Question: When planning for my child’s lifetime needs, what do I need to consider that I may not be thinking about?
Answer: It is a bit challenging to answer because I am not sure exactly what you are thinking about at this time. Over the years, I have found most autism families have heard of a Special Needs Trust. One of the main reasons to use a properly drafted (and managed) Special Needs Trust is so your child will not lose access to government benefits and the services they provide. However, there are three items that are often overlooked or misunderstood, which are:
- The amount of money that should be placed in the Special Needs Trust and when the trust should be funded
- The impact of taxes
- The risk of the market going down at the wrong time
How much money does the trust need?
The amount of money your child will need for the remainder of his/her life will depend on a number of factors. You must consider the daily needs of your child and if he/she will require 24/7 supervision. Based on that determination, the following items will be critical:
- Living Arrangements – Housing options that may fit for your child and the cost of each
- Employment – Will your child be able to work and how many hours per week?
- Caregivers and Support – Will your child’s government benefits cover the entire cost, or will you need to cover a portion?
By defining these four areas of your child’s future, you will be able to calculate his/her lifetime cost and then determine the amount of money you need to fund your child’s Special Needs Trust. After you determine that amount, you must now decide how and when to fund it.
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How does taxation affect the trust?
When deciding how to fund the trust, it is important to understand the impact of taxation on assets inside it. Taxation will play a critical role in which assets you use to fund your child’s Special Needs Trust, due to the fact that any growth and income that is not used by your child will stay in the Special Needs Trust and be taxed at the trust tax rates. These tax rates take almost all families by surprise because the tax brackets for trusts are drastically compressed compared to individual tax rates. This compression means that assets inside a Special Needs Trust can carry a much higher tax burden than those same assets would if they were not in the trust.
It is imperative that taxes are a major consideration in how and when you fund your child’s trust because we have seen families lose 40% of the value of their child’s trust due to taxation. However, that does not need to be you. As long as you know the rules and you have the discipline to make different decisions then that level of taxation can be avoided.
How should I invest my assets?
The third element that is often overlooked is the investment allocation for those assets you plan to use to fund your child’s Special Needs Trust. As you determine your funding mechanism, you want to balance the risk you are taking with those assets versus the possible growth in those assets as you try to reach your funding goal. Consideration should be given to financial tools that can offer a guaranteed return, so you are not solely relying on market investments that can suddenly drop in value. If those drops occur at the time when your child’s trust needs to be funded, then your child may not have enough resources to support his/her lifetime needs.
These are only three factors that you should consider as you plan for your child’s future, but there are certainly other factors, as well.
For more information on how to prepare for the future, be sure to contact a financial advisor who specializes in serving families with special needs. A Special Needs Plan is driven by their purpose of leading families to independence through an ongoing multi-generational plan. A Special Needs Plan is passionate about families confidently moving forward. 101 N. McDowell Street, Suite 120 Charlotte, NC 28204 704-326-7910 Website: www.aspecialneedsplan.com.
This article was featured in Issue 116 – Enhancing Communication Skills