There are two main ways to use life insurance if a special needs child is in your family. In one situation, parents may consider purchasing life insurance for their child's life, addressing the possibility of outliving them. Alternatively, parents may use a life insurance policy in a trust as part of their estate planning; knowing their child with special needs is an enormous priority to safeguard after they have died.
Parents of a special needs child may opt to purchase life insurance on a child to benefit family caregivers. These caregivers often have sacrificed career development, retirement savings, pension plans, and even social security benefits that may adversely affect the caregiver's future while providing for their child's special care. Aside from helping make up lost income opportunities, the death benefit can also help with potential funeral costs.
Special Needs Attorneys
Purchasing a life insurance policy will require a reputable advisor who understands pre-existing conditions, disabilities, and how a policy may affect the beneficiary's estate planning. Each family situation is different; however, there are many options to obtain life insurance, including a graded life benefit, rating request, or policy based on your child's functional level. Presenting psychological and medical issues in a favorable light during the application process is key to a positive outcome. Although applications need to be honest and accurate, you do not need to volunteer information beyond what is requested.
Life Insurance Policy Ownership
The special needs child should not own the policy as any cash value is a countable asset for the purposes of SSI and special needs Medicaid programs. These federal programs have very low asset limits, and losing these crucial benefits can have disastrous consequences for the child. The parent may opt to be the policy owner as long as there are no estate tax or long-term care issues that may cause complications. Another child can own the policy, or in the case of a significant policy, an appropriate trust can be established with the trust as owner and a named beneficiary.
Special Needs Trusts
The more common life insurance strategy for special needs planning is the creation of a trust that will provide for the child upon the parents' death. Proper planning of a special needs trust will protect benefits received from SSI and Medicaid and still provide additional funds for the lifetime of a special needs child. There are two primary trust types:
Stand-Alone Special Needs Trust –
This trust type is similar to other irrevocable trusts and is created during the lifetime of the trust grantor. This independent trust entity can immediately receive asset funding from the grantor and maintains a unique tax ID number. A stand-alone trust also has the advantage of asset protection as trust assets are safeguarded from any potential liabilities from the trust grantor that may arise after establishing the trust. A stand-alone trust can be advantageous if the grantor has a larger estate requiring federal estate tax planning. Just as with an irrevocable life insurance trust, the special needs trust is irrevocable and allows gifting funds.
Testamentary Special Needs Trust –
Creating this special needs trust type is either part of a parent's will or, more commonly, an addition to the provisions of a revocable living trust, which becomes effective upon the death of the trust grantor. While a testamentary trust loses the immediacy of funding, asset protection, and estate tax planning functions of a stand-alone trust, it has greater flexibility in other ways. The goal of this trust type is to continue to provide caretaking services for the special needs child after the parent's death. If the grantor's estate is relatively small and without the need for estate tax planning, the gifting benefit will not be a major factor.
Both stand-alone and testamentary special needs trusts have the same goal: to preserve SSI beneficiary status and provide a supplemental fund during the SSI beneficiary's lifetime. The life insurance policy most advantageous for your family depends on the strategy and qualified special needs trust type you choose to create.
A common approach is to use a second-to-die life policy or guaranteed universal life policy to fund a stand-alone special needs trust. Higher net worth households may benefit from a second-to-die life policy if the spouse does not need the death benefit. The many different life insurance products and how they complement your estate plan can require complex planning strategies. A qualified insurance specialist and special needs planning attorney often work together. A family with a special needs child faces unique challenges to ensure caretakers and the child will receive financial assistance. And in the case of the child, protection from losing critical government benefit programs is vital. Review or create a new estate plan with your attorney to make educated decisions that provide the best path forward for your special needs child.
If you would like to discuss your particular needs, please don't hesitate to reach out. Give us a call at 717-374-2244 or fill out this form and we'll call you back.
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