The Number: A Completely Different Way to Think about the Rest of Your Life (by Lee Eisenberg, and not to be confused with a ridiculous tween video of similar name featuring former YouTube darling Logan Paul) is a financial self-help book that explores the interdependence of lifestyle expectations, the financial groundwork one would need to meet those expectations and the advice and methods that clients and their advisors apply to the process. The book is well worth reading. If you don’t have time to read the whole thing, you can skip to page 125 for Eisenberg’s 10-commandments-style list of do’s and don’t’s for investors or Chapter 17: Bottom Lines, where Eisenberg condenses down the wisdom he’s gleaned from interviewing many financial advisors. The book ends thus: “The moral here is obvious: An unexamined life may or may not be worth living—but it’s almost always more costly.”
I have had clients ask me their version of The Number question: How much do I need to put into a Special Needs Trust for my loved on with a disability. My response to this is: It depends. Occasionally, clients phrase it as a statement: My attorney/insurance agent/broker told me I need at least half a million in my trust. My response to this is: Based on what?
You get to The Number for a person with a disability via the same process you would get to your own Number for retirement. You need to start out by creating a future budget.
Step 1: Without considering the current living situation or any future income sources, estimate what expenses the person with a disability would need to cover if s/he was living entirely independently. For example: rent or mortgage, homeowner’s or renters insurance, utilities, vehicle or transportation, food, clothing, furniture, personal use items, toiletries, medical costs not covered by any insurance, personal support services, fitness, entertainment, travel and gifts to others, including charities, just to name a few. It is helpful to distinguish the required, such as food and rent, from the discretionary, such as travel and entertainment. Travel, entertainment and the like are important to quality of life and mental health, but they are discretionary because they can be increased or decreased within a range. Rent and utilities, not so much. Finally, add up all your annual expenses. For example, let’s say the required expenses total $45,000 and discretionary total $15,000. The $60,000 total is the money that will go OUT every year.
Step 2: Now consider future sources of income. Pretty much everyone with a disability will have some kind of Social Security income. Some will have income from their own work. Make sure to account for income and FICA taxes. Some may be eligible for Medicaid Waiver funding for vocational or personal supported living services. Note that depending on the type of waiver, the topline amount may be reduced by any Social Security benefit the person is getting. Let’s say that the person receives $1,000 of Social Security per month or $12,000/year and earns $500/month or $6,000/year after taxes. Although s/he does not yet, we expect that the person will begin to receive the home-based support waiver (which is not offset by Social Security) in the future. In Illinois, this Waiver amounts to $2,313/month or $27,756/year (for an adult for 2019). The total of $45,756 is the money that will come IN every year.
Step 3: Asses the gap. In our example here, the person has an expected $45,756 in annual income and an expected $60,000 in expenses. The difference of $14,244 is what the Special Needs Trust will need to cover, every year until the person’s expected death. Suppose that the person is 60 when her/his second parent dies and the trust takes over paying the “supplemental” needs beyond what Social Security, Medicaid and Medicare will cover. Let’s further suppose that the trust assets are invested such that they return an average 3% after taxes and inflation and that the person lives to age 95. The trust would then need to have a minimum of $325,000 at the start. To prevent the any adverse impact from a steep-market downturn, near the beginning of the funding stream, you might want to have $375,000 or even $400,000.
But this is just one scenario. Suppose instead that the person has more significant support needs. S/he will get Social Security (on a parent’s work record) and the funding level will be higher; but the 24-hour supported living Waiver award of $72,000 will be offset by the $12,000 of Social Security for a net of $60,000. The person is not able to work and earn for her/himself, but needs a special diet and certain therapies and medications not covered by insurance as well as a higher level of personal assistance. The person’s total support needs are thus $100,000, but the money coming in every year is $72,000 ($12,000 of Social Security plus the net $60,000 from the Waiver). The gap is $28,000 and the trust would need a minimum of $600,000 at a 3% expected net rate of return to last those 35 years, or maybe even $700,000 to protect from the unexpected market downturn.
The main factors that drive the calculation of The Number needed to adequately fund a Special Needs Trust are:
What expenses will the person have over her/his expected lifetime?
What income will the person have?
What is the size of the gap the SNT will need to cover each year?
For how many years might the SNT need to meet this need?
What is a reasonably conservative expectation for the investment return on SNT-held assets?
At what rate will the trust pay taxes over its lifetime? Note that this, too, can change.
There are many other factors to consider such as the fact that trusts, including Special Needs Trusts, typically pay higher taxes than individuals. There could be a downcycle in the market, which causes a sharp decline in the trust’s asset value early on which will be hard to recover from over the lifetime of expected need. The beneficiary’s needs may increase due to positive factors, such as the person developing a new appetite for travel or a new hobby or for a negative reason such as the person losing her/his job and work income or developing a need for long-term care or durable medical equipment of a higher quality than Medicaid can afford.
The Number for any person with a disability is as unique as her/his finger prints. But it can be estimated with a fair degree of confidence with time, effort, patience and a good understanding of how income and expenses are likely to unfold.