The proper use of life insurance in a special needs trustArticle added by Roccy DeFrancesco on September 9, 2009
Roccy Defrancesco

Roccy DeFrancesco


Joined: May 24, 2006

This article covers a topic that could help insurance agents really help a very motivated client base -- parents with special needs children. Marketing is king right now, and when you can find a topic where the clients have as their driving goal the desire to help a "special needs" child, you have a client who will act when you put forth a plan that will protect their children.

What is a special needs child?

A special needs child (SNC) has special health care needs; unique, out-of-the-ordinary concerns created by a person's medical, physical, mental, or developmental condition or disability. Additional services are usually needed to help a person in one or more of the following areas: thinking, communication, movement, getting along with others, and taking care of self.

Causes for special needs

Physical conditions -- Cancer and heart defects, muscular dystrophy and cystic fibrosis; chronic conditions like asthma and diabetes; congenital conditions like cerebral palsy and dwarfism.

Mental conditions -- Autism, Downs syndrome, ADHD, Fetal Alcohol Spectrum Disorder, Dysfunction of Sensory Integration, and Tourette Syndrome.


According the Cornell University's recent disability statistics, there are more than 2.6 million boys and girls between the ages of five and 15 with one type of disability. Thirty percent of that group -- or over 600,000 boys and girls -- have two or more disabilities.
Opportunities abound with parents of special needs children

While the previous stats are somewhat depressing, the fact of the matter is that there is a world of opportunity for advisors who know how to give advice to parents and grandparent with special needs children. If you know anyone with a special needs child, you know that it takes a special person to hang in there with a child through all the problems that comes with having special needs.

The parents and grandparents of most SNC are very giving and want to take care of the child or grandchild while living and after their death through proper planning.

Financial aid -- 18 years of age or over

At age 18, disabled individuals unable to earn a self-sufficient wage become eligible to receive a monthly income allowance through the Social Security Administration's Supplemental Security Income (SSI) program. They also qualify for payment of health services through Medicaid.

All of these benefits can be cut off immediately if the disabled person earns or has assets worth more than $2,000 (excluding a home, car and household possessions).

The government allows a disabled person to receive only $60 of unearned income per quarter, and the individual must be incapable of earning more than $500 per month.

When a SNC turns 18, they can apply for Federal assistance; however, for most parents, the Federal aid provided will not be sufficient; and so the parents will allocate their own money to help the child while they are alive.

Pitfalls to planning

The following are cardinal mistakes that are made when gifting money or passing money to a SNC:
    1) Gifting money directly to the child. If the child is older than 18 and receiving financial aid, the gift could immediately stop the aid.

    2) Gifting money to a child upon the death of a parent or grandparent (same issue).
It is also vitally important to remember to have your clients change all of their beneficiary designations to that of the special needs trust (see below). That includes 401(k) plans, IRAs, etc.

Special needs trusts (SNT)

Planning for a SNC needs to focus on how to care for the child's well being after the parents have passed away. A huge fear of the parents is that after the last parent dies, no one will take care of the SNC, or if someone does, the level of care will not be what the parent would like.

Therefore, to ensure that the child is taken care of in the appropriate manner after the last parent's death, a SNT is set up.

In order to not foul up a SNC's ability to receive Federal aid, any gifts while living or upon the death of a parent must go to a trust that has the SNC as the beneficiary.

Because the assets are that of the trust and not the child (even though the beneficiary is the child), the aid from the trust is not counted when calculating whether a SNC can qualify for Federal aid.

Funding a SNT

If the goal is to take care of a SNC after the death of a parent, what is the best tool you can use? Life insurance. The key is that, upon the death of one or both parents, a large death benefit will pour into the SNT tax-free, where that money will be used to take care of the SNC until he/she passes away.

A SNT is classically an irrevocable trust, and is funded accordingly. The trustee has discretion to use assets for the benefit of the disabled person and must handle all distributions from the trust. When the disabled person dies, unused assets can go to other heirs. When set up correctly, the assets in the trust will be used to improve the quality of life of the SNC and not disqualify the child for financial assistance.


Should you learn more about SNTs? Absolutely. Doing so will make you a more well-rounded advisor, and you will really be helping out clients who need it. A Hartford Insurance Co. study of special needs parents found that 50 percent plan on leaving their money directly to their children, which would make the children ineligible for aid .

By dealing with SNTs, you will open up more doors for business to flow through. And since the best tool used inside a SNT is a life insurance policy, you can also make decent money along the way.

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