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The Proper Use Of Life Insurance In A Special Needs Trust

By Roccy M. DeFrancesco, JD, CWPP™, CAPP™ - Email Editor

Date : September 1, 2009

Dear Valued Reader,

I want to cover a topic with this newsletter that will not apply to everyone, but if it does (or if it applies to someone you know) and you are not familiar with the topic covered, it can save your loved ones tens of thousands of dollars in aid and can improve their lifestyle dramatically after you have passed.

Causes for special needs

Physical conditions—Cancer and heart defects, muscular dystrophy and cystic fibrosis; chronic conditions like asthma and diabetes; congenital conditions like cerebral palsy and dwarfism.

Mental conditions—Autism & Down syndrome, ADHD, Fetal Alcohol Spectrum Disorder, Dysfunction of Sensory Integration, and Tourette Syndrome.

Statistics

According to Cornell University's recent disability statistics, there are more than 2.6 million boys and girls ages 5 to 15 with one type of disability. Thirty percent of that group — or over 600,000 boys and girls ages 5 to 15 — have two or more disabilities.

Financial aid – 18 years of age or over

At age 18, disabled individuals unable to earn a self-sufficient wage become eligible to receive a monthly income allowance through the Social Security Administration's Supplemental Security Income (SSI) program. They also qualify for payment of health services through Medicaid.

All of these benefits can be cut off immediately if the disabled person earns or has assets worth more than $2,000 (excluding a home, car, and household possessions).

The government allows a disabled person to receive only $60 of unearned income per quarter, and the individual must be incapable of earning more than $500 per month.

When a special needs child (SNC) turns 18, they can apply for Federal assistance. However, for most parents, the Federal aid provided will not be sufficient; and so the parents will allocate their own money to help the child while they are alive.

Pitfalls to planning

The following are cardinal mistakes that many parents make when gifting money to or passing money to a SNC:

1) Gifting money directly to the child. If over 18 and receiving financial aid, the gift could immediately stop the aid.

2) Gifting money to a child upon death. Same issue.

It is also vitally important to remember to change all of their beneficiary designations to that of the SNC. That includes 401(k) plans, IRAs, etc.

Special Needs Trusts (SNT)

Planning for a SNC needs to focus on how to care for the child’s well being after the parents have passed away. There is a huge fear of the parents that after the last parent dies, no one will take care of the SNC, or if someone does, the level of care will not be what the parent would like.

Therefore, to ensure that the child is taken care of in the “appropriate” manner after the last parent’s death, a SNT is set up.

In order to not foul up a SNC’s ability to receive Federal aid, any gifts while living or upon the death of a parent MUST go to a trust that has as the beneficiary the SNC.

Because the assets are that of the trust and not the child (even though the beneficiary is the child), the aid from the trust is NOT counted when calculating whether a SNC can qualify for Federal aid.

Funding a SNT

If the goal is to take care of a SNC at the death of a parent, what is the “best” tool you can use? Life insurance.

The key is that, upon the death of one or both parents, a large death benefit will pour into the SNT tax free where that money will be used to take care of the SNC until he/she passes away.

A SNT is classically an irrevocable trust (and is funded accordingly). The trustee has discretion to use assets for the benefit of the disabled person and must handle all distributions from the trust. When the disabled person dies, unused assets can go to other heirs.

When set up correctly, the assets in the trust will be used to improve the quality of life of the SNC and not disqualify the child for financial assistance.

Summary

Should you learn more about SNTs? That depends on whether you have or know someone who has a SNC. If you do or you know someone who has such a child, learning about the proper use of SNTs can be invaluable.

Recently the Hartford Insurance Co. did a study of special needs parents and found that 50% of those with SNC plan on leaving their money directly to their children which would make the them ineligible for aid. Doing so is a terrible idea since it will cause most children to have their Federal benefits terminated and proves that many parents with SNC are not planning correctly to take care of their children upon their death.

If you would like more information on SNTs or planning for your loved ones after you pass away, please feel free to contact our office for a consultation.

Until next time,

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