Life Insurance & Special Needs Planning
Although the recent tax legislation has temporarily reduced the importance of estate tax planning for everyone except the ultra-wealthy, it did not obviate the need to make estate plans for non-tax reasons. These non-tax estate planning concerns are especially magnified for families who have members with special needs. It is imperative for guardians of a dependent with special needs to plan for a time when they are no longer able to care for the individual.
While there may be an abundance of love in the family, there may not be adequate financial assets to maintain the lifestyle that the parents envision for their child. Even families with significant assets must plan for an unknown financial future and special needs which may require a lifetime of care. As parents grow older, their own aging and health care issues may consume a greater portion of their assets than anticipated, thus impacting the level care that can be provided.
Estate Options for a Client Who Has a Child with Special Needs:
As part of planning for families with special needs, it is important to maximize financial resources for present and future expenses to provide for the highest possible quality of life. Often, this can involve securing eligibility for government-financed programs and then supplementing those program resources with private funds. There are several estate options for a client who has a dependent with special needs.
They can: (1) include the child in the estate plan through an outright distribution, (2) disinherit the child, (3) distribute the child’s share to their sibling(s) and rely on the moral commitment of that sibling to provide care or (4) create a third-party supplemental special needs trust.
Making an outright distribution to a child with special needs will result in disqualification for most government benefits. While disinheriting the child may retain qualification for government benefits, it doesn’t improve their quality of life. Leaving the share of a child with special needs to a sibling may seem appropriate in theory, but often falters in practice. The best laid plans of relying on “moral commitment” often go astray, especially after the parents die and new parties become involved in the process (for example, through marriage). Thus, the surest way to secure the optimal quality of life for an individual with special needs is through a third-party supplemental needs trust.(1)
Third-Party Supplemental Needs Trust
A third-party supplemental needs trust is a completely discretionary trust designed to provide for the financial management of family gifts, inheritances, and life insurance proceeds. This model is intended to provide a child with special needs the comforts of life and other necessities not provided by funding from governmental agencies. It is important to note that the child for whom the trust is established cannot have any rights to compel distributions.
While any family member other than the individual with special needs can establish the trust, this is typically established by the parents who also serve as trustees. The trust may be set up as a testamentary trust in a will, or as a lifetime inter-vivos trust. Because a trustee has full and absolute discretion on whether to provide financial assistance, the trust avoids being counted as an asset by various other programs if properly drafted, thus protecting access to public benefits.
Funding the Trust
Obviously, the trust must be funded to accomplish its purpose. Unless there are substantial assets available from the family, it can be very difficult to sufficiently fund the trust to the extent needed to provide a lifetime of care. In many cases, the parents are able to address the dependent’s needs while they are alive. However, a parent’s untimely death could cause considerable financial hardship not only for the dependent with special needs, but also for other family members. This is where life insurance can help. The value of life insurance for special needs families goes beyond simply providing for the child. An untimely death of the family breadwinner could significantly impact the financial situation of all the family members and their ability to continue providing the same level of health care necessary to maintain quality of life. Therefore, it is important to consider not only providing funding for the child, but also the surviving spouse and other family members.
How Can DBS Help?
While the recent tax laws reduced the importance of estate tax planning for most, it did not obviate the need for estate planning. There are several ways to structure life insurance to help provide for the family of a dependent with special needs. If you would like to discuss a case in more detail, contact Terri Getman, DBS’s in-house Advanced Case Design resource at extension 230.
DBS also maintains a Special Needs Planning advisor education page. Click here to learn more and continue the conversation.