Funding Your Special Needs Trust

You have created the special needs trust for your disabled loved one, but now how do you properly fund the trust. When an attorney says that you need to “fund the trust,” what they are telling you to do is to transfer assets from yourself to the trust. This may require re-titling assets, such a bank accounts or opening a bank account in the trust name. But there are other ways to fund a trust as well.

One way is to designate the trust as a beneficiary on life insurance policies. A beneficiary designation will bypass the probate court as the insurer agrees to pay the sums upon your death to designated person or, in this case, a trust. The trust will be the legal owner of the insurance proceeds with clear instructions to use them for the benefit of the trust’s beneficiaries. This is an excellent way to ensure that the funds, which you want available for your disabled loved one’s financial needs after you are gone, are spent the way you would have wanted. There are several different forms of life insurance available, such as second-to-die, term life, whole life, and variable life. Be sure to discuss which policy is right for your family’s needs.

Another way is to leave the family home to a third-party special needs trust. This method will not create the real estate as an asset for the disabled person, which can negatively impact their government assistance. The popular method of funding can escape the Medicaid lien that a first party trust would be exposed to. The home can transfer to other beneficiaries after the disabled person has passed away. If staying in the home is not the best option for the disabled person, then the property can be sold, and the proceeds will remain in the trust.  Even if title to the property is retained by the trust, a prudent investor can lease the property, thereby creating an income stream to maintain the property and provide income for pay towards the disabled person’s care.

A trickier way to use retirement funds. However, there are some tax consequences that could occur if this not done properly. If you are considering funding a special needs trust with retirement fund, then speak at length with your financial planner on the benefits and disadvantages to this method of funding.

If you need help funding or drafting a special needs trust, call our Client Coordinator today to schedule your paid Pre-engagement meeting.

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