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.
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.
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/
Are you looking for legal advice? RJ Fichera Law Firm can help with strategic business planning, including legal organization and business structuring. Call today for a free consultation. 610-768-9255
This article was provided by Caleb Harty for Kiplinger Magazine and brought to you by the Ronald J. Fichera Law Firm, where our mission is to provide trusted, professional legal services and strategic advice to assist our clients in their personal and business matters. Our firm is committed to delivering efficient and cost-effective legal services focusing on communication, responsiveness, and attention to detail. For more information about our services, contact us today!
This is not tax advice and should not be construed as such. Please seek professional tax services for more information and advice that will apply to your specific tax situation.
Comments
There are no comments for this post. Be the first and Add your Comment below.
Leave a Comment