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Life Insurance Strategies for Special Needs Planning

Fact Checked by Jason Herring & Barry Brooksby
Licensed Agents & Life Insurance Experts.
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Life Insurance for Special Needs Planning

It goes without saying that for parents with special needs children, estate planning becomes an enormous priority.  If an adult child is receiving need based disability benefits such as SSI, special needs planning will become even more challenging. This sets the stage to require a skillful and insightful special needs planning effort that can involves legal, tax and insurance professionals who are well versed all aspects of life insurance strategies for special needs planning.

Unfortunately, folks in the life insurance industry are often unfamiliar with the various options in this area. What I mean is that one common approach is often touted at the expense of fully exploring a number of greater possibilities that may be available in the context of ways to use life insurance for estate planning effectively.

Before we dive into life insurance for special needs trusts planning, let’s review what is special needs planning and what it is not.

Overview of Special Needs Planning

Disability Benefits [SSI vs. SSDI]

Many people are confused by special needs benefits and when it is actually necessary to do some proactive planning. Let’s start with a brief intro into some definitions.

First, special needs refers to someone who has been deemed as disabled by applying statutory tests to determine disability. The Americans with Disabilities Act (ADA) defines disability as one who has a physical or mental impairment that substantially limits one or more major life activity.

For special needs planning purposes, we are referring to qualifying for need based social security disability (SSI). SSI is a “need based” benefit” that is NOT available if the candidate exceed a minimum amount of assets in the same was as Medicaid is a need based benefit program for seniors.

If social security disability benefits are in question, the law defines disability as the inability to engage in any substantial gainful activity (SGA) by reason of any medically determinable physical or mental impairment(s) which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

SSI is often confused with its counterpart SSDI which is NOT need based and is a benefit that is paid much like workers compensation and is based upon amounts deducted from paychecks in lieu of work related injuries. Whereas SSDI does not require proactive planning, SSI is critical because if the SSI beneficiary gets anything from an estate that is not properly planned for, it will disqualify them from SSI benefits. This disqualification can be avoided by properly planning with qualified special needs trusts.

Using Qualified Special Needs Trusts with Life Insurance

Qualified Special Needs Trust Options

There are 2 primary types of special needs trusts which are stand alone special needs trusts or testamentary special needs trusts.

Using a Stand Alone Special Needs Trust

A stand alone special needs trust is created like any other irrevocable trust during lifetime of the trustmaker. This trust is set up an an independent entity, with its own tax id number, and can be funded with assets gifted by the trustmaker immediately. Another advantage of this trust strategy is asset protection because the assets placed in the special needs trust are safeguarded from the trustmaker’s potential liabilities that arise following the establishment of the trust.

A stand alone special needs trust can also be advantageous if the trustmaker has a large estate requiring federal estate tax planning because assets can be “gifted” to the special needs trust in the same manner as often used for an irrevocable life insurance trust.

Using a Testamentary Special Needs Trust

A testamentary special needs trust can be created as part of a last will and testament or, more commonly, it can be added to the provisions of a revocable living trust to become effective upon the death of the trustmaker. This trust strategy makes up in flexibility what it loses in the other benefits discussed above of immediacy, asset protection and estate tax planning.

Using a testamentary special needs trust is more ideal if the trustmaker/s are providing for the special needs beneficiary now and the main concern is what will happen to them upon the last trustmaker/s death. If there is little need for immediate benefits for the special needs child, this may be a better option.

Also, if the trustmaker’s estate is relatively smaller with no need for estate tax planning, then the gifting benefit is not a major factor.

Finally, if the trustmaker’s liabilities are in a low risk category (not a doctor or contractor) then there is less concern about protecting the assets in a separate trust for the special needs beneficiary now.

A testamentary special needs trust, is qualifying special needs trust as is the stand alone and the goal is the same for both which is to preserve the SSI beneficiary’s status while allowing for a supplemental fund to be used during the SSI beneficiary’s lifetime.

Under current laws, special needs trust repayment provisions are common, meaning that the state may make a claim from the trust assets for repayment of SSI benefits. However, in practice, whether they choose to pursue recovery will depend largely upon the organization and policy of the state government at that time.

Life Insurance for Special Needs Trust Planning 

The type of permanent life insurance that is most advantageous will be determined based upon the strategy and type of qualified special needs trust that is being used. A very common approach is to use a second to die life policy OR a guaranteed universal life policy to fund a stand alone special needs trust upon the trustmaker’s death.  This approach is common because the life insurance is permanent, thereby providing security to the plan AND is also relatively inexpensive. Also, the stand alone special needs trust, as discussed above, can be funded with other assets during the trustmaker/s lifetime.

For wealthier households doing high net worth estate planning, the second to die policy may be most beneficial if the spouse does NOT need the death benefit. This is relatively inexpensive and the benefits only flow upon the last trustmaker’s death in the case of a married couple. For a single person, a guaranteed UL is a sound approach because it again provides a permanent death benefit to the trust.

With a stand alone special needs trust strategy, cash value life insurance types such as dividend paying whole life insurance OR universal life insurance are not generally used because of issues with the trust actually owning cash value during the life of the trust. It isn’t that this can’t be done but is more a matter of the trustee’s access to using it and issues with using and paying it back, etc.

For this reason, a cash value life insurance strategy such as a family banking strategy, is more appropriate for funding a testamentary special needs trust. This strategy works very well because the trustmaker/s can use the cash value for a variety of purposes during their lifetime and the death benefit can pass to the special needs trust, via the revocable living trust, upon the trustmaker’s death.

The important thing to understand is that the above factors are the MINIMAL issues to consider when doing this kind of planning. This is an endeavor that requires the assistance of experienced professionals and the pros and cons of each approach should be carefully considered and understood.

Our experts are well versed in this kind of planning and can help you create the strategy that makes the most sense for you and your special needs loved one. If you have questions about this or any insurance or estate planning matter, please connect with us today.


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