Special Needs Trust Funding Part 1

This material contains references to concepts that have legal, accounting and tax implications.  It is not intended as legal, accounting or tax advice. Consult your own attorney and/or accountant for advice regarding your particular situation. Accordingly, any information in this document cannot be used by any taxpayer for purposes of avoiding penalties under the Internal Revenue Code.  Information developed by The Prudential Insurance Company of America, Newark, NJ, and its affiliates.  I am not affiliated with Prudential Insurance Company of America or its affiliates.

The greatest concern for parents of a child with special needs is not knowing what will happen when they are no longer able to care for the child because of their own health issues or, more critically, after their deaths.   

While there may be an abundance of love in the family, there may not be adequate financial assets to maintain the lifestyle that the parents desire for their child. Even for families with significant assets now, the future is unknown and special needs may last the child’s lifetime.  As parents grow older, their own aging and health care issues may consume a greater portion of their assets than anticipated, thus impacting the care that can be provided to the child.   

Although public assistance programs such as Social Security and Medicaid are designed to provide some very basic medical care and possibly shelter for disabled persons, they are an important aspect of the financial care of the child with special needs. These programs are often needs based and never provide more than the basics. They do not provide the child the “pleasures of life,” such as vacations, recreation, education, job training, rehabilitation, computer equipment, transportation, and so forth.  Those items and others must all be funded from other sources, and those funds may be more difficult to obtain as parents grow older.  Because public programs are generally needs based, it is important that funding be provided in a manner that does not impute income or assets to the child in any way that would jeopardize those benefits.  The objective of special needs planning is to provide for a standard of living that is higher than basic subsistence while preventing a loss of government benefits.  A special needs trust is often used for that purpose. Your tax and legal advisors can help you determine if this type of trust is right for your situation.  A special needs trust is a trust that will provide for financial management of family gifts, inheritances, and life insurance proceeds in order to provide a child with special needs the comforts of life and other necessities not provided by funding from governmental agencies.   

Typically, the parents or other family members establish such a trust.  The person who establishes the trust is called the grantor. A trustee, who can be anyone other than the child with special needs, manages the assets. Typically, the parents serve as trustees. Because a trustee has full and absolute discretion on whether or not to provide financial assistance,  the existence of the trust, if properly drafted, avoids being counted as an asset by various other programs, thus protecting public benefits.


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