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Special Needs Trust Annual Budget

In planning for your loved one’s future (or if you are already administering a trust as the trustee), one of the critical steps you need to take is calculating how much the beneficiary can spend per year (or per month) for a given trust value.  Based on the current value (or your estimated trust value based on what you plan to leave the trust when you are no longer around), you can make a few simple calculations.

First, you will need to determine the life expectancy of your loved one.  The number of years will be dependent on your loved one, their age, their health condition, and their lifestyle.

Next, you will want to determine your expected real rate of return for the trust portfolio.  This is your assumed rate of return minus the rate of inflation.  For example, if you assume your portfolio can earn an annual rate of return of 8% and the current inflation rate is 3%, then your expected real rate of return is 5%.  Please keep in mind that this simple calculation is not taking into consideration taxes or asset management fees.  So, be very careful and avoid setting your expectations too high on an annual rate of return.

With today’s low interest rates and the sluggish slow growth economy, we are using a real return of 0% for a conservative (mostly fixed income) portfolio, a 3% real return on a balanced (even split between fixed income and equities) portfolio, and a 5% real return on an aggressive (mostly equities) portfolio.  Of course, the more aggressive the portfolio, the more risk exposure the portfolio has to potential loss.

Finally, let’s make the calculation. You will use the trust value (V), the life expectancy in number of years (n), and the estimated real rate of return (r) to calculate the annual amount (A) that will be available. Here we go: if r = 0, then A = V/n. Otherwise, if r > 0, then A = V * (r / (1-(1+r)-n)). In either case, the answer you get is an annual amount. To determine the monthly amount, simple divide your answer (A) by 12.

Simple…right? Not always, so if you would like some help making these calculations, please get in touch with a Golden Financial Services Advisor. We would be happy to assist.

With this critical information, you can now determine if you have enough in the trust or if you are leaving enough for your loved one’s future.

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