Maximum recommended funding for Special Needs Trust

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
Swampy
Posts: 772
Joined: Fri Aug 31, 2012 7:16 am
Location: Between gators, rattlers and snowbirds

Maximum recommended funding for Special Needs Trust

Post by Swampy » Mon Apr 06, 2015 8:00 am

We have several children, one who has severe autism.

While meeting with the attorney, we wondered if we might be over or underfunding our autistic child's SNT.

That said, it appears that there will be more than enough for all three, maybe even too much for the two 'normal' kids.

The last thing we want is having nonproductive trust fund kids while the one who has autism is being shortchanged. The continuing expense and carrying costs of a trust range between 1-2.5% annually. This alone takes a big bite out of returns and distributions over time.

I guess the question is at what dollar amount does a SNT have diminishing long term returns and only enriches the government with high tax rates after hitting low dollar amount distributions?

I am aware that the tax rate for a trust hits 39.6% after reaching $12,300 after expenses. Going forward, with a possible 1.5-2.5% distribution after expenses, it would seem that maximum funding should be in the range of $500-$800,000. What negatives (besides paying more taxes) are there if the SNT was funded with $1,000,000 of more from assets and insurance in order to make sure it lasts a long time? The SNT has to potentially last for 60-70 years. It would not be set into motion until we are both gone, so numbers will be adjusted and revised as we age.

Any suggestions and first hand experience would be appreciated.
If you fail to plan, you plan to fail. | Failure is not an option. | If I have seen further, it is because I was carried on the shoulders of giants.

CFOKevin
Posts: 134
Joined: Sat Jan 04, 2014 4:07 pm

Re: Maximum recommended funding for Special Needs Trust

Post by CFOKevin » Mon Apr 06, 2015 10:52 am

Swampy,

One of our daughters has cerebral palsy and a significant cognitive deficit. We established a SNT for her and its balance is such that it can provide $10K per year for her annually adjusted for inflation as that is the expected amount of the difference between her annual expenses for a "good" life and the amount she earns from work, SSI and other gov't programs.

She is 22 now and lives at home so we have not yet tapped the SNT for her. We have communicated to all of our relatives who may be inclined toward gifts or bequests to make them to the trust.

We expect to spend the next 20-30 years monitoring her income and expenses to be certain the SNT will be able to provide financially when we aren't around. Our oldest daughter will take over guardianship and we have a local bank trust company who will manage the funds after we die for 0.75% annually.

Kevin

harmony
Posts: 558
Joined: Sun Nov 24, 2013 1:35 am

Re: Maximum recommended funding for Special Needs Trust

Post by harmony » Tue Apr 07, 2015 1:35 am

We went around and around on this too and currently have landed on the side of treating our children equally. The nondisabled sibling had a challenging family situation growing up and we don't want that to be amplified in a negative way with how an inheritance would come down. We hope that the sibling relationship will remain strong after we are both gone.

Is it possible for the SNT to be funded in part with a stretch Roth IRA? This would make it possible for much of the growth to remain in the tax-free Roth and only the annual RMD would go into the trust each year. Thus the taxable trust earnings would only be on the growth of the RMD after it has come out of the Roth IRA; not on the whole Roth IRA, which is allowed to continue to grow tax free.

In proposals about changes to the Roth IRAs, there is talk of removing the stretch feature. However, this is often accompanied with a proposal to continue to allow the stretch feature if the Roth IRA is for the benefit of a disabled child. (This is proposed, so we can't discuss it here, but you can read more about it elsewhere.)

Severe autism has its challenges. Parents may have had such a long time to be accommodating that it may be hard to calculate the cost of this accommodation in a future living situation. It may be difficult to have the adult child with autism adapt to a group living situation because of sensory difficulties. So one idea to consider is to have the SNT own the home that the adult disabled child would be living in. The rent could be paid by the disabled adult child from whatever public benefits he/she is receiving. The expenses of keeping up the home will use up some SNT earnings, but the home equity remains and increases within the SNT. The trustee could get a suitable housemate, so that the sensitivities of the person with autism are accommodated appropriately.

We are watching the development of the Achieving a Better Life Experience Act to see how that might coordinate with an SNT. https://www.autismspeaks.org/news/news- ... t-able-act

Have you visited this site? http://www.specialneedsalliance.org/the-voice/ I haven't taken time to see if your specific question is addressed in any of the articles, but we have found this to be an excellent resource. Many of the articles were written by lawyers who have family members with special needs.

Topic Author
Swampy
Posts: 772
Joined: Fri Aug 31, 2012 7:16 am
Location: Between gators, rattlers and snowbirds

Re: Maximum recommended funding for Special Needs Trust

Post by Swampy » Tue Apr 07, 2015 6:43 am

Good points so far.

Since the rules governing SNT's are so difficult, it was my understanding that an SNT could not pay for property taxes and utilities,making property ownership impractical.

I guess my confusion stems from the high tax rates on SNT's. Is the high rate ONLY on retained taxable income in the SNT and NOT on distributions?

Let me get this straight, if I fund our child's SNT with mostly bond funds that distribute dividends, the dividends have to be spent down, otherwise any retained dividends are subject to the high taxes.

If I keep the SNT funded with mostly tax efficient equity index funds which have little capital gains or dividend distributions, these assets can grow without kicking off a taxable event...hence whenever the need for funds arises for our child, some fund shares could be liquidated and distributed.

If this is the case, then it is a strong argument for keeping the bare minimum in bonds and the highest equity allocation possible in SNT's.

It also means, at least to me, that the amount to fund the SNT need not be so high because equities return more over the long term.

Am I getting this right?
If you fail to plan, you plan to fail. | Failure is not an option. | If I have seen further, it is because I was carried on the shoulders of giants.

stlrick
Posts: 479
Joined: Mon Apr 14, 2008 4:37 pm

Re: Maximum recommended funding for Special Needs Trust

Post by stlrick » Tue Apr 07, 2015 8:05 am

Swampy wrote:
Since the rules governing SNT's are so difficult, it was my understanding that an SNT could not pay for property taxes and utilities,making property ownership impractical.
That depends. My understanding is that if the beneficiary is receiving SSI and Medicaid, you are correct, because those programs are means-tested. If they are receiving SSDI and Medicare, the trust can own the property and pay living expenses such as utilities and property taxes, because SSDI and Medicare are not means-tested.

The trust can be written so that someone on SSI and Medicaid can have living expenses (such as property taxes and utilities) paid by the trust, with a reduction in SSI payments. I don't know what the consequences might be for Medicaid eligibility.

The Special Needs Trust is a bureaucratic abomination. As my wife and I look to the future, the issue of burdening one of our child's siblings with managing the rules of this trust after we are gone is leading us to start thinking about alternatives. With the Affordable Care Act, we can pursue health insurance and forget about Medicaid. Are the SSI benefits worth the limitations and complexity?

Rick

CFOKevin
Posts: 134
Joined: Sat Jan 04, 2014 4:07 pm

Re: Maximum recommended funding for Special Needs Trust

Post by CFOKevin » Tue Apr 07, 2015 9:50 am

I guess everyone has to make their own decision regarding the value of SSI benefits.

For our daughter, her roughly $800 per month in SSI is reduced by 50% of her wage earnings so she ends up with approximately $750 from wages and $500 from SSI each month. We have to be careful to keep her bank balances below the asset limit of $2,000. My understanding of the Disabled Adult Child (DAC) benefit under SS is that, once I am 62 and file, her monthly benefit (half my PIA) will replace SSI for her and will not be reduced by her wage income. Effectively, she will get a raise of almost 60% in her monthly income.

We also have made the decision to have our estate split equally between our four children since the amount our disabled daughter will receive seems sufficient to provide for the lifestyle we envision for her. However, that could change as the system continues to feel the pressure from budget cuts at the State level here in Wisconsin.

harmony
Posts: 558
Joined: Sun Nov 24, 2013 1:35 am

Re: Maximum recommended funding for Special Needs Trust

Post by harmony » Tue Apr 07, 2015 5:59 pm

Thank you, Swampy, for prompting us to dig further for answers to your question. A Special Needs Trust investment goal must last a long time. (I hear you, 60-70 years.) I looked this up in my copy of Managing a Special Needs Trust, A Guide for Trustees, 2012 Edition. In Chapter 11 (entitled Taxes, pp. 123-137) the authors (all 4 lawyers) suggest these investments for reducing trust taxes:

---Growth-oriented stocks because they invest their earnings in capital projects, instead of paying them as dividends
---Tax-free investments such as municipal bonds, even though they pay lower interest than other bonds
---Deferred-income assets i.e., Series EE savings bonds (tax is postponed until redemption or maturity)
---A tax-deferred annuity was mentioned since it also postpones taxes until payments are withdrawn.

The authors also mention that if the trust is set up as a “Qualified Disability Trust”, a personal exemption can be taken against the trust's income. (A trust exemption would be much smaller.) The authors write that "the trust may deduct any income it distributes directly to the beneficiary or spends on his/her behalf. The trustee is to report all such amounts on the K-1, which it sends to the IRS and to the beneficiary. The beneficiary reports all K-1 income on his/her tax return and pays tax at his/her personal rate which is almost always lower than the trust rate". (p. 128) The law requires that the trust pay taxes only on net income; so all income that was distributed to or for the benefit of the beneficiary, as well as the trust expenses, get subtracted from total trust income.

The authors give three types of expenses which can be used to offset the special needs trust income to arrive at net income:
---Taxes such as state and local income taxes, real estate and personal property taxes
---Trustee fees and direct expenses the trustee incurs
---Professional fees including attorney, accountant, bookkeeper costs and tax preparer fees

If you have access to tax software that includes a 1041, you might be able to model a few different tax scenarios.

In most cases it is against the law to sell Affordable Care Act coverage to someone who qualifies for Medicare. Though a child may be getting SSI and Medicaid while parents are yet living, after both parents have passed and if the child does not have qualifying work credits of his/her own, then the child is likely to qualify for higher SSDI and Medicare off of the more ample work record of his/her parents. This often raises the child's benefit above the SSI monthly benefit. Our child qualified for SSDI after both of us parents took retirement benefits. At that point our DAC (Disabled Adult Child) was automatically enrolled in Medicare. See: https://www.healthcare.gov/medicare/med ... rketplace/. Click on “Can I choose Marketplace coverge instead of Medicare?” Scroll down to this section: “If you’re getting Social Security retirement or disability benefits before you’re eligible for Medicare, you’ll automatically be enrolled in Medicare once you’re eligible.” (Medicare may still need to be supplemented by state Medicaid.) We also wondered for a time if the ACA would be a simpler answer, until we found that it wouldn't even be available for our DAC.

We had our lawyer set up two trust shells with only a couple of sentences difference between them. One of them is a Special Needs Trust. The other is for a trust which still has restrictions and trustee management, but doesn't qualify as a Special Needs Trust. The trustee will choose which trust is most appropriate to fund after the second one of us passes away. Since we signed our documents, the ABLE 529A legislation has come into the picture. Once that passes in our state, we'll check if our plan is still good.

Topic Author
Swampy
Posts: 772
Joined: Fri Aug 31, 2012 7:16 am
Location: Between gators, rattlers and snowbirds

Re: Maximum recommended funding for Special Needs Trust

Post by Swampy » Tue Apr 07, 2015 8:37 pm

Thank you for your informative reply, harmony.

I will look into the Qualified Disability Trust and see if it is an option for the SNT in my state.

Going through this process is like peeling the layers off an onion.
If you fail to plan, you plan to fail. | Failure is not an option. | If I have seen further, it is because I was carried on the shoulders of giants.

FL1234
Posts: 23
Joined: Sat Jun 03, 2017 9:29 pm

Re: Maximum recommended funding for Special Needs Trust

Post by FL1234 » Thu Jul 30, 2020 4:10 pm

I know this post is old but reading similar topics I wonder why nobody mentions the following benefit:
https://howtogeton.wordpress.com/how-to ... -benefits/
or google if you want an official version for: "Disabled adult child benefits" (DAC)
In short if an adults childs disability started before age 22 they will receive benefits on the parents Social Security record when the parent retires or dies! If that benefit is higher than the SSI then they will only receive the DAC money - go on Medicare and be free from asset restrictions, SNT etc. In addition they can have a much higher balance in an Able account that SSI recipients. Check it out.

JBTX
Posts: 6506
Joined: Wed Jul 26, 2017 12:46 pm

Re: Maximum recommended funding for Special Needs Trust

Post by JBTX » Thu Jul 30, 2020 7:16 pm

harmony wrote:
Tue Apr 07, 2015 1:35 am
We went around and around on this too and currently have landed on the side of treating our children equally. The nondisabled sibling had a challenging family situation growing up and we don't want that to be amplified in a negative way with how an inheritance would come down. We hope that the sibling relationship will remain strong after we are both gone.

Is it possible for the SNT to be funded in part with a stretch Roth IRA? This would make it possible for much of the growth to remain in the tax-free Roth and only the annual RMD would go into the trust each year. Thus the taxable trust earnings would only be on the growth of the RMD after it has come out of the Roth IRA; not on the whole Roth IRA, which is allowed to continue to grow tax free.

In proposals about changes to the Roth IRAs, there is talk of removing the stretch feature. However, this is often accompanied with a proposal to continue to allow the stretch feature if the Roth IRA is for the benefit of a disabled child. (This is proposed, so we can't discuss it here, but you can read more about it elsewhere.)

Severe autism has its challenges. Parents may have had such a long time to be accommodating that it may be hard to calculate the cost of this accommodation in a future living situation. It may be difficult to have the adult child with autism adapt to a group living situation because of sensory difficulties. So one idea to consider is to have the SNT own the home that the adult disabled child would be living in. The rent could be paid by the disabled adult child from whatever public benefits he/she is receiving. The expenses of keeping up the home will use up some SNT earnings, but the home equity remains and increases within the SNT. The trustee could get a suitable housemate, so that the sensitivities of the person with autism are accommodated appropriately.

We are watching the development of the Achieving a Better Life Experience Act to see how that might coordinate with an SNT. https://www.autismspeaks.org/news/news- ... t-able-act

Have you visited this site? http://www.specialneedsalliance.org/the-voice/ I haven't taken time to see if your specific question is addressed in any of the articles, but we have found this to be an excellent resource. Many of the articles were written by lawyers who have family members with special needs.
In terms of the stretch IRA, you should familiarize yourself with the SECURE Act that was passed not long ago. It shortened the inheritance stretch from projected lifetime to 10 years in most non spouse situations. However there is a provision for disability that allows you to keep the lifetime stretch.

MtnBiker
Posts: 290
Joined: Sun Nov 16, 2014 4:43 pm

Re: Maximum recommended funding for Special Needs Trust

Post by MtnBiker » Thu Jul 30, 2020 8:51 pm

FL1234 wrote:
Thu Jul 30, 2020 4:10 pm
I know this post is old but reading similar topics I wonder why nobody mentions the following benefit:
https://howtogeton.wordpress.com/how-to ... -benefits/
or google if you want an official version for: "Disabled adult child benefits" (DAC)
In short if an adults childs disability started before age 22 they will receive benefits on the parents Social Security record when the parent retires or dies! If that benefit is higher than the SSI then they will only receive the DAC money - go on Medicare and be free from asset restrictions, SNT etc. In addition they can have a much higher balance in an Able account that SSI recipients. Check it out.
That link gives an excellent summary of the DAC benefits. There are a few other threads on Bogleheads that discuss DAC benefits. Some examples:

viewtopic.php?t=192296
viewtopic.php?t=147604
viewtopic.php?t=135141

I found out about this benefit thanks to such Bogleheads posts. My son is now receiving DAC benefits including an SSDI payment (~60% larger than his former SSI) and dual Medicare/Medicaid, which is very helpful in his situation. It took about 16 months to get all the pieces in place, primarily because the Social Security Administration (SSA) made several mistakes along the way. I had worried that the state might not agree to continue Medicaid coverage under the DAC provision when my son's SSDI income became too large for him to ordinarily qualify for Medicaid, but that turned out to not be a problem at all. Once the state reviewed his disability history and confirmed that the disability originated prior to age 22, they acknowledged that Medicaid coverage could continue.

When I applied for Social Security retirement benefits I also asked for my wife to be enrolled in spousal benefits on my earnings record and for my son to be enrolled in disability benefits on both of our earnings records. One error that the SSA made was they enrolled my son for disability only on my (larger) earnings record. This resulted in a lower spousal payment for my wife based on the family maximum for my earnings record, rather than the combined family maximum. It took close to a year to get that straightened out and to receive applicable retroactive payment.

A second error that SSA made was failing to automatically enroll my son into Medicare at the earliest time (based on him being eligible for SSDI retroactively at an earlier date on my wife's earnings record). Meanwhile the Centers for Medicare and Medicaid Services (CMS) used the correct early Medicare eligibility date to change Medicaid from primary to secondary coverage, even though SSA had not yet actually enrolled my son in Medicare. Because these two arms of the government were acting independently without talking to each other, the net effect for my son was that he had no medical insurance for a period of time. (Medicaid would not pay when Medicare was primary and Medicare would not pay without enrollment by the SSA.) Getting that straightened out was a real nightmare requiring assistance from the office of our US Senator.

While navigating the transition was difficult for us, now that it is behind us it was worth the effort.

bsteiner
Posts: 4998
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Maximum recommended funding for Special Needs Trust

Post by bsteiner » Thu Jul 30, 2020 10:18 pm

Swampy wrote:
Mon Apr 06, 2015 8:00 am
We have several children, one who has severe autism.

While meeting with the attorney, we wondered if we might be over or underfunding our autistic child's SNT.

That said, it appears that there will be more than enough for all three, maybe even too much for the two 'normal' kids.

The last thing we want is having nonproductive trust fund kids while the one who has autism is being shortchanged. The continuing expense and carrying costs of a trust range between 1-2.5% annually. This alone takes a big bite out of returns and distributions over time.
...
I am aware that the tax rate for a trust hits 39.6% after reaching $12,300 after expenses. Going forward, with a possible 1.5-2.5% distribution after expenses, it would seem that maximum funding should be in the range of $500-$800,000. What negatives (besides paying more taxes) are there if the SNT was funded with $1,000,000 of more from assets and insurance in order to make sure it lasts a long time? The SNT has to potentially last for 60-70 years. It would not be set into motion until we are both gone, so numbers will be adjusted and revised as we age.
...
The cost should be at the lower end of the range if you name a bank or trust company as trustee. They usually charge about 1% a year, or a little more for smaller trusts.

The taxes aren't that much. If the trustee makes distributions to or for the child's benefit, that will carry out the income. The child will probably be in a low tax bracket. The trust will be taxable on the income it retains, and will probably be taxable on any capital gains. However, capital gains (and most dividend income) is taxed at lower rates.

The amount to leave for that child will depend on your total assets, and whether you want to provide for your children equally or unequally.

While the SECURE Act generally requires that retirement benefits be distributed by the end of the 10th calendar year following the IRA owner's death, trusts for a disabled beneficiary may still stretch the distributions over the beneficiary's life expectancy. The trust may not have any current beneficiaries who aren't disabled or chronically ill during the child's lifetime.

FL1234
Posts: 23
Joined: Sat Jun 03, 2017 9:29 pm

Re: Maximum recommended funding for Special Needs Trust

Post by FL1234 » Sat Aug 01, 2020 12:26 pm

Still pondering....
As stated by harmony our plan was to have two trust shells setup so there would be more freedom when no asset restriction exists.
It's unclear to me if a SNT could payout freely if the beneficiary is not on government subsidies (SSI/Medicaid)? Or does it have to follow the trust language? If there's that flexibility only a SNT is required.
In any case we will need a trust as the beneficiary has poor spending habits.

Also I believe that the Able account can be funded from a SNT - thus offering more options and tax free growth etc.
Has anyone researched this?

Post Reply