FAQs About Special Needs Trusts – Part II

January 11, 2015

My child receives SSI and I am the representative payee. Can I use the rent I charge my child to pay the premium for a life insurance policy to fund a special needs trust?
Yes. The rent money is yours to spend as you like. Purchasing a life insurance policy with you or you and your spouse as the insured will ultimately fund the special needs trust and is an excellent way to secure your child’s financial future. The life insurance must be a permanent type of life insurance, not term insurance. And remember, the SNT must be named as the beneficiary of the life insurance policy.

Is life insurance the best way to fund a special needs trust?
Often it is, because it is not subject to ordinary income tax. It is not always the best solution, however, and needs to be viewed as part of the entire estate. While insurance can help fund a trust, it can also cause dissention between siblings if there hasn’t been conversation as to why certain products and tools are being used to implement a plan. There may also be other options which can serve the same purpose without the expense.

I had a special needs trust created years ago by an attorney but I can’t remember what type it is and what I should be doing with regard to funding. Any suggestions?
There are different types of special needs trusts. Some are funded with your child’s money and others are funded by a third-party i.e. the parents, relatives or others. Your child’s money cannot be comingled with others’. Always ask before doing anything that could cause problems with the trust. Call your attorney or seek the assistance of someone familiar with special needs trusts who can advise you. An ounce of prevention is worth a pound of cure.

I have become the trustee for a special needs trust and need advice regarding the distribution rules. What do you suggest?
You don’t want to make incorrect distributions that could adversely affect the beneficiary’s government benefits such as SSI and Medicaid. Seek the help of someone knowledgeable with special needs trusts and distribution rules. An attorney who practices in this area or a special needs consultant such as myself can advise you regarding distributions so that you don’t get into trouble. The trust usually allows payment for professional services of this type.

My parents want to leave part of their estate to my special needs child. How do they do that?
The best way is usually through a Special Needs Trust. Either you create a living (inter vivos) Special Needs Trust which your parents can name in their will, or your parents can have their attorney create a testamentary Special Needs Trust. (The special needs trust is incorporated into their will.) You do not want your parents leaving part of their estate directly to your disabled child, as this will adversely affect his or her government benefits.

I had a Special Needs Trust created by an attorney a few years ago and want to change the beneficiary designation on some of my assets so that they go to the trust. However, I don’t remember what the proper wording should be? What do I do?
Contact your attorney and ask him or her what the wording should be. Have them provide it to you in writing to avoid mistakes.

I had an attorney create a Will and special needs trust. The Will states that my estate will be split between my three children upon my death and that one-third will be placed into the special needs trust. Am I correct in thinking that everything is now in place as far as my legal and financial issues?
If one-third of your estate is adequate to properly fund your disabled child’s trust for the remainder of his/her life, and if you have coordinated the beneficiary designations with your legal documents, then you may in good shape. Remember, a beneficiary designation overrides your Will, so if the beneficiary designation is different from your Will, the beneficiary designation will determine to whom and where the asset goes. It is also a good idea to review your legal and financial documents at least every three years, and sooner if there has been a major change in your life.