Funding A SNT
Funding a Special Needs Trust means transferring assets into the trust to ensure they are properly managed and protected for the beneficiary. It’s a key step in making the trust effective.
A trust does not automatically include all your assets. This is particularly important if you have multiple heirs such as one child with special needs and others without because you may have different trusts for different purposes. Typically, a revocable living trust is used for general estate planning, while a separate revocable special needs trust is created for a child with disabilities. This allows flexibility in deciding which assets go where.
The most important asset to place in a trust in California is real estate. Any property not held in a trust will go through probate, which can be costly and time-consuming. To transfer real estate into a trust, you must execute and record a new deed placing the property into the trust.
Other assets, such as bank accounts, investment accounts, and life insurance policies, may be transferred into the trust in different ways:
Beneficiary Designations
Some assets, like life insurance or retirement accounts, can be directed to the trust by naming it as the beneficiary.
Transfer On Death (TOD) Designations
Many financial accounts allow you to name the trust as a TOD beneficiary. There are pros and cons to this approach so you need to be thoughtful with the decision about whether to make the account a trust account, changing the signature card(s), or using a TOD or POD (payable on death) beneficiary form.
There are both legal and tax implications with these different approaches so it’s important to work with an estate planning lawyer and a tax professional, or an estate planning lawyer who coordinates with tax professionals, to determine what approach is best in your specific situation.
Account Ownership Changes
Bank and investment accounts may require updating signature cards or changing the account type to reflect trust ownership.
The key to properly funding a trust is identifying which assets will go into the SNT and ensuring the necessary paperwork is completed so the assets legally belong to the trust. Without this step, the trust will not function as intended, potentially leaving the special needs beneficiary without the financial protection the trust was meant to provide.
Rebecca Sommer, founder of The Law Office of Rebecca Sommer in California, specializes in helping families establish and fund Special Needs Trusts to protect their loved ones with disabilities. With extensive experience guiding clients through complex estate planning challenges, Rebecca ensures every detail is handled to preserve government benefits and maximize resources. Her compassionate approach has helped countless families across California secure financial stability for their loved ones.
Contact The Law Office of Rebecca Sommer today to start building a customized plan that meets your family’s unique needs.
Commonly Used Assets
A SNT can be funded with various assets, but tax-deferred accounts offer a significant advantage. Tax-deferred accounts include traditional IRAs, 401(k)s, 457 plans, and 403(b) plans accounts where contributions were made pre-tax, and growth occurs tax-free until withdrawal. The challenge with these accounts is that withdrawals are taxable, and under the SECURE Act of 2019, most beneficiaries who inherit them must withdraw all funds within 10 years, leading to potentially high tax burdens.
However, SNT beneficiaries who qualify as disabled are exempt from this 10-year rule. Instead, the trust can take distributions over the beneficiary’s lifetime, reducing annual taxable income and preserving more of the inherited wealth. This allows tax-deferred funds to last longer and benefit special needs individuals without jeopardizing government benefits.
While an SNT can be funded with nearly any asset, the best strategy often involves coordination between legal, tax, and financial professionals to ensure optimal tax efficiency and long-term financial security for both the special needs beneficiary and other heirs.
Limits
There is no legal limit on how much you can fund an SNT with you could theoretically place tens of millions of dollars into one if you wanted. Despite this, it’s essential to be strategic when determining how much to fund your SNT with. The trustee will manage and distribute the funds for the beneficiary’s lifetime, and any remaining funds will be distributed according to the terms set in the trust.
Many families understandably choose to overfund rather than underfund an SNT to ensure their loved one has enough support. However, if you have multiple heirs, it’s important to balance allocations wisely. For example, if you have three children but allocate 100% of your estate to the SNT, the other children may receive little to no inheritance during their lifetime, even if you leave them the assets once the disabled beneficiary has passed away. As a result, you may not get the results you intended.
By working with an estate planning lawyer and finance professionals, you can help ensure both the security of your loved one with special needs as well as ensure your goals are met with respect to other heirs.
Who Can Contribute
Family members and even friends can contribute to third-party SNTs. Once the trust is set up, it’s a good idea to inform relatives, especially those who may want to provide financial support but worry about jeopardizing the beneficiary’s government benefits. Many attorneys provide template letters to help educate family members on how to direct gifts or inheritances into the trust. Contributions can be small, like a birthday gift, or larger, such as an inheritance. The key is that only third parties not the beneficiary can add funds to third party special needs trusts. If the beneficiary contributes, it will generally convert the trust to a first person special needs trust and lose some of the benefits (such as avoiding Medicaid claw-back).
Working With An Attorney
Working with an attorney when funding a Special Needs Trust is essential for two key reasons: maximizing assets and avoiding costly mistakes.
Attorneys, oftentimes working with tax professionals, help ensure that the right assets are allocated in the most strategic way. This allows the beneficiary to get the most out of the available funds while preserving eligibility for government benefits.
If a trust is not properly funded or if assets are incorrectly designated, there is a risk that money could go directly to the beneficiary instead of the trust. Even a small direct payment of $5,000, for example, could cause the Social Security Administration to suspend Supplemental Security Income benefits until the beneficiary’s assets fall below the $2,000 threshold.
Attorneys can’t handle every step such as signing beneficiary designation forms but they can guide you through the process, review documents for accuracy, and ensure everything is set up correctly to avoid jeopardizing the government benefits your loved one with special needs relies on.
Still Have Questions? Ready To Get Started?
For more information on Funding A Special Needs Trusts, a free consultation is your next best step. Get the information and legal answers you are seeking by calling (657) 571-1241 today.
Rebecca Sommer, founder of The Law Office of Rebecca Sommer in California, specializes in helping families establish and fund Special Needs Trusts to protect their loved ones with disabilities. With extensive experience guiding clients through complex estate planning challenges, Rebecca ensures every detail is handled to preserve government benefits and maximize resources. Her compassionate approach has helped countless families across California secure financial stability for their loved ones.
Contact The Law Office of Rebecca Sommer today to start building a customized plan that meets your family’s unique needs.
