Founder
If you have a special needs family member, then you know that they often need services to help them with therapies, training, adaptive, and vocational skills, as well as daily living activities. In many instances, they live in group homes or have some type of assisted living arrangement. Of course, all of this can be expensive. And when you pass away, you will need to know that they are being properly cared for and with adequate funds. In such cases, a special needs trust (SNT) can be a valuable tool with which to help pay for things not covered by government programs.
Because your family member may be receiving public benefits like MassHealth or Supplemental Security Income [SSI], funds to pay for their care may render them ineligible for public benefits unless a trust is established from which a trustee can direct funds for the needs of the special needs family member. In a SNT you must name a Trustee to manage the monies in the Trust for the benefit of the Special Needs family member so your family member remains eligible for public benefits.
After the SNT is established, it must be funded. While some families may turn to retirement accounts like an IRA or 401(k) to fund a SNT, your estate planning lawyer may advise against it. For one, an IRA or a 401(k) can disappear in an economic downturn or if an employer becomes bankrupt. You may also want the funds from such accounts to go to other family members. Accordingly, a life insurance policy can be the funding source for the SNT.
Types of Life Insurance to Consider
Before you turn to life insurance to fund the SNT, you need to know the different types of policy before choosing which one is best for your situation and your special needs family member. Your estate planning attorney can discuss this with you. The different types include:
Term Life
A common form of life insurance is term where you pay a set monthly premium for 10 or 20 years. If you pass away within this time, then your beneficiary receives the policy face amount death benefit. However, when the term expires, the policy coverage ends or the premiums may increase substantially so if you wish to continue the policy, these premiums are often unaffordable for most families.
Whole Life
These policies last for the policyholder’s lifetime and have a death benefit guarantee as well as cash value from which the policy owner can borrow against. Dividends can also be paid from these policies. If you do borrow against it, you have to pay it back with interest or it will accumulate and be deducted for the death benefit. Also, if you withdraw any funds from the policy during your lifetime, you may incur a fee.
Universal Life
With this type of policy, you can adjust the premiums and death benefits to tailor them to your circumstances. Premiums may be credited to an accumulation fund out of which premiums may be deducted and interest credited. Income can accumulate when the premiums are invested.
Variable Life
The cash value of these policies rise or fall according to the performance of the financial markets.
Survivorship Life
This policy is taken out on the lives of two people, usually the parents of a beneficiary, but the death benefit is not paid out to the beneficiaries until the second person dies.
Which Life Insurance is Best for Your SNT?
The type of policy for your family member is best determined by your own financial circumstances in most cases. While term life policies are less costly, you take a chance that a death benefit will not exist if the term expires before you pass away. Accordingly, a universal or whole life policy that does guarantee death benefit protection is often advised. Also, the income generated from investing the premiums can be used to pay for at least a portion of the premiums after the policy has been generating income for several years.
Survivorship policies are also less costly than universal or whole life policies but the surviving spouse may not be able to afford the cost of the premiums. In conjunction with an insurance agent knowledgeable financial planning and insurance, your estate planning attorney may recommend purchasing life insurance for each of you with the SNT as the beneficiary.
If you have an estate of considerable value that is subject to the estate tax, the federal amount is currently set at $5,430,000 and the Massachusetts amount is 1,000,000.00, you might consider an irrevocable life insurance trust [ILIT]. Because the insured does not own the policy when he/she passes away, the value of the policy is not part of the insured’s taxable estate. With a SNT, the Trust becomes the beneficiary.
Your SNT needs to be properly set up and, of course, adequately funded with the long-term needs of your family member in mind and with protections against loss of your family member’s SSI and other public benefits. Talk to estate planning lawyer Patricia Bloom-McDonald if you are considering a SNT for your family member and the best way to fund it.