For those who care for someone with special needs, it is likely that they are also in charge of managing their financial support as well. In such cases, these care providers are typically concerned about both current care management, as well as ongoing care and  financial well-being after the care giver is no longer there for support. This is where a Special Needs Trust can be useful.

How a Special Needs Trust Can Help

Special needs trusts are planning tools that are used with individuals who qualify for government benefits such as housing, cash, or medical assistance due to their disability or needs. Because these benefits, which oftentimes come in the form of Medicare or SSI (Supplemental Security Income) typically have eligibility requirements, the receipt of additional funds from family or other sources could deem the recipient ineligible for further benefit.

Therefore, by directing assets to the Special Needs Trust, rather than directly to the individual, these trusts can offer a number of advantages, without jeopardizing the government benefits that the individual may already qualify for.

How Does a Special Needs Trust Work?

Special Needs Trusts can be created in a number of different ways. These may include:

  • Will – A Special Needs Trust may be created through an individual’s will. The trust’s rules can be written in the will. In this scenario, the trust will not begin until the person who’s will it is created under dies.
  • Revocable Living Trust – If a Special Needs Trust is set up through a revocable living trust, it will also begin when the person making the trust passes away.
  • Irrevocable Living Trust – If a Special Needs Trust is set up via an irrevocable living trust and assets are transferred into the trust while the donor is still alive, the beneficiary can use trust assets prior to the time that the donor dies.

With a Special Needs Trust, the trust distributions are paid at the trustee’s discretion – and the trust’s beneficiary is not typically given funds with which to make purchases. One of the biggest reasons for this is because it is possible that the individual could inadvertently make a “prohibited” purchase.

Should this occur, his or her government benefits could be reduced – or even eliminated – for a certain period of time. Therefore, in order to avoid this situation from occurring, it should be the trustee who purchases any items that are needed by the trust’s beneficiary with funds from the Special Needs Trust.

In most cases, trust funds may be used to pay for items like caregiving, such as therapies that are not paid for by governmental benefits, as well as travel, pet care, clothing, furniture, and other personal needs items such as the purchase of a computer.

The Role of Life Insurance in Special Needs Trusts

There are several ways to fund a Special Needs Trust. While making direct gifts of cash from savings or other assets may build trust assets to a nice level, one way to truly provide a substantial amount of funds into the trust is to fund it with life insurance proceeds. In fact, in many instances, life insurance provides a method for literally guaranteeing a set amount of future funds into the trust – provided that the policy is in force at the time of the insured’s death.

In addition, life insurance is also a fairly inexpensive way to fund a Special Needs Trust. This is because the internal rate of return that is necessary (after income or estate taxes) for producing the same after tax amount as a life insurance policy death benefit can be difficult to determine.

Certainly, one of the biggest reasons to consider life insurance for funding a Special Needs Trust is because of the financial security it can provide. This is especially the case if the parent or parents should die prematurely. In this case, the life insurance policy will automatically fund the trust with the set amount of funds, ensuring that the recipient will be taken care of financially, just as they had planned for.

The Best Type of Coverage to Use

When choosing the best type of life insurance coverage to use in a Special Needs Trust, it is important to consider several factors. First, who is / are the primary care giver(s)? Also, how and when is the best method for the Special Needs Trust to be funded?

This is why a second to die permanent life insurance policy using guaranteed universal life may be an ideal option. One reason for this is because it is cheaper to insure both parents this way. In addition, as long as one of the parents is still living, the child will be financially supported.

Why Planning Ahead is Essential

Planning ahead for any type of financial need is essential – and this is certainly the case when working with Special Needs Trusts. It is important to find the fine line between providing enough financial support, while at the same time preserving any government benefits that the individual qualifies for.

When working with special needs cases, it is important to include a life insurance professional who is well versed in this area, as he or she can help in determining which type of policy can work best for the particular client’s situation and needs.


Liran Hirschkorn is an independent life insurance agent. His mission is to help individuals across the U.S in finding the best rates on life insurance as well as helping those that have previously been declined get approved for coverage.

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