From Our “Ask a Question” mailbag: “I want to set up a Special Needs Trust for my son in my Will. Can I fund a Special Needs Trust with life insurance?”
You can fund a Special Needs Trust with just about anything, including life insurance.
A Special Needs Trust formed in your Will is called a Third Party Special Needs Trust. A variety of assets can fund the Trust, including cash, stocks, and life insurance proceeds. Life insurance is a flexible tool, as you can change the amount you wish to pour into the Special Needs Trust by modifying the beneficiary designation
Life insurance is a flexible tool. With life insurance, you can adjust the amount you wish to pour into the Special Needs Trust by modifying the beneficiary designation. For example, if I draft for you a Special Needs Trust crafted to hold life insurance proceeds you can name the trust as the recipient of 1/2 the policy. But, should you change your mind, you can easily modify the beneficiary designation and name the trust as beneficiary of, say, 3/4 the policy. You make this change without changing your Will. I find that clients benefit from a flexible estate plan.
Further, in many states including Pennsylvania, life insurance passes Income Tax and Inheritance Tax-free. Life Insurance allows you to fund Special Needs Trust tax-free.
Funding the Special Needs Trust with life insurance requires specific language which differs from the typical Will.
You may also wish to have other assets pour into the Special Needs Trust, such as a house. You child could live in the house, maintained by the life insurance proceeds. When a trust owns real estate, special powers need be added giving the Trustee authority to manage the property without court involvement.
Not to be forgotten, the life insurance beneficiary designation must then be completed correctly to name the Special Needs Trust as the recipient. A designation error may ruin the entire plan.
If the plan is crafted correctly, at your death, the Trustee will quickly and seamlessly collect the life insurance proceeds. The funds pour directly into the Trust, immediately available to provide care for your son avoiding Probate.
Funding Special Needs Trusts With Life Insurance Requires Selecting The Right Trustee!
Because your son might need funds soon after your death, it is important to choose a Trustee who will quickly collect the funds.
Often family members are not a good fit as Trustee. There are many excellent trust companies who provide service as Special Needs Trust Trustees. Another option is to pick a friend or family member who will interview and hire the Trustee after your death. This “Protector” will have the luxury of knowing the exact circumstances at the time. Using a Protector allows your trusted friend or family member to pick the best person or Corporate Trustee for the job. The Protector may also replace the Trustee if they are not doing a good job. Consequently, the Protector may replace the Trustee without a court hearing, which is much less expensive.
Clearly, with all these options is to your advantage to retain the help of an experienced Estate Planning Attorney. When dealing with a Special Needs Person, you want the process to be smooth, quick and uncomplicated.
I would be happy to brainstorm options with you. This way I can design a Special Needs Trust that best fits your circumstances.
Contact our office for a free consultation if you have further questions about Special Needs Trusts or any other Estate Planning issues!
Wills, Trusts, Probate, and Estate Litigation, It’s All We Do!
Peter Klenk, Esq., LL.M.