Don’t Name Your Special-Needs Child as the Beneficiary of Your Life Insurance

While you may think you’re doing the right thing if you name your special-needs child (or grandchild, sibling, etc.) as the beneficiary of your life insurance, you may be doing the wrong thing. Here’s why.

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Under current federal law, an individual with more than $2,000 in assets is disqualified from most needs-based government benefits. State assistance programs may also be based on need. If your child were to receive an inheritance from you directly, including the proceeds of a life insurance policy, it’s highly probable that the inheritance would disqualify the child from receiving needed benefits. Do not leave assets to the child directly.

Instead, create a special-needs trust and leave assets to the trust. The special-needs trust will provide financial assets for a disabled child’s future care and well being, while maintaining the child’s eligibility for government benefits. The trust is managed by a trustee, who then can use trust assets on the child’s behalf.

In a properly structured special-needs trust, the trust holds the title to the property for the benefit of the disabled child or adult. The assets in the special-needs trust can then be used to provide for the needs of the disabled individual, as well as to supplement benefits received from government assistance programs. For example, trust assets can be used for:

  • transportation, including purchase of a vehicle
  • training, rehabilitation or education programs
  • equipment
  • medical, dental and eyesight expenses
  • entertainment
  • insurance premiums
  • companion/home health aide expenses
  • items to enhance quality of life/self esteem

A special-needs trust can hold cash, as well as title to stocks, bonds, mutual funds, real estate and personal property. In addition, it can own and/or be the beneficiary of life insurance policies, one of the least expensive ways to fund a special-needs trust. Another use for special-needs trusts is to receive any proceeds from personal injury settlements without jeopardizing eligibility for government benefits.

In order to retain eligibility for government benefits, it’s important that well-intentioned family members, such as grandparents, understand that their will should bequeath assets to the special-needs trust, and not directly to the disabled individual.

Keep in mind that special-needs trust requirements are stringent, so it’s important that you work with qualified financial and legal experts when establishing a special-needs trust.

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