How Life Insurance Can Help Your Special Needs Child

Many parents are concerned about how they can fund a supplemental needs trust, especially in these rough economic times.  Parents are also concerned about how their other children will feel if they divide their estate assets unevenly, providing more for their siblings with disabilities.  These siblings might have even more resentment if they end up being financially responsible after you are no longer able to supplement your special needs child’s benefits.  Children with autism have a normal life span and could easily need financial assistance until they are well into their 80s!  Additionally, they may need to pay for care that you are no longer able to provide, such as a care manager or help with cleaning and shopping.

Parents with a disabled child should consider buying life insurance to wholly or partially fund the special needs trust.  There are several types of insurance to consider.  Term life is the least expensive option, but the premiums increase each year as the insured (that’s you) gets older.  Since these policies need to be renewed, at some point these policies are typically dropped due to the steep increases in premiums as you age or experience health issues.  There are several types of permanent life insurance including whole and universal.  The least expensive option is known as survivorship or second-to-die life insurance.  This term policy is payable only upon the death of the second insured, when it is most needed.  It is best to consult a life insurance agent with expertise in this area.

If you have any questions about this post,  please feel free to call or drop me a line on either the comment or contact form.

Types of Special/Supplemental Needs Trusts (SNTs)

The terms “special” and “supplemental” are often used interchangeably. Frequently, “special” refers to a first party, or self-settled trust, while “supplemental” refers to a trust settled by a third party which supplements basic food and shelter. Other sources define “special” as one in which the trustee has limited discretion to make distributions, whereas “supplemental” is one in which the trustee has unlimited discretion. For simplicity and clarity, I will often just refer to both types of trusts as SNTs, while specifying whether the trust is funded by a third party or self-settled.

There are two main types of SNTs. The biggest difference between the two types of trusts is the identity of the person whose assets are used to fund the trust. Both types of SNT can and should be individually designed to meet the specific needs of the disabled person.

The first type of SNT, the self-settled SNT, is funded with the assets of the person with the disability. Frequently, this type of SNT is created when the disabled person themselves receives a sum of money, often as a result of a lawsuit. Sometimes a self-settled SNT needs to be created because the disabled person received an inheritance, but their families had not planned with a qualified estate lawyer to avoid that pitfall. It is important to plan now so that your assets flow directly into a third-party SNT in order that any funds remaining upon the death of the disabled person do not have to be paid back to Medicaid.

The main drawback to self-settled SNTs is that after the disabled person dies, Medicaid or the Office of Mental Health is entitled to receive all remaining assets in the trust. For those disabled persons who have received a large sum of money as the result of a lawsuit, the ability to fund an SNT, enabling them to use that money for their supplemental needs as opposed to having the entire sum be used towards shelter and housing, is a wonderful option. However, before the disabled person receives any gift, inheritance or life insurance policy, the grantor of the assets should consult with an attorney who focuses on special needs planning.

The second type of SNT, the third-party SNT, is usually funded with the assets of a parent, grandparent or guardian, and can be funded either during the parents’ or grandparents lifetimes, or upon their deaths. The trustee is designated the beneficiary of life insurance policies, annuities, bank and/or brokerage accounts.

As we shall discuss in further blog posts, when created properly, a trustee can be instructed as to how you would like your loved ones’ needs supplemented with the assets from the third-party SNT.

When Family Wants to Help Your Child with Special Needs

Very often a family member such as a grandparent, aunt or uncle or even a sibling would like to give the disabled individual a cash gift or other assets. Although the services available through government benefits are substantial, the actual cash benefits are not. Outright gifts might cause the disabled person’s assets to increase above the minimum established by the government (currently $3,000 for Medical Assistance and $2,000 for SSI).

Once a Special or Supplemental Needs Trust has been set up by the parent, grandparent or guardian for the disabled person, other family members can provide additional assets for that individual, creating a benefit without disqualifying the individual from their government benefits. Family members can contribute cash, stocks, bonds and even real estate for the benefit of the disabled individual.