In an earlier posting, we provided an overview of the benefits of executing a Special Needs Trust, also known as a Supplemental Needs Trust (“SNT”) for a disabled child.  However, a proper plan ensures that the trust is funded at the appropriate time.  Put simply, any trust, if not properly funded, is just a pile of papers.  For this reason, expert attorneys in asset protection have developed relationships with trusted teams of non-legal professionals such as geriatric care managers, investment advisors, financial planners, reverse mortgage specialists and insurance professionals to assist their clients with implementing carefully crafted estate and asset protection plans.   In this article, we discuss various funding options after a supplemental needs trust is signed.

Non-retirement assets:

Certificates of deposit, checking, savings, money market, and brokerage accounts can name a special needs trust as the beneficiary of those assets.   Often, the trust is one of several beneficiaries.  In the case of three children, one of whom is disabled, the account could give each non-disabled child an outright one-third share and name the special needs trust as the beneficiary of the remaining share.  This option works well if enough non-retirement assets exist to meet the needs of all the children when the parents pass.  However, the disabled child may require additional financial assistance.  In that case, life insurance naming the special needs trust as the sole beneficiary can supplement the other assets that may eventually go into the trust.

Retirement assets:

Naming a Supplemental Needs Trust as the beneficiary of retirement assets such as IRAs, 401(k)s, or 403(b) accounts can create adverse tax consequences and complicate the disabled person’s ongoing receipt of public benefits.  For these reasons, elder law attorneys often advise against naming a special needs trust as the beneficiary of retirement assets.   This quandary creates conflicts when the majority of the assets to be passed on to heirs reside in retirement accounts.   In such scenarios, life insurance can offer the solution.  Retirement assets can pass solely to the non-disabled children with the special needs child benefiting from a trust funded by life insurance when the parents pass away.

Life insurance:

Life insurance as a funding source for an SNT can resolve all of the problems noted above.  It can provide additional funds for the increased needs of a disabled beneficiary, avoids the complications of naming an SNT as the beneficiary of a retirement asset and provides a guaranteed source of funds if other assets diminish in value.  Elder law attorneys work with qualified insurance brokers to determine what type of insurance should fund SNTs.  Although term insurance offers lower premiums for a fixed time frame (i.e. 10, 15, 20 years), the premiums often become unaffordable once the term expires.  For that reason, a universal or whole life policy with a guaranteed death benefit is often a better alternative.   Working with a trusted insurance professional can be critical when an elder law attorney recommends a special needs trust as part of a comprehensive estate plan.

Regards

Eric R. Oalican