If you are a parent to a child who was born with a disability or who unexpectedly became disabled as an adult, there are a few strategies you can use in your estate plans to provide some level of financial security to your child after you die. It allows you to put aside funds without depleting your own retirement accounts or upsetting other beneficiaries by favoring the disabled child in your will.
This can be achieved by setting up a special needs trust (SNT) for your child and funding it with a last-to-die insurance policy. A special needs trust is created specifically to provide additional financial means for a person that has a disability. Besides added financial stability, an SNT allows for additional financial management and preserves the assets in case a disabled person is not competent to manage them, or if the donor fears the beneficiary may be easily taken advantage of otherwise.
What Affect Does a Special Needs Trust Have on Government Benefits?
Another advantage of setting up a special needs trust is to protect your child’s eligibility for government benefits. If the money was paid directly to the disabled person, he or she may not qualify to receive benefits such as SSI or Medicaid due to receiving a large inheritance that would place their income above the threshold for these benefits. By placing the money in a trust, the inheritance would not count towards the beneficiary’s income, allowing him or her to enroll in government benefits while still being able to rely on the financial security provided by the trust.
What are the Two Categories of Special Needs Trusts?
Special needs trusts are typically divided into two categories: first-party trusts and third-party trusts. First-party trusts are designed to hold assets from the beneficiary who is also receiving government benefits. After the beneficiary dies, a first-party trust will use any money left to pay back the government for any funds received during the beneficiary’s lifetime.
Third-party trusts do not have a payback requirement since the assets go to a trustee and not to the beneficiary when he or she passes away. This type of trust is funded by assets that did not belong to the beneficiary, and it provides protection from creditors and helps the disabled person to maintain their eligibility for government benefits. When the beneficiary dies, the remainder of the cash goes to other beneficiaries named in the trust – such as close relatives or siblings. Both first-party and third-party trusts are not required to go through probate, allowing assets to be passed on directly to the beneficiary.
What About Life Insurance?
Once the trust is created, one of the ways many clients choose to fund it is through a last-to-die life insurance policy where money is paid out after the second parent dies. The life insurance proceeds can go directly into the special needs trust without requiring probate and help provide additional financial security to a disabled child without straining your estate funds. At the Johnson Law Firm, PC, our legal team has assisted many families to navigate the intricacies of special needs trusts and to set up plans to ensure their disabled loved ones would be taken care of regardless of what tomorrow brings. If you are thinking about setting up a special needs trust or would like to learn your options for safeguarding a disabled child’s future, contact our office today and schedule a consultation to get started.