Advanced Planning for Specialized Risk Insurance Needs

Nevertheless, even these families might be worried about future financial problems or long-lasting health problems that might diminish their properties and lower the funds readily available for the trust. Other households may have considerable retirement assets (examples: Individual retirement accounts, 401(k) plans, and 403(b) accounts) that they are depending on to money their SNTs.

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Still other households of more modest ways may have insufficient funds and other assets with which to money their SNT and require to explore other alternatives. Life insurance coverage has become a common response to the concern of how to money an SNT. Even for those with bigger estates, life insurance coverage can be an appealing financing source.

Life insurance coverage directed to an SNT can also provide versatility to a household by offering sufficiently for the child with special needs while permitting the parents to direct retirement assets or organization properties that might be improper for an SNT to their other children. Life insurance is also a beneficial tool when parents want to leave a larger share for the special needs kid and smaller sized shares for his/her brother or sisters.

That is, the function of the insurance coverage is not to cover a finite set of requirements over a limited duration of time, such as providing for a making it through spouse or paying for college educations in case the wage earner in the household passes away. Rather, the SNT will last for the life of the child with a special needs, and the funding and price of the premium must be considered.

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For that reason, an entire life policy or universal life policy with a guaranteed survivor benefit is suggested. The premiums for these kinds of policies, while at first more expensive than the premiums for term policies, normally stay constant throughout the period of the policy. In numerous cases, the earnings that the policy produces by investing the premium payments can pay some or all of the premium, particularly after the policy has been in location for several years.

These policies cover two lives, generally, but not always, the parents' lives. The premiums on survivorship policies are lower than the premiums on a policy for a single person or on separate policies covering 2 peoples' lives since the policy just pays off after both of the insured individuals have passed away.

If effectively structured (as discussed listed below) the policy might even be "unavailable" for Medicaid purposes if one of the parents requires nursing home care in the future. Whatever type of insurance policy is chosen, the policy should call the trustee of the SNT, in his/her capacity as trustee, as beneficiary of the policy, rather than calling either the trust itself or the specific with special needs.

Such trusts own, administer, and receive proceeds from life insurance policies bought in the name of the trust in order to prevent the death benefit from being included in the estate of the guaranteed individual for estate tax purposes. Individuals often erroneously assume that life insurance is not taxable. While it is real that the proceeds of a policy are not taxable for income tax purposes, they are taxable for estate tax purposes.

Such irrevocable life insurance coverage trusts can be collaborated with SNTs by making an SNT the supreme recipient of the irreversible life insurance trust. Additionally, a life insurance coverage policy owned by an irreversible life insurance coverage trust might not be considered a disqualifying property for Medicaid functions if the guaranteed individual requires long-term care him or herself in the future.

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Drafters of irreversible life insurance trusts typically make a common error when the trust is planned to serve unique needs recipients: the inclusion of so-called "Crummey" powers in the trust instrument. (This odd nameCrummeycomes from a lawsuit that licensed such powers.) Crummey powers enable the trust recipients a specific limited duration of time to withdraw contributions made to the trust.

Trust beneficiaries who have these Crummey withdrawal rights deliberately and normally do not exercise them, and after that the trustee uses the gift to pay the insurance premium. Nevertheless, if the life insurance coverage trust is to function as an SNT for a recipient who is receiving Supplemental Security Income (SSI) from the Social Security Administration, such Crummey powers can cause a catastrophe.

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It will then impose a duration of disqualification on the SSI recipient. For this factor, it is a good idea not to provide withdrawal rights to an SNT beneficiary receiving means-tested advantages like SSI or Medicaid. Restricting the withdrawal rights to non-disabled recipients (typically other kids) is usually sufficient for gift tax functions and, if not, the gift can be credited against the donor's lifetime present tax exclusion (likewise $5,120,000 in 2012).