You know that life insurance can provide financial security for your family after you’re gone. But did you know that it can also be an invaluable tool when it comes to setting up a special needs trust? In this blog, we’ll dive into why special needs trusts don’t typically buy life insurance policies—but designate them as the beneficiary of one instead.
What is a Special Needs Trust?
A special needs trust is set up through an attorney by parents or other family members of a special needs child to hold assets and help pay for their child’s lifetime care after they are gone. That typically includes things like medical care, transportation, housing, recreational activities, and more. It also helps ensure that government benefits such as Supplemental Security Income (SSI) or Medicaid continue without interruption. With careful planning and proper execution, an Special Needs Trust can provide a secure future for your loved one with special needs.
So Why Don’t Special Needs Trusts Buy Life Insurance Policies?
The primary reason why SNTs rarely purchase life insurance policies is that the funds from the policy would become part of the trust principal—and thus subject to being used to fund care beyond what SSI or Medicaid would cover. This could result in a decrease in available benefits and could even jeopardize eligibility altogether. Therefore, if a Special Needs Trust serves as the owner and beneficiary of a policy, those funds may not be available to meet any additional costs associated with the individual’s disability-related expenses.
What About Designating the Special Needs Trust as a Beneficiary?
As we already discussed, parents can designate their Special Needs Trust as the beneficiary of their life insurance policy instead of buying one specifically for their child with special needs. Doing so ensures that any death benefit proceeds will pass directly to the trust upon their passing—where they will remain protected from taxation while still providing funds to cover additional care costs down the road. It also avoids probate delays since there is no need for court involvement in distributing the death benefit payments from an existing life insurance policy.
Setting up a special needs trust doesn’t generally involve buying a separate life insurance policy for your child with disabilities since doing so could potentially reduce or eliminate government benefits they were receiving at the time of your passing—which defeats the very purpose of creating a Special Needs Trust in the first place! However, designating your trust as the beneficiary of your existing policy or a new policy is often recommended since it allows those death benefit payments to pass directly into your trust where they can be used to cover any additional care costs in accordance with its terms without any delay due to probate proceedings. That way everyone wins!
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