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One of the most common questions parents have is, “How do I fund a special needs trust?” Maybe you have set aside some money for your child and want to put it into the trust. Perhaps you have a life insurance policy and want to name the trust as a beneficiary. How do you do this? This article will discuss how you can fund a special needs trust or name the special needs trust as a beneficiary on one or more of your accounts.
Before we delve into how you can set up an account in the name of the special needs trust or name the trust as a beneficiary, I want to answer some questions parents often ask:
“Does the Trust Account Have to be at a Bank?”
This question raises the question: Where is the trust?
Well, where is your money? How do you know you own your retirement plan, home, or checking account? Your name is on the account, right?
Do you have to invest all your assets in just one bank? Of course not. You can invest your money at any financial institution if the account has your name on it. The same concept is true for a trust account. The trustee of a trust can open up an account at most financial institutions. Some credit unions may not accept trust accounts.
How do you know the money is in the trust? The name of the account states who controls the account. For example, when I opened a checking account for my brother’s special needs trust, the account was titled “Mark Russell, as trustee of the Jonathan Russell Special Needs Trust dated __/__/___.”
The trustee of a special needs trust can open most any kind of checking or investment account (other than an Individual Retirement Account) at most banks or financial institutions. The trustee can also title other assets in the name of the trust. For example, signing a Deed In Trust can title a home or condominium into a special needs trust. As a trustee, you can move the trust accounts to another financial institution or state as necessary.
“Do I Have to Fund the Special Needs Trust While I Am Alive?”
The special needs trust is often not funded until after the last-to-die parent dies.
“Can I Fund the Special Needs Trust Now?”
Sure – if the special needs trust is a living trust.
“Is there Any Reason Why I Should Fund the Special Needs Trust While I am Alive?”
Many parents have been saving money for their child with a disability, but the money is titled in the parent’s name because the parents know their child cannot have countable resources over $2,000 to qualify for SSI. Once the special needs trust is established, the parents can transfer this money “earmarked” for their child into the special needs trust.
The living special needs trust is like a bucket. Friends and relatives can write a check payable to the trust.
Warning: Never commingle your child’s money into a third-party special needs trust. Please chapter about the difference between first-party and third-party special needs trusts.
Opening a Financial Account in the Name of a Special Needs Trust
You already know how to open up a checking account or investment account in your name. Give the financial institution your name, address, and social security number. Opening up an account in the name of a special needs trust is similar.
The financial institution needs to know how to identify the trust. To open a trust account, you need to be able to answer four questions:
What is the Name of the Trust?
The name of the trust is usually at the top of the first page of the trust. Often, a paragraph on the first page will be titled “Name of Trust.” That paragraph will state the name of the trust. And, of course, you can ask your attorney.
What is the Date of the Trust?
The date of the trust is the day you (as the trust’s creator) sign the trust. The trust date is usually on the second to last page of the trust. The last page is often the notary page. The date of the trust may also be on the first page.
Who is the Trustee?
If you or you and your spouse are creating a third-party special needs trust for your child, then you will likely be the trustee(s). The trustee's name (or trustees) is usually stated in the first or second sentence of the trust. The successor trustees will usually be in a section of the trust about trustee succession.
What is the Tax Identification Number of the Trust?
This question causes a lot of confusion. Why? Because most people — including bankers and financial professionals — do not understand trust taxation's complicated rules.
Because these rules are complex, most bankers or financial advisors will not understand them. Ask your attorney for a letter stating the trust’s tax identification number to avoid confusion. If necessary, give a copy of this letter to the bank or financial institution.
The tax identification number of the special needs trust may use your social security number if you are trustee of the trust and have grantor (IRC 671-679 Grantor Trust Rules) powers over the trust. In any event, you should have a letter from your attorney indicating the trust’s tax identification number.
Warning: Some bankers will see your child’s name on the trust and incorrectly assume the tax identification number should be your child’s social security number. If the trust is a third-party special needs trust – no, do not use your child’s social security number. If you use your child’s social security number, Social Security or Medicaid may think your child owns the assets in the trust.
Mary Opens a Special Needs Trust Account
Here’s a fictional account of Mary, a mother of a child with a disability, opening up an account in the name of the special needs trust:
Mary walks into her local bank. A young man who looks like he graduated from college last week, wearing a trim-fitting suit, steps up and says, “Hi, my name is Joe. Can I help you?”
“I’d like to open up a checking account in the name of this special needs trust.” Mary raises a manila envelope. Inside the large envelope is a signed copy of the special needs trust for her daughter, Molly.
Pointing to his cubicle Joe says, “Sure, I can help you with that. Let’s go into my office,”.
Joe sits behind his desk. Mary sits across from Joe.
Joe says, “Can I see the trust?” Mary pulls it out from the envelope and hands it to Joe. “What’s the name of the trust?”
“It's the Molly Smith Special Needs Trust. You can see the name of the trust at the top of the page. I think the name is also mentioned in the second paragraph on the first page.” Mary is pleased with herself because she was prepared to answer that question.
“And who is the trustee?”
“I am. Mary Smith. I’m named as trustee on the first page at the top.” She leans over the desk and points at the paragraph where she is named as trustee.
“I see. And can I see a photo ID?”
“Sure.” Mary reaches into her purse, grabs her wallet, fingers through all her credit cards, finds her Driver’s License, and hands it to Joe. He examines it and hands it back to her.
“Great. And what’s the date of the trust?”
“It’s ______, 20__. The date is on the last page of the trust just above where I signed my name.”
“I see. And what’s the tax identification number of the trust?”
“Here’s a note from my attorney with the tax identification number.”
Do you mind if I make a copy of the trust for our records?”
“No, go ahead,” said Mary. “My attorney told me you would probably want to make a copy of the trust.”
The legal department gives Mary the green light to open the account. She deposits $500 into the account by writing a check from her account payable to the “Molly Smith Special Needs Trust. The money she had been saving up for Molly. But importantly, the $500 was titled in Mary’s account, not Molly’s name. Mary remembers that Molly can never fund a “third-party” special needs trust.
Mary orders checks. “Will the checks have the name of the trust on them?” Mary asked.
“Yes. And you’ll sign the trust as trustee of the trust.” Joe writes out an example and shows it to her. “This is how you will sign the check. ‘Mary Smith, as trustee.’ ”
Mary thanks Joe for all his help. She leaves the bank, smiling to herself. Delighted, she knew the answers to those four questions.
Now there’s a checking account titled in the name of the special needs trust.
Later, Mary plans to open an investment account in the name of the trust at a different financial institution. The process will be the same.
Never Deposit Cash into a Special Needs Trust
As you learned in a previous chapter, you should never commingle your child’s money into the third-party special needs trust for your child. It’s okay if a relative or friend writes a check payable to the trust. In Mary’s example above, the check would be payable to “The Molly Smith Special Needs Trust.”
However, never deposit cash into the third-party special needs trust. Why? Because if Social Security asks you whose money was deposited into the trust, you cannot prove it wasn’t your child’s.
One more layer of caution: Have a folder labeled “Deposits to Special Needs Trust.” Before depositing a check into the special needs trust account, make a copy of the check. Put the copy of the check into the folder. You have a readily available paper trail if Social Security asks who funded the special need trust.
How to Name the Special Needs Trust as a Beneficiary of a Retirement Account, IRA, Life Insurance Policy, or Other Financial Account
One way to fund the special needs trust on your death is to name it as a beneficiary of your retirement plan, IRA, life insurance, or another financial account. Let’s say you own a life insurance policy. You want to name your spouse as the primary beneficiary and the special needs trust as the secondary beneficiary. How do you do that?
First, you have to get the life insurance company’s beneficiary form. You can call your life insurance agent or the company and ask them to mail you a beneficiary form. Or you can usually find the beneficiary form on the company’s website.
I can’t tell you exactly how to fill out a beneficiary form because every form differs. Some forms anticipate that you may name a trust as a beneficiary, while others will not. You should ask your attorney or financial advisor to help you fill out these forms, at least with the first few beneficiary forms, so you get the hang of it.
Nonetheless, here are some general guidelines: Do you remember the four questions you need to know when you open up a financial account in the name of the special needs trust?
You’ll need to know the answers to those same four questions when you fill out a beneficiary form naming the special needs trust as a beneficiary.
Plus, you may need to answer a fifth question. Occasionally the form will also ask whether the trust is living or testamentary. A living trust means the trust is in existence now. It’s a stand-alone document. You can point to one document, which is the trust. A testamentary trust means the trust is a sub-trust drafted inside your will or your living trust, and the special needs sub-trust comes into existence after you die.
Well-Designed Beneficiary Forms
A well-designed beneficiary form anticipates you may name a trust as a beneficiary. Filling out these forms is pretty straightforward. The form will ask you questions, and you will check a box or fill in the answer. You will understand these questions:
These well-designed forms are easy to fill out.
Poorly-Designed Beneficiary Forms
Poorly-designed beneficiary forms do not anticipate you may name a trust as a beneficiary. Typically, they have two big boxes for the primary and secondary beneficiaries.
Ask your attorney how to fill in these forms. Every attorney will have their preferred way to designate a trust as a beneficiary.
Make sure to follow your attorney’s instructions to the letter. The last thing you want to do is go to the trouble and expense of having an attorney draft your estate plan and then end up botching everything by messing up the beneficiary designation.
Written Confirmation
After you submit the beneficiary form, wait a few weeks. Usually, the financial institution will confirm the beneficiary change by mail or online. If you are still waiting to receive confirmation of the change, ask them to mail you a written confirmation of the new beneficiary designation if the confirmation is not online.
Getting written confirmation does two things: First, you can check if the beneficiary designation is correct. Second, now you have a paper trail. Financial institutions lose beneficiary forms. Imagine that you named the special needs trust as the beneficiary of your life insurance policy, but because the financial institution lost the beneficiary form, the proceeds go to your child outright instead of to the trust, disqualifying your child from receiving SSI or Medicaid. Or worse, the proceeds don’t even go to your child; they go to someone else. Keep the written confirmations in your estate-planning file.
One of the most common questions parents have is, “How do I fund a special needs trust?” Maybe you have set aside some money for your child and want to put it into the trust. Perhaps you have a life insurance policy and want to name the trust as a beneficiary. How do you do this? This article will discuss how you can fund a special needs trust or name the special needs trust as a beneficiary on one or more of your accounts.
Before we delve into how you can set up an account in the name of the special needs trust or name the trust as a beneficiary, I want to answer some questions parents often ask:
“Does the Trust Account Have to be at a Bank?”
This question raises the question: Where is the trust?
Well, where is your money? How do you know you own your retirement plan, home, or checking account? Your name is on the account, right?
Do you have to invest all your assets in just one bank? Of course not. You can invest your money at any financial institution if the account has your name on it. The same concept is true for a trust account. The trustee of a trust can open up an account at most financial institutions. Some credit unions may not accept trust accounts.
How do you know the money is in the trust? The name of the account states who controls the account. For example, when I opened a checking account for my brother’s special needs trust, the account was titled “Mark Russell, as trustee of the Jonathan Russell Special Needs Trust dated __/__/___.”
The trustee of a special needs trust can open most any kind of checking or investment account (other than an Individual Retirement Account) at most banks or financial institutions. The trustee can also title other assets in the name of the trust. For example, signing a Deed In Trust can title a home or condominium into a special needs trust. As a trustee, you can move the trust accounts to another financial institution or state as necessary.
“Do I Have to Fund the Special Needs Trust While I Am Alive?”
The special needs trust is often not funded until after the last-to-die parent dies.
“Can I Fund the Special Needs Trust Now?”
Sure – if the special needs trust is a living trust.
“Is there Any Reason Why I Should Fund the Special Needs Trust While I am Alive?”
Many parents have been saving money for their child with a disability, but the money is titled in the parent’s name because the parents know their child cannot have countable resources over $2,000 to qualify for SSI. Once the special needs trust is established, the parents can transfer this money “earmarked” for their child into the special needs trust.
The living special needs trust is like a bucket. Friends and relatives can write a check payable to the trust.
Warning: Never commingle your child’s money into a third-party special needs trust. Please chapter about the difference between first-party and third-party special needs trusts.
Opening a Financial Account in the Name of a Special Needs Trust
You already know how to open up a checking account or investment account in your name. Give the financial institution your name, address, and social security number. Opening up an account in the name of a special needs trust is similar.
The financial institution needs to know how to identify the trust. To open a trust account, you need to be able to answer four questions:
- What is the name of the trust?
- What is the date of the trust?
- Who is the trustee?
- What is the tax identification number of the trust?
What is the Name of the Trust?
The name of the trust is usually at the top of the first page of the trust. Often, a paragraph on the first page will be titled “Name of Trust.” That paragraph will state the name of the trust. And, of course, you can ask your attorney.
What is the Date of the Trust?
The date of the trust is the day you (as the trust’s creator) sign the trust. The trust date is usually on the second to last page of the trust. The last page is often the notary page. The date of the trust may also be on the first page.
Who is the Trustee?
If you or you and your spouse are creating a third-party special needs trust for your child, then you will likely be the trustee(s). The trustee's name (or trustees) is usually stated in the first or second sentence of the trust. The successor trustees will usually be in a section of the trust about trustee succession.
What is the Tax Identification Number of the Trust?
This question causes a lot of confusion. Why? Because most people — including bankers and financial professionals — do not understand trust taxation's complicated rules.
Because these rules are complex, most bankers or financial advisors will not understand them. Ask your attorney for a letter stating the trust’s tax identification number to avoid confusion. If necessary, give a copy of this letter to the bank or financial institution.
The tax identification number of the special needs trust may use your social security number if you are trustee of the trust and have grantor (IRC 671-679 Grantor Trust Rules) powers over the trust. In any event, you should have a letter from your attorney indicating the trust’s tax identification number.
Warning: Some bankers will see your child’s name on the trust and incorrectly assume the tax identification number should be your child’s social security number. If the trust is a third-party special needs trust – no, do not use your child’s social security number. If you use your child’s social security number, Social Security or Medicaid may think your child owns the assets in the trust.
Mary Opens a Special Needs Trust Account
Here’s a fictional account of Mary, a mother of a child with a disability, opening up an account in the name of the special needs trust:
Mary walks into her local bank. A young man who looks like he graduated from college last week, wearing a trim-fitting suit, steps up and says, “Hi, my name is Joe. Can I help you?”
“I’d like to open up a checking account in the name of this special needs trust.” Mary raises a manila envelope. Inside the large envelope is a signed copy of the special needs trust for her daughter, Molly.
Pointing to his cubicle Joe says, “Sure, I can help you with that. Let’s go into my office,”.
Joe sits behind his desk. Mary sits across from Joe.
Joe says, “Can I see the trust?” Mary pulls it out from the envelope and hands it to Joe. “What’s the name of the trust?”
“It's the Molly Smith Special Needs Trust. You can see the name of the trust at the top of the page. I think the name is also mentioned in the second paragraph on the first page.” Mary is pleased with herself because she was prepared to answer that question.
“And who is the trustee?”
“I am. Mary Smith. I’m named as trustee on the first page at the top.” She leans over the desk and points at the paragraph where she is named as trustee.
“I see. And can I see a photo ID?”
“Sure.” Mary reaches into her purse, grabs her wallet, fingers through all her credit cards, finds her Driver’s License, and hands it to Joe. He examines it and hands it back to her.
“Great. And what’s the date of the trust?”
“It’s ______, 20__. The date is on the last page of the trust just above where I signed my name.”
“I see. And what’s the tax identification number of the trust?”
“Here’s a note from my attorney with the tax identification number.”
Do you mind if I make a copy of the trust for our records?”
“No, go ahead,” said Mary. “My attorney told me you would probably want to make a copy of the trust.”
The legal department gives Mary the green light to open the account. She deposits $500 into the account by writing a check from her account payable to the “Molly Smith Special Needs Trust. The money she had been saving up for Molly. But importantly, the $500 was titled in Mary’s account, not Molly’s name. Mary remembers that Molly can never fund a “third-party” special needs trust.
Mary orders checks. “Will the checks have the name of the trust on them?” Mary asked.
“Yes. And you’ll sign the trust as trustee of the trust.” Joe writes out an example and shows it to her. “This is how you will sign the check. ‘Mary Smith, as trustee.’ ”
Mary thanks Joe for all his help. She leaves the bank, smiling to herself. Delighted, she knew the answers to those four questions.
Now there’s a checking account titled in the name of the special needs trust.
Later, Mary plans to open an investment account in the name of the trust at a different financial institution. The process will be the same.
Never Deposit Cash into a Special Needs Trust
As you learned in a previous chapter, you should never commingle your child’s money into the third-party special needs trust for your child. It’s okay if a relative or friend writes a check payable to the trust. In Mary’s example above, the check would be payable to “The Molly Smith Special Needs Trust.”
However, never deposit cash into the third-party special needs trust. Why? Because if Social Security asks you whose money was deposited into the trust, you cannot prove it wasn’t your child’s.
One more layer of caution: Have a folder labeled “Deposits to Special Needs Trust.” Before depositing a check into the special needs trust account, make a copy of the check. Put the copy of the check into the folder. You have a readily available paper trail if Social Security asks who funded the special need trust.
How to Name the Special Needs Trust as a Beneficiary of a Retirement Account, IRA, Life Insurance Policy, or Other Financial Account
One way to fund the special needs trust on your death is to name it as a beneficiary of your retirement plan, IRA, life insurance, or another financial account. Let’s say you own a life insurance policy. You want to name your spouse as the primary beneficiary and the special needs trust as the secondary beneficiary. How do you do that?
First, you have to get the life insurance company’s beneficiary form. You can call your life insurance agent or the company and ask them to mail you a beneficiary form. Or you can usually find the beneficiary form on the company’s website.
I can’t tell you exactly how to fill out a beneficiary form because every form differs. Some forms anticipate that you may name a trust as a beneficiary, while others will not. You should ask your attorney or financial advisor to help you fill out these forms, at least with the first few beneficiary forms, so you get the hang of it.
Nonetheless, here are some general guidelines: Do you remember the four questions you need to know when you open up a financial account in the name of the special needs trust?
- What is the name of the trust?
- Who is the trustee (or trustees)?
- What is the date of the trust?
- What is the tax identification number of the trust?
You’ll need to know the answers to those same four questions when you fill out a beneficiary form naming the special needs trust as a beneficiary.
Plus, you may need to answer a fifth question. Occasionally the form will also ask whether the trust is living or testamentary. A living trust means the trust is in existence now. It’s a stand-alone document. You can point to one document, which is the trust. A testamentary trust means the trust is a sub-trust drafted inside your will or your living trust, and the special needs sub-trust comes into existence after you die.
Well-Designed Beneficiary Forms
A well-designed beneficiary form anticipates you may name a trust as a beneficiary. Filling out these forms is pretty straightforward. The form will ask you questions, and you will check a box or fill in the answer. You will understand these questions:
- Primary or Secondary beneficiary?
- Name of individual or trust?
- Date of birth or date of trust?
- Social Security Number or Trust FEIN Number?
- Trustee’s name?
These well-designed forms are easy to fill out.
Poorly-Designed Beneficiary Forms
Poorly-designed beneficiary forms do not anticipate you may name a trust as a beneficiary. Typically, they have two big boxes for the primary and secondary beneficiaries.
Ask your attorney how to fill in these forms. Every attorney will have their preferred way to designate a trust as a beneficiary.
Make sure to follow your attorney’s instructions to the letter. The last thing you want to do is go to the trouble and expense of having an attorney draft your estate plan and then end up botching everything by messing up the beneficiary designation.
Written Confirmation
After you submit the beneficiary form, wait a few weeks. Usually, the financial institution will confirm the beneficiary change by mail or online. If you are still waiting to receive confirmation of the change, ask them to mail you a written confirmation of the new beneficiary designation if the confirmation is not online.
Getting written confirmation does two things: First, you can check if the beneficiary designation is correct. Second, now you have a paper trail. Financial institutions lose beneficiary forms. Imagine that you named the special needs trust as the beneficiary of your life insurance policy, but because the financial institution lost the beneficiary form, the proceeds go to your child outright instead of to the trust, disqualifying your child from receiving SSI or Medicaid. Or worse, the proceeds don’t even go to your child; they go to someone else. Keep the written confirmations in your estate-planning file.