Parents or guardians of a dependent with special needs are likely to be familiar with the legal document commonly known as the special needs trust. With the help of an attorney who has expertise in this area, they’ve come to understand that the purpose of the special needs trust is to provide extra and supplemental care, maintenance support and education above and beyond that which is already provided by any local, state and federal programs.
The trust is an important tool for protecting a dependent’s assets as well as his or her eligibility to receive government assistance. It enables friends and family to direct assets to the trust rather than directly to the person with special needs – thus preserving the individual’s eligibility to receive benefits.
With a special needs trust in place, families are taking a giant step toward securing a future of financial security for their loved one with special needs.
A Trust is of No Value Without Funding
The challenge for many families is to determine the best way to fund the trust, because a special needs trust by itself has no value without financial assets.
An attorney can establish the trust, but you’ll want to work with a specialized financial professional to help quantify the projected costs of care for the dependent and to determine the best means for funding the trust to provide for the lifetime of your loved one with special needs.
Funding a special needs trust can be an overwhelming undertaking for many families. Present-day costs for care may have them thinking there will be little left to put aside for future planning. However, families have choices in deciding the best ways to fund a trust in light of their personal circumstances. For some families, funding the trust may require a reallocation of current assets, while others may need additional assets to secure the level of financial security they desire for their child or dependent.
There are many ways to fund a special needs trust, including the aforementioned family assistance of leaving money or property to the trust. For example, parents can leave a portion or all of their estate to the trust; inheritances from relatives or friends can be gifted to the trust; and investments such as CDs, IRAs and Keogh plans can also be directed to the trust.
For many families, life insurance may be the most feasible way to leave the dependent sufficient funding for the future. In fact, a paid-up life insurance policy in a trust may be one of the few methods to guarantee future funding.
While there are several types of life insurance, the most effective methods for providing a lifetime of coverage are the following:
- Whole life insurance lasts the entire lifetime of the policyowner and provides both death benefit protection and cash value accumulation. With these types of policies, part of the premium paid by the policyowner builds equity in the policy. We call this equity cash value which is accessible to parents and family. Whole life insurance policies may also be eligible for dividends (Dividends are not guaranteed and are subject to change).
- Second-to-die life insurance, which is a permanent life insurance policy that provides much needed resources at a time when the funds will likely be most needed – at the death of the second parent. The cost of a second-to-die policy is typically lower than that of a single life policy. Proceeds can be directed to the special needs trust and used for supplemental long-term quality of care needs.
Friends, grandparents and other relatives may consider this funding solution as a way to allocate assets to their loved one. By designating the special needs trust as the beneficiary rather than the individual, proceeds can be left to help provide for the individual without penalizing him or her from receiving third-party benefits.
Funding from a Holistic Perspective
It’s hard to expect parents and guardians to know the best ways to fund their dependent’s special needs trust until they’ve weighed all their options with a financial professional experienced in special needs planning. An experienced professional will take into consideration additional matters such as:
- Protecting the parent’s or guardian’s ability to fund the trust
- Balancing their concerns for the individual with special needs along with the financial goals for the rest of the family.
When thinking about funding a trust, it’s important to include the financial goals of the entire family in addition to those for the dependent with special needs. An experienced financial representative will take a holistic approach to your planning to ensure your ability to achieve your goals for your loved one with special needs in addition to planning for your own retirement, establishing income protection and perhaps college funding in situations where there are other children to consider.
It’s not surprising that most parents or guardians of dependents with special needs are challenged to find the time to focus on their own needs or those of the rest of the family. By working with an experienced financial professional you can make an important difference in how you map out a future of financial security for your entire family including your loved one with special needs.
The fact is, when you overlay a plan for funding the long-term financial security of someone with special needs, virtually everything and everyone is affected.
This article prepared by Northwestern Mutual with the cooperation of Stephen A. Ehrens. Stephen A. Ehrens is a Financial Advisor with Northwestern Mutual Financial Network the marketing name for the sales and distribution arm of The Northwestern Mutual Life Insurance Company (Northwestern Mutual) (NM), Milwaukee, Wisconsin, its affiliates and subsidiaries. Financial Advisor is an insurance agent of NM based in Fairfield, CT. To contact Steve, please call 203-256-2162, e-mail him at stephen.ehrens@nmfn.com or visit his website at www.nmfn.com/stephenehrens.
