Ways to Fund Your Child’s Lifetime Support Needs
Ron asks: “I have a Special Needs Trust for my son, and at this point it is not funded. I was thinking about funding it with life insurance when I die. Is this is a good idea?”
Ron, thank you for the thoughtful question.
Funding your son’s Special Needs Trust is quite an important task. I know that statement sounds obvious; however, most families do not know the amount of money that their child will need for their lifetime of support in order to ensure the Special Needs Trust is funded with enough money. Most families also do not know what type of accounts are more effective to leave in a Special Needs Trust especially as it relates to taxation. Life insurance is certainly one type of financial vehicle that can be used, and it may just be the most effective.
- Life insurance offers tax advantages (as of 2016 Tax Code), because when you die, it will transfer into your son’s Special Needs Trust free of income or capital gains taxation. Please don’t overlook this advantage, because when compared to other types of accounts, this one fact can potentially save you tens or even hundreds of thousands of lost dollars in the form of taxes that do not have to be paid.
- Life insurance provides immediate liquidity to fund your son’s trust. This means the trustees do not have to wait until your estate is settled, and your assets are dispersed in order to fund the trust. There are many families that have used real estate as their main investment vehicle, which is fine, however real estate must be sold in order to fund the trust. The process of selling the real estate can take time, money, and energy, and at the time of the owner’s death, the property value may be down due to market conditions. The question with illiquid assets like real estate or a family business is, “will your child’s life stop in order to wait for the trust to be funded?”
- Certain types of life insurance also are not dependent on the stock market for their value. It is best to use these types so that fluctuations in the market do not impact the amount of money your son’s Special Needs Trust will receive.
When you are considering life insurance, it is critical to understand the various types available and which type will best fit for the purpose of funding your son or daughter’s special needs trust.
- Term life insurance provides a death benefit for specific period of time with a locked in price for that period. For instance, an individual can purchase 5, 10, 15, 20 and even 30-year term life insurance policies in which the price will stay constant for time period you select, but then, once that time period expires, it is common that your cost of the insurance will increase substantially. That means that if you live long enough, you will most likely not be able to afford the death benefit. Term life insurance is great for a specific purpose over a specific time period, but when you are trying to fund your son’s Special Needs Trust regardless of when you die, you will most likely want to entertain a permanent life insurance policy.
- Permanent life insurance means the life insurance will continue for your entire life. All permanent life insurance policies are not created equal. The two main types of permanent life insurance is Universal and Whole life.
- Universal life insurance has been commonly referred to as Flexible Adjustable life, because it is designed so that you have flexibility in terms of your payments, year to year. The reason for this is the internal pricing of the insurance is based on your current age, meaning the younger you are the less costly it is, but the older you are, the more costly. It is important that, if you decide to use a universal life policy to fund your son’s Special Needs Trust, you overfund (pay more than the insurance company requires) the policy or ensure it has a Guarantee. I have seen too many universal life policies that were not funded properly and therefore the death benefit vanished (before the insured died), leaving the Special Needs Trust without funds.
- Whole life insurance has always been considered more stringent than universal life and typically it is not as flexible. However, in recent years it has become more flexible in terms of its funding and design. Whole life insurance will usually have a higher contribution level than universal life insurance; however, its internal insurance costs are more stable and do not rise as an existing policyholder ages.
- Survivorship or Second to Die is a joint policy that typically covers a husband and wife and pays a death benefit at the second death in order to fund your son’s special needs trust. This type of insurance is available in both universal and whole life cost chassis.
Having a plan to fund your son’s Special Needs Trust is vital. Please consult an experienced special needs professional to ensure you make the most educated decision for your family’s situation.
For more information on how to prepare for the future, be sure to contact a financial advisor who specializes in serving families with special needs. A Special Needs Plan is driven by what they call Unleash L.I.F.E.™- L.I.F.E. meaning Lasting Independence For Everyone™. This is accomplished with education, action, and support in the creation, implementation, and continued monitoring of a specifically designed lifelong and integrated plan for your family: parents, caregivers, your loved one with special needs and their siblings.
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This article was featured in Issue 49 – Understanding the People We Love