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Ways to Fund Special Needs Trusts

Brent E Chavez

Ways to Fund Special Needs Trusts

A look at the different options & strategies.

If you have a child with special needs, a trust may be a financial priority. There are many crucial goods and services that Medicaid and Supplemental Security Income might not pay for, and a special needs trust may be used to address those financial challenges. Most importantly, a special needs trust may help provide for your disabled child in case you’re no longer able to care for them.

In planning a special needs trust, one of the most pressing questions is: when it comes to funding the trust, what are the options?

There are four basic ways to build up a third-party special needs trust. One method is simply to pour in personal assets, perhaps from immediate or extended family members. Another possibility is to fund the trust with permanent life insurance. Proceeds from a settlement or lawsuit can also serve as the core of the trust assets. Lastly, an inheritance can provide the financial footing to start and fund this kind of trust.

Families choosing the personal asset route may put a few thousand dollars of cash or other assets into the trust to start, with the intention that the initial investment will be augmented by later contributions from grandparents, siblings, or other relatives. Those subsequent contributions can be willed to the trust, or the trust may be named as a beneficiary of a retirement or investment account.1

When life insurance is used, the trustor makes the trust the beneficiary of the policy. When the trustor dies, the policy’s death benefit is left, tax free, to the trust.2

A lump-sum settlement or inheritance can be invested while within the trust, inviting the possibility of growth and compounding. With a worthy trustee in place, there is less likelihood of mismanagement, and funds may come out of the trust to support the beneficiary in a measured way that does not risk threatening government benefits.

The trust may also be funded with tangible, non-cash assets. Examples include real estate, securities, collections of cars or art or antiques, or even a business. These assets (and others like them) can be left to the trustee of the special needs trust via a revocable living trust or will. Just remember that the goal of the trust is to provide the trust beneficiary with cash. Those tangible assets will need to be sold or liquidated to meet that objective.1

Currently, it costs about $3,500 to design a basic special needs trust. Given that initial expense and ongoing administrative costs, most families aim to place at least $100,000 inside these vehicles. The typical trustee is a bank – or more precisely, a bank’s trust division – and annual administration fees commonly range from 0.5% to 1.5%. If the trustee is a relative of the child or a close friend of the family, administration may be done for free or at minimal cost.3 

Care must be taken not only in the setup of a special needs trust, but in the management of it as well. This should be a team effort. The family members involved should seek out legal and financial professionals who are well versed in this field, and the resulting trust should be a product of close collaboration.

Questions? Please contact us: 215-766-7002, info@aeinvestmentsgroup.com

Citations
1 – specialneedsanswers.com/the-top-7-reasons-to-establish-a-special-needs-trust-13358 [7/3/19]
2 – specialneedsanswers.com/funding-a-special-needs-trust-with-life-insurance-the-basics-17359 [10/2/19]
3 – barrons.com/articles/their-child-has-special-needs-heres-how-theyre-planning-for-assistance-51575032400 [11/29/19]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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The SECURE Act

Brent E Chavez

The SECURE Act

Long-established retirement account rules change.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act is now law. With it, comes some of the biggest changes to retirement savings law in recent years. While the new rules don’t appear to amount to a massive upheaval, the SECURE Act will require a change in strategy for many Americans. For others, it may reveal new opportunities.

Limits on Stretch IRAs. The legislation “modifies” the required minimum distribution rules in regard to defined contribution plans and Individual Retirement Account (IRA) balances upon the death of the account owner. Under the new rules, distributions to non-spouse beneficiaries are generally required to be distributed by the end of the 10th calendar year following the year of the account owner’s death.1

It’s important to highlight that the new rule does not require the non-spouse beneficiary to take withdrawals during the 10-year period. But all the money must be withdrawn by the end of the 10th calendar year following the inheritance.

A surviving spouse of the IRA owner, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the IRA owner, and child of the IRA owner who has not reached the age of majority may have other minimum distribution requirements. 

Let’s say that a person has a hypothetical $1 million IRA. Under the new law, your non-spouse beneficiary may want to consider taking at least $100,000 a year for 10 years regardless of their age. For example, say you are leaving your IRA to a 50-year-old child. They must take all the money from the IRA by the time they reach age 61. Prior to the rule change, a 50-year-old child could “stretch” the money over their expected lifetime, or roughly 30 more years.

IRA Contributions and Distributions. Another major change is the removal of the age limit for traditional IRA contributions. Before the SECURE Act, you were required to stop making contributions at age 70½. Now, you can continue to make contributions as long as you meet the earned-income requirement.2

Also, as part of the Act, you are mandated to begin taking required minimum distributions (RMDs) from a traditional IRA at age 72, an increase from the prior 70½. Allowing money to remain in a tax-deferred account for an additional 18 months (before needing to take an RMD) may alter some previous projections of your retirement income.2

The SECURE Act’s rule change for RMDs only affects Americans turning 70½ in 2020. For these taxpayers, RMDs will become mandatory at age 72. If you meet this criterion, your first RMD won’t be necessary until April 1 of the year after you reach 72.2

Multiple Employer Retirement Plans for Small Business. In terms of wide-ranging potential, the SECURE Act may offer its biggest change in the realm of multi-employer retirement plans. Previously, multiple employer plans were only open to employers within the same field or sharing some other “common characteristics.” Now, small businesses have the opportunity to buy into larger plans alongside other small businesses, without the prior limitations. This opens small businesses to a much wider field of options.1

Another big change for small business employer plans comes for part-time employees. Before the SECURE Act, these retirement plans were not offered to employees who worked fewer than 1,000 hours in a year. Now, the door is open for employees who have either worked 1,000 hours in the space of one full year or to those who have worked at least 500 hours per year for three consecutive years.2

While the SECURE Act represents some of the most significant changes we have seen to the laws governing financial saving for retirement, it’s important to remember that these changes have been anticipated for a while now. If you have questions or concerns, reach out to your trusted financial professional.

Have questions? Please contact us at (215) 766-7002 or info@aeinvestmentsgroup.com.

Learn more about Brent E Chavez, the Services We Provide, or Why Choose AE?

Citations
1 -waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section.pdf  [12/25/19]
2 – marketwatch.com/story/with-president-trumps-signature-the-secure-act-is-passed-here-are-the-most-important-things-to-know-2019-12-21 [12/25/19]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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Homeowner’s and Renter’s Insurance Basics – How much is enough?

Brent E Chavez

Homeowner’s and Renter’s Insurance Basics

How much is enough?

Many people don’t want to put a lot of thought into their renter’s or homeowner’s insurance policy. They buy a renter’s policy because the building they live in makes them do so. When they close on a home, they will buy a homeowner’s policy because their lender requires it.

These insurance policies are much more important than you may think at first glance. When it comes time to make a claim, many people find out just how critical their coverages are. They cover more than just the value of your home and your contents; they also include liability coverage which can come into play if someone gets injured on your property.

These policies are important for everyone, especially when looking at it from a retirement point of view. Having the right coverages will serve as a protection for your hard earning savings and retirement assets.

Renter’s Policies

A renter’s policy covers your belongings from any peril not excluded in the policy. This can include fire, theft, smoke, and so on.

Your possessions are covered in one of two ways:

  1. A less expensive policy covers your belongings on a depreciated value basis. This means if you have a 10-year-old TV it will only be covered for how much it is worth today (which likely isn’t a whole lot).
  2. For a little bit more, you can have a policy that covers your items on a replacement cost basis. This means that if your 10-year-old TV is damaged or destroyed in a fire it will be covered based on how much it would cost to replace. If you have an older 43″ TV you’ll get enough money to buy a new 43″ TV.

Nevertheless, for either type of policy, there will still be a deductible, which, for most is in the $250 or $500 range.

These policies are relatively inexpensive. In Pennsylvania, the average renter’s policy is around $200 a year. The cost may be higher or lower depending on how much personal property you need to insure, how much liability coverage you want, and what deductible you choose.

Homeowner’s Policies

A family can have thousands to hundreds of thousands of dollars invested in their homes. To have all that wiped away in an uninsured fire would be devastating to any family’s finances. A family risks ruin by not having their homes properly insured, making homeowner’s insurance far more important than just something to check off when you buy a home.

A homeowner’s insurance policy provides protection in a variety of ways and there are many different types to choose from.

The broadest type of homeowner’s insurance policy is called a HO-5. This is a comprehensive policy that covers any sort of peril, unless it is specifically excluded by the policy. Many homeowners are unaware that events such as earthquakes and flooding are not covered under home insurance policies. These perils can only be covered with the purchase of separate policies.

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Each policy is broken down into different sectors of coverage: A, B, C, D, E and F.

  • Coverage A is the portion of insurance that covers the actual structure of your home.
  • Coverage B if for separate structures on your property (sheds, fences, etc.).
  • Coverage C is your personal property.
  • Coverage D is loss of use of your home. For example, if you need to live in a hotel for some time while your home is being repaired after suffering a covered peril, the loss of use coverage will reimburse your expenses.
  • Coverage E is your liability coverage, such as if a suit is bought against you if someone were to be injured on your property.
  • Coverage F is for medical payments for injuries to others that are not insured by your policy.

It can all sound very confusing at times, but don’t let that deter you from learning more about your policy and its coverages. Having the knowledge to make decisions now, while you still can, is a priceless asset.

How Much Liability Coverage Is Right For You?

Usually, the default amount of liability coverage on a renter’s or homeowner’s policy is $100,000; which, as I’m sure you know, is most likely not enough for the average family. You can add a lot of peace of mind by bumping this coverage up and it really doesn’t cost very much to do so.

The next step up is $300,000. It depends on where you live and your carrier, but it can be as little as $20 a year to boost your liability to $300,000. As such, it may be worth checking into the cost of increasing this coverage to $500,000 or even $1,000,000, especially if you are nearing retirement. If you do not have enough coverage, your nest egg could be instantly depleted in a potential lawsuit or incident.

You can also consider getting an umbrella policy. These provide an additional $1,000,000 in liability coverage on top of your other policies whether it’s auto, boat, renter’s, homeowner’s, and so on. The price of an umbrella policy will vary widely based on the family circumstances, but it could be worth finding out the price to have the additional protection.

Circumstances are always changing. Make sure your policies are staying in sync with your situation by reviewing your coverages when they renew each year.

So, how much coverage is enough? Ultimately, it comes down to what will help you sleep soundly at night.

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