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Life insurance and planning of special needs



Protect government benefits

Many people with special needs qualify for government benefits such as Medicaid and Supplemental Security Income (SSI). However, these programs are needs-based.

If an individual has too many assets in their name, they may become unjustified to these benefits, or their benefits may be diminished.

For example, if you are buying a life insurance policy for yourself, do not mention your loved one with special needs as a policyholder.

When government special needs and disability benefits are involved, a trust can be very helpful in ensuring that your life insurance is set up correctly.

Special Need Trusts

A trust is a legal vehicle that allows a trustee to hold and manage assets on behalf of a beneficiary. A special needs trust is specifically an irrevocable trust that holds assets that supplement benefits from government programs.

Irrevocable trust means that once someone transfers assets to the trust, they relinquish control of the assets and cannot take them back. Trust now owns the asset.

Assets for the benefit of the person with special needs are placed in the trust, and it is avoided to name the individual as owner or a direct beneficiary of the assets and thus keep them entitled to continue receiving the needs-based government benefits (ie Medicaid and Supplemental Security) Income).

Life insurance income can be paid to the trust by designating the trust as the beneficiary of the insurance. This ensures that government benefits are protected because the income will not be in the name of the individual.

The benefits of using life insurance to finance a trust:

  • Cost-effective ̵
    1; provides a large amount of money for comparatively low premium payments
  • Usually protected from creditors
  • Death benefit is income and property tax free if it is correctly structured
  • Can easily distribute income between care for your loved one with special needs and any other children or family members you want to protect financially
  • Gives peace of mind that your loved one will be cared for even after your death

A trust can also own the life insurance. A trust-owned life insurance policy is often used as a property planning tool for individuals with large properties. It’s a way to avoid paying property taxes.

Types of foundations for special needs

There are two types of trusts for special needs: first-party SNTs and third-party SNTs.

First-party SNTs (also called self-regulated special needs funds) are trusts that are financed with the special needs recipient’s own assets. For example, if the beneficiary has a job, earned income can be placed in the trust. If the beneficiary receives an inheritance, the money can be placed in the trust.

Self-regulated / first-party trusts are also “payback” trusts. This means that after the beneficiary dies or the trust has been terminated, all remaining funds left in the trust are used to “repay” the state Medicaid program up to the amounts paid for the individual’s care.

As these SNTs are repayment trusts, it is not advisable for parents, friends or other family members to contribute to it. This is when a separate trust for special needs from third parties comes in.

Third-party funds for special needs (also called supplementary special needs foundations) are created by and financed with assets from someone other than the person with special needs. Third party SNTs are not covered by the refund rules.

How does a trust for special needs work?

The assets held in the special needs trust (SNT) are managed by a designated trustee. The trustee can be a family member or friend. Or parents can use an independent trustee, such as a lawyer or bank clerk.

The trustee shall not use the funds to pay for such things as the state’s benefits pay for. Medicaid and Supplemental Security Income (SSI) provides a person’s basic need for shelter, health care and food. Needs outside these can be paid for with the management funds.

If the special needs fund pays for the beneficiary’s basic needs, such payments are reported to the social insurance and then the individual’s SSI control is reduced. This situation should be avoided. The trustee must pay close attention to how he or she uses the funds for the person with special needs.

ABLE accounts

The expenses that come with managing a trust may not be feasible for families with limited assets. To meet the needs of more families, Congress Section 529A Achieves a Better Life Experience (ABLE) Act.

The ABLE Act allows tax-free growth on contributions after tax. Nor will it disqualify an individual with special needs from receiving needs-based programs such as Medicaid and SSI.

In essence, an ABLE account is a tax-advantageous savings account for people with disabilities and their families.

How the ABLE account works

Parents, grandparents or other family members can create a 529A account for the individual with special needs. To qualify for a 529A account, the individual with special needs must have been diagnosed with the disability before reaching the age of 26 and the permit is expected to last for at least 12 consecutive months. The individual must also receive benefits according to supplementary income or social insurance.

Individuals with special needs can also open a 529A account on their own behalf.

Contributions to the account may not exceed the annual gift tax exclusion amount ($ 15,000 in 2021). Account funds are not taxed on dividends as long as they are used for eligible expenses.

Eligible expenses include education, housing, transportation, employment training, personal support services, health and wellness expenses, legal fees, financial management, and funeral and burial expenses. Dividends used for unqualified expenditure will be taxed and fined 10% for early withdrawal.

If the total balance of the 529A account exceeds $ 102,000, the individual with special needs will not be eligible for SSI benefits. Using housing dividends can also disqualify individuals for some or all of SSI benefits.

If the beneficiary dies before the full balance of the ABLE account has been used, the remaining funds will be used to repay Medicaid services provided to the beneficiary. This is in contrast to a special needs fund where unused funds can be distributed to other named beneficiaries.

Most US states have established an ABLE program, but not all have. You may be able to create an account even if your state does not yet have its own program. Many government programs allow beneficiaries outside the state to open accounts.

Other steps Parents with special needs that children need to do

Create a will

Your will states how you want to distribute your assets after death. Without a will, a probate judge will, in accordance with state law, designate your child with special needs as the beneficiary of your property. Unfortunately, this is unlikely to make your child eligible for government benefits. By writing a will, you ensure that your assets are distributed correctly.

Mention an executor, trustee and guardian

Choosing an executor for your estate, a trustee for any trusts and a guardian for your child with special needs is an important and often challenging task. When choosing these important people, keep in mind that the family member who may be best at handling administrative and financial matters after your death may not be the right person to oversee the care of your child with special needs.

Think carefully about whether there is a family member who is willing and able to take care of your child after you are gone. If necessary, consider naming an agency that specializes in providing the services your child needs.

Apply for guardianship or power of attorney

When children turn 18, they are considered adults in the eyes of the law. This gives your child with special needs the right to make medical and financial decisions.

If your child is not able to make these decisions or needs guidance, consider taking custody. A less restrictive alternative is to have a power of attorney and health care representative for the child’s financial, legal and medical matters.

Write a letter of intent

A letter of intent allows you to express your personal concerns about how your child’s everyday needs will be met when you are not around. Include a list of contact information for your child’s physicians, therapists, and other medical assistants, as well as current medications with their doses and schedules.

If your child’s daily routine is very important, write it down and be as detailed as possible. The same goes for activities that you want your child to maintain, travel or enrichment that you want to be sure of continuing, and your child’s liking and taste.

As this is an informal document, it is easy to update as needed. Save a copy with your will and make sure that your child’s appointed guardian has a copy as well.

Educate and communicate

Communicating with family members can avoid costly misunderstandings. Grandparents and other loved ones may want to give gifts to your child with special needs, but well-meaning gifts can have negative consequences. Explain to everyone the importance of not putting anything in your child’s name, not even in the wills or as a named beneficiary.

It is advisable to work with a financial planner if you have a child with special needs. They can advise you on which financial products are best for your situation.


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