If you have concerns about providing for your special needs child after your death, estate tools such as a special needs trust and a life insurance policy can help fulfill your wishes. As you make your estate plans, you should know how to use your life insurance policy and the trust together to help your loved one.
A special needs trust is valuable because it provides a place for assets to help your child throughout his or her life. Your trust may also serve as a place to direct other assets, so your special needs child does not lose access to government benefits.
The problem with an insurance payout
Policy Genius explains that the federal government may provide your child with benefits such as Medicaid and SSI provided that your child does not exceed the asset limit of $2,000. This means if your child comes into enough money, the government could cut off benefits.
This situation might happen with a life insurance payout. In the event of your death, the insurance policy will pay out to your child if you have named him or her as a beneficiary. This could boost the personal assets of your child over the qualifying limit.
Redirecting a payout to the trust
Instead of designating your child as a beneficiary, you may name the special needs trust to receive the life insurance payout. Since your child does not own the trust, the government will not count the insurance money toward his or her benefit limits. Your trustee will instead be able to use the insurance payout pursuant to the terms of the trust based on the discretion you have given your trustee.
If you anticipate directing life insurance money to a special needs trust, take this into account when composing your trust documents and in designating life insurance beneficiaries. Also, make sure your trustee understands how to handle a payout into the trust.