By James Grennen | September 3, 2018


A special needs trust is an essential part of life planning if you have a loved one with special needs. Unfortunately, most caretakers just assume that their life insurance will take care of it. While this is a crucial component, there is more to funding a special needs trust. Most families dive in without even considering what quality of life they want to provide for their loved one or how much their lifetime financial support will be.

Determining how much and when to fund a special needs trust is one of the most important things you can do to provide a financially secure future for your loved one after you’re gone. In this blog post, you’ll learn how to get started using your lifetime financial support baseline (we have a great article on this that you can find here), why having a special needs trust is important, and how and when to fund it.

What’s A Dollar Worth?

After you’ve taken the time to properly estimate what the total lifetime financial support will be, then and only then will you have a realistic baseline to work from.  Whether you work with a certified financial planner or within your family, the number you will likely determine is the NPV, or net present value.

The NPV is simply a concept that is used to signify the time value of money. For instance, let’s say you can buy a gallon of milk for $2. In 20 years, the cost of milk will no longer be $2 a gallon due to inflation. Based on an average of 3% a year, a $2 gallon of milk would be close to $4 in 20 years.

This has to be taken into consideration with potential investments. If you expect a 7% yield over the course of 20 years, after subtracting 4% for inflation, you’ll be left with the true value of your investment. Taking these considerations into account is the big reason why calculating the NPV will give you a better estimate on how much you’ll actually need to fund the trust.

NPV 2.0

While the NPV is a fairly simple formula to plug into an Excel spreadsheet, it should be used as a guideline and not as the final say for funding. The main factors that need to be considered when calculating the NPV is the amount of funding, the number of yearly distributions, the expected lifespan of the beneficiary, expected return on investments, trust expenses, and the present value of the trust. All of this should either return zero or a positive value. That ensures the trust will last the duration of your loved one’s life.

However, there are a couple of faults with this model. Expenses are rarely fixed from year to year and can vary greatly. Cutbacks on government funding, purchase of a home, or additional illnesses can all increase expenses. A shortened life span, increased income from the beneficiary, and additional income from family and friends can actually reduce the amount needed. Due to fluctuations such as these, a better approach would be to calculate NPV during time blocks such as between significant events or a set amount of years.

How To Fund A Special Needs Trust The Right Way

When Should I Fund the Trust?

Another issue that potentially throws a wrench in proper funding is the “all at once” mentality. Many families assume that once the trust is set up, it should be fully funded. That’s not practical or realistic in most cases. A trust really only needs to be fully funded after the second parent dies. With that in mind, there are key periods during the caregiver’s life when a trust should be funded.

This period varies from person to person, but it usually falls during retirement or during a period of max wealth contribution. To put it simply, funding should be done during the period of the caretaker’s life where they are the most financially secure. In most cases, this falls towards the end of their working lives or during retirement. An exception to the rule would be if the caretaker has a serious ailment that could produce a sudden change in their ability to provide financially such as a disability or death.

Determining the right time frame will require a proper evaluation of your expected time working as well as current health and past family history of illness. Remember, your loved one’s future is important, but so is the rest of your family’s.

Choosing the Right Investments

Any good financial planner will cover your cash flow, net worth, future goals, and adequacy of risk. Risk levels can range from conservative to aggressive and investments will be made according to that level.

With a conservative approach, you are more likely not to lose your money, but the yield will be smaller than you could achieve with an aggressive approach. The aggressive approach doesn’t come without risk though. Aggressive and moderately aggressive approaches should not be taken unless you don’t need the funds for at least ten years — preferably longer.

Don’t Take Chances With Your Loved One’s Future

Funding a special needs trust for your loved one isn’t as cut and dry as it sounds. Seeking the help of an experienced financial planner can help ease your mind. As a fee-only certified financial planner serving the Long Island, NY metropolitan area, Woodhull Capital Advisors, LLC can simplify the process for you and your loved one with special needs.

Since we are a fee-only financial planning firm, we don’t earn commissions on our services. That means when you meet with us, you can rest assured knowing that we will have both you and your loved one’s best interest in mind. You’ll receive expert guidance from a trusted CFP to make sure that you and your loved one are taken care of.

Schedule a free 30-minute consultation today so that we can learn more about you and your needs. We’ll fill you in on how we can help and what your next steps should be to ensure your loved one lives a full and well-funded life after you’re gone.


James Grennen

Written by James Grennen


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