How Much Is Enough For My Special Needs Child?

by: J. Patrick Collins, CFP® , EA

I often get asked the question, “How much money needs to be in my child’s special needs trust when I am gone?” This is one of the most important questions when it comes to special needs planning, and there is not a simple answer. We use a process for each client to determine an appropriate funding amount.

1. Determine Child’s Future Quality of Care: parents should agree on what type of care they want for their child when they are no longer able to support him/her. The more specific the parents can be the better, as it will help solidify how much that care will cost. If there is a certain facility in the area the parents would like to see their child admitted to, they should investigate the quality and cost of that facility.

2. Develop a Spending Plan: parents should develop a spending plan for the trustee of their child’s special needs trust. This plan should be included in the Letter of Intent, which is not legally binding, but will give the trustee some guidelines on what is appropriate to use the trust funds for. Items to consider are facility costs, entertainment, travel, un-reimbursed medical, clothing, and any other ordinary expense you may incur.

3. Determine Income Sources: if the Special Needs Trust is structured correctly, there is a good chance that a disabled child will be eligible for government benefits. Parents should meet with their child’s local case manager to not only determine what government benefits their child is currently eligible for (SSI, Medicaid, etc), but benefits that they may be entitled to in the future (SSDI, Medicaid Waiver Programs, etc).

4. Calculate the Difference: parents should add up all of the income sources and subtract all of the expenses to determine any shortfall that must be made up. For example, if the total expenses for their child will be $50,000 and the total amounts of government benefits will be $20,000 there is shortfall of $30,000 that must be generated from the Special Needs Trust.

5. Determine Funding Amount: in the example above, the Special Needs Trust must generate $30,000 per year in income. To determine how much money should be in the Trust, parents should take the annual income needed and divide by an interest rate they believe the money in the trust will earn. For this example, we’ll say 5 percent. That means that the Special Needs Trust should be funded at the parents death with $600,000 ($30,000 / 5%). An important item to note, is that most states do not allow Special Needs
Trusts to pay for items having to do with food, shelter or clothing, so this should be taken into consideration when determining the spending plan and funding amount.

In a prior article, I wrote about using life insurance to fund a Special Needs Trust. In an upcoming article, we’ll review other funding strategies. While there is NO substitute for competent professional advice when it comes to planning for your child with special needs, a well thought out strategy is the foundation for your child’s long-term needs.

The information in this article is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, and does not purport to be complete and is not intended as the primary basis for financial planning or investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.