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You can leverage life insurance to fund a special needs trust

by Joseph Arroyo | Contributor
September 23, 2020

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If you’re concerned with the welfare of a special needs child or grandchild, a special needs trust funded with life insurance can be a helpful tool to provide them a secure future. By using life insurance to fund this trust, you can leverage your estate and leave an inheritance of hard assets to other children and grandchildren while still seeing to the care of your special needs beneficiary.

What is a special needs trust?

A special needs trust, which can also be called a supplemental needs trust, is an irrevocable trust that you set up to hold assets and pay for certain expenses related to the well-being of your special needs heir. A few key points about this:

Moving flip book of Understanding life insurance book  offer.
  • The trust is not revocable.
  • There must be an independent trustee appointed to oversee and administer the trust.
  • There must be legal paperwork executed to create, maintain and guide the operation of the trust.

A trust is irrevocable when you cannot remove assets or change the beneficiary without the beneficiary’s approval. For all intents and purposes, this means that any assets you fund into the trust can’t be taken out easily. This is different from other trust arrangements like revocable living trusts, where you, the creator of the trust, have great control of the assets in the trust.

The trust document will spell out in detail how the trust is to be operated, who the beneficiaries are and under what circumstances payments are to be made from the trust. Since the trust is for the welfare of your special needs heir over their entire life, you’ll want to ensure that the funds are used responsibly and are not depleted while your beneficiary remains alive.

Some common expenses that are paid from special needs trusts include:

  • Medical expenses
  • Caregiving
  • Training and education
  • Travel
  • Special equipment like wheelchairs and other mobility aids

Why is a life insurance funded special needs trust a good idea?

A special needs trust benefits everybody: you, your special needs beneficiary and other beneficiaries.

You benefit from this arrangement on several levels. First of all, you can have peace of mind that your special needs child or grandchild will be provided for. The trust will make payments as you have dictated to cover the needs of your heir, from hands-on caregiving to enriching pursuits like education, travel and more. Also, you can feel good about leaving other assets to your non-special needs heirs.

Your other heirs will benefit since the use of life insurance to fund the trust will allow them to inherit your hard assets, like:

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  • Investment accounts
  • Real estate
  • Businesses
  • Cars

With the life insurance funded special needs trust, you don’t have to sink the entirety of your estate into providing for your special needs beneficiary, thus depriving your other heirs of a significant memorial.

Your special needs beneficiary benefits greatly because many or all of their needs may be met with the funds in the trust. By appointing a responsible trustee, the trust will be managed with discretion so the assets will last for your heir’s lifetime.

Plus, provided certain conditions are met, payments from a special needs trust do not count toward income and asset limits for needs-based programs. So, your beneficiary can still qualify for Medicaid or Social Security disability income, even though the trust is providing for them.

Also, any assets in the special needs trust are protected from creditors. Since they’re not a part of your estate, they won’t pass through probate. Whatever amount of money you’ve planned on going to the trust will make it there. Even if something terrible happened before you died and your estate owed a huge liability, your special needs trust will still be funded if you use life insurance.

How do you set up and fund a special needs trust?

There are several aspects to establishing and funding your trust. First of all, you’ll have to create the trust, which generally means working with an attorney and completing paperwork. This paperwork defines and sets all the terms of the trust. These terms will come into play upon your death, or your spouse’s death, whichever is later.

The other aspect of using a special needs trust is funding it. When you use life insurance, this is a simple step. You’ll need to do one of three things:

  • Use existing life insurance, and name your special needs trust the beneficiary.
  • Purchase a new life insurance policy and name the trust the beneficiary.
  • Some combination of existing and new life insurance.

Depending on your circumstances, you may want to have insurance on you and your spouse’s life, or just on one of you. Working with your financial professional, you’ll pick the policy or policies that are best suited to your goals.

You’ll absolutely want to use life insurance that is permanent. Term life insurance will not work for your special needs trust. You need to be guaranteed that the insurance will be in force at your death – no matter how long you live. To accomplish this, you’ll likely choose one or both of these kinds of life insurance:

  • Whole life
  • Indexed universal life (IUL)

While IUL is not permanent insurance in the same way that whole life is, it can be designed to perform just like whole life, and can often accumulate more cash than whole life. If you use some other kind of insurance and you stop paying the premiums because you can no longer afford them, you’ll have wasted your money, and your trust won’t be adequately funded. Instead, use the right kind of insurance from the beginning.

Once you choose and purchase your life insurance, you have to take the most important step: designating your special needs trust as beneficiary. When you do this, the death benefits paid by your insurance will go directly to the trust – tax-free and without passing through your probate estate.

Funding your special needs trust in the context of your overall retirement plan

The wonderful thing about using life insurance to fund your trust is that you can provide for your special needs beneficiary without using all of your other assets. For this reason, you’ll want to make sure that your retirement and estate professionals know about your desire to fund a special needs trust.

Be sure to work with them to choose the right life insurance and keep in in force. This is a plan for the long haul, so make sure you’re committed to it. Also, always talk to a financial professional before making any changes to your insurance coverage.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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