How much do I need to fund a Supplemental Needs Trust?

When I work with clients to create a comprehensive financial plan, one of the big questions we often need to tackle is “How much do I need to fund the Supplemental Needs Trust for my loved one with a disability?”  The way we develop an answer requires asking a lot more questions to define the relevant variables.  Since these types of trusts are designed specifically to pay for goods and services that government benefits programs do not cover, the first set of  questions we need to ask are for which programs the trust beneficiary either is or will be eligible.

In terms of cash benefits, the trust beneficiary may be receiving Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI), or a Childhood Disability Benefit (CDB, also known as a “Disabled Adult Child” benefit, which comes from a parent’s Social Security history).  If the trust beneficiary is eligible for a CDB/DAC while the parent is alive, s/he will be eligible for a survivor’s benefit when the parent dies.  At the lowest end of the range, a person who receives only SSI will receive a maximum of $994/month for 2026.  This equates to an annual income of $11,928, which is only 75% of the Federal Poverty Level for a single person.  At the highest end of the range, an adult child with a disability who receives a survivor’s benefit may have as much as $3,000 per month for an annual income of $36,000, which is 225% of the Federal Poverty Level.  For people receiving SSDI or CDB/DAC or a combination of the two, the monthly and annual amounts will fall somewhere in between.

In terms of medical insurance and personal support, the trust beneficiary may be eligible for Medicaid, a Medicaid Waiver, Medicare, or a combination of the three.  Medicaid can function as health insurance, but not every medical provider takes it because the reimbursement rates are low and the payment process can be slow.  Medicare is better health insurance, but it may also have deductibles and copays that need to be paid out of pocket.  Medicaid Waivers cover personal support, which could range from 15 hours per week at the low end to 24 hours per day with awake overnight support at the high end.

Then, we must consider the living and working situation of the trust beneficiary.  If s/he is living with family, the person may have no out-of-pocket costs for shelter or food, or s/he may contribute to those costs from a portion of whatever cash benefits s/he receives.  If the trust beneficiary lives independently, s/he will have to cover rent or mortgage and property tax, homeowner’s or renter’s insurance, utilities, and food.  If the person lives in a facility, owned and managed by a disability support provider agency, s/he will likely have a costs-sharing arrangement with the agency, such that the agency receives any SSI, SSDI, CDB/DAC, or survivor’s benefit over and above the Personal Needs Allowance that the beneficiary is permitted to keep.  If the trust beneficiary is employed, s/he will have additional income from employment to cover daily living expenses.  Currently, in my home state of Illinois, disability-support-provider agencies cannot require cost sharing from a person’s earned income for people with disabilities enrolled in Medicaid Waivers.  It is important to remember that people with disabilities, who are employed at one time, may be unemployed or eventually retired.

When all the above variables have been factored in, we can tell whether all, most, or only some of the trust beneficiary’s essential costs will be covered by either government benefits or a combination of government benefits and earned income.  To the extent that essential costs, such as shelter, food, clothing, transportation, and medical care are not covered, the trust must then fill the gap.  For example, if the person’s SSDI and earned income provide a monthly cash inflow of $2,500, but their monthly rent, food, utilities, and transportation costs amount to $3,000, the Supplemental Needs Trust will cover the $500/month shortfall.  The trustee will want to decide which of the expenses the trust will cover and through what mechanism, because covering shelter costs and/or giving money directly to the beneficiary can affect her/his eligibility for SSI and Medicaid.

Beyond the essential costs of daily living, most families want to make sure that a Supplemental Needs Trust will be able to cover the discretionary expenses that contribute to a better quality of life for the beneficiary.  Such expenses might include haircuts, manicures and pedicures, cosmetics, massage, health club memberships, subscriptions, personal use technology, books, sporting equipment, dining out, recreational activities, birthday and holiday gifts for others, continuing education, and travel, among others.  With regard to travel, it might be useful to consider whether the person would enjoy guided tours and whether s/he will need a travel companion whose way the trust would also want to pay.  If the trust beneficiary wants to maintain relationships with siblings, cousins, or friends, and any of those people move out of town, the trust may want to cover the cost of the out-of-towners visiting the beneficiary or the other way around.

Once we have an estimate of the annual supplement that the trust will need to fund, we then inflate the figure in today’s dollars to future dollars, since we are generally planning some, if not many, years before we expect the trust to be funded.  We also consider the number of years that the beneficiary will require the annual supplement, once the trust is funded and responsible for that support.  We take into account that the trust principle will be invested, but also that the trustee may choose, or be required to choose, investment assets with low risk and hence low expected returns.  And, of course, the IRS always takes its share of investment and capital gains income.  The process of calculating the funding, required by any particular Supplemental Needs Trust, requires both imagination to envision the beneficiary’s future life as well as a good Microsoft® Excel spreadsheet.