Using Life Insurance to Fund Special Needs Trust

Using Life Insurance to Fund a Third-Party Special Needs Trust

Life insurance is a valuable tool for parents and caregivers planning for the long-term financial security of a loved one with special needs. When combined with a third-party special needs trust (SNT), it ensures that the individual receives financial support without compromising eligibility for government benefits like Medicaid or Supplemental Security Income (SSI).

A third-party SNT is designed to hold assets for the benefit of a person with special needs without being considered their property. This is crucial, as exceeding asset limits can disqualify them from essential public benefits. Life insurance provides a reliable funding mechanism for the trust, offering tax-free death benefits that can be directed to the SNT upon the policyholder’s passing. This ensures a seamless transfer of resources to support the beneficiary’s supplemental needs, such as education, therapy, and recreational activities.

Choosing the right type of life insurance is critical. Term life insurance may be suitable for families with limited budgets, but it only provides coverage for a specific period. Permanent life insurance, such as whole or universal life policies, guarantees benefits regardless of when the insured passes away, making it a more dependable option for funding an SNT.

Designating the SNT, rather than the individual, as the beneficiary of the life insurance policy prevents the funds from being counted as personal income or assets. This ensures the individual remains eligible for public assistance programs. Parents should work closely with an attorney experienced in special needs planning to properly draft the trust and align it with state and federal requirements.

Using life insurance to fund a third-party SNT provides peace of mind, knowing that a loved one with special needs will have the financial resources to maintain their quality of life and independence after the caregiver is no longer able to provide direct support.