the care staff.

In conclusion, the takeaway is that it is essential to do a complete analysis of the future costs to provide for a child with special needs so that the parents can begin saving and making adjustments in their planning today. This analysis isn't a perfect science and is a moving target at times, but ideally it can help guide families and their advisers toward creating a thoughtful plan that will leave the right amount to fund a child's special needs trust.

Hypothetical annual budget for Sarah’s support

Annual budget before passing of Joseph and Christine 
Housing, including food$24,000
Entertainment/eating out$3,600
Athletic club$1,200
Transportation$1,200
Vacation$2,000
Clothing$1,200
Electronics$600
Laundry/dry cleaning$240
Medical co-pays$600
Care coordination/advocacy$0
Legal/trust administration$0
Tax preparation$0
Phone/cable/internet$1,200
Taxes$0
TOTAL per year$35,840
Sarah's income before passing of Joseph and Christine (pre-retirement) 
SSI$9,180
SNAP food assistance$1,200
Section 8 voucher$3,900
TOTAL per year$14,280
Gap in funding$21,560
Annual budget after passing of Joseph and Christine 
Housing including food$24,000
Entertainment/eating out$3,600
Athletic club$1,200
Transportation$1,200
Vacation$2,000
Clothing$1,200
Electronics$600
Laundry/dry cleaning$240
Medical co-pays$600
Care coordination/advocacy$2,400
Legal/trust administration$3,600
Tax preparation$500
Phone/cable/internet$1,200
Taxes$5,000
TOTAL per year$47,340
Sarah's income after passing of Joseph and Christine 
SSDI (DAC/CDB)$23,000
SNAP food assistance$1,200
Section 8 voucher$3,900
TOTAL per year$28,100
Gap in funding$19,240
Gap adjusted for inflation (1.9% inflation when Christine is 90, aka "future dollars")$33,840
LUMP SUM NEEDED to generate $33,840 each year for 30 years (assuming the money is $0 at the end of the 30-year period, 1.9% inflation rate, 6% return on money after fees, etc.)Approximately $583,492 (when Christine passes away)

*See www.justiceinaging.org/wp-content/uploads/2018/10/SS-Benefits-Youve-Never-Heard-Of.pdf ... see pages 22/30 AND www.specialneedsalliance.org/the-voice/benefits-for-special-needs-children-of-civil-service-employees-2/

This article and material are written by Caleb Harty for informational purposes only and the content does not necessarily represent the views of Eagle Strategies LLC or its affiliates. This is not a solicitation of any particular product. Any assumptions are hypothetical and for illustrative purposes only. Neither Harty Financial or its staff, nor Eagle Strategies LLC or its advisers/affiliates provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions.

About the Author

Caleb Harty, CFP®

Founder and Principal, Harty Financial

Caleb is a principal at Harty Financial and a CERTIFIED FINANCIAL PLANNER™ (CFP®). He has his BA in Economics from Gordon College in Wenham, Mass. Caleb is one of only a few advisers in the New England area who specialize in working with families that have a child with special needs. The connection is a personal one, as his brother-in-law has Down syndrome. He also focuses on holistic financial planning for successful professionals, business owners and those approaching retirement.

Caleb Harty is an Investment Adviser Representative of Eagle Strategies LLC, a Registered Investment Adviser and a Registered Representative offering securities through NYLIFE Securities LLC (member FINRA/SIPC), a Licensed Insurance Agency, 189 North Main Street, Unit 2A, Middleton, MA 01949. Phone: 978-972-5961 Eagle Strategies LLC and NYLIFE Securities LLC are New York Life Companies. Harty Financial is not owned or operated by NYLIFE Securities LLC or its affiliates. 

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