As a Virginia special needs planning lawyer, I’ve spoken to hundreds of parents who have children with special needs and one common concern that they share is making sure their child has access to the money they need to remain comfortable and secure for the rest of their life. The good news is that it isn’t necessary to be rich to accomplish this. You can set up a special needs trust using funds you may not have considered.
But, before jumping into the source of funds that you may use, you need to remember this one very important thing:
The Special Needs Trust, NOT your child, must be the beneficiary of any funds that you, or anyone else, wants to transfer to your child.
Always keep in mind that there are limits to how much money (in cash or property) that are not in a Special Needs Trust that your child can have before becoming ineligible for receiving government benefits.
Finding the Funds for Special Needs Trust
In addition to a family’s savings, there are other sources that you can use to fund your child’s Special Needs Trust.
Insurance – There are actually a few scenarios to consider here.
- Term Life Insurance – This type of policy is a relatively inexpensive path to funding a Special Needs Trust because they only guarantee a payout during a defined period of time. Most of the time, term policies can be renewed upon expiration unless there are changes in the owner’s medical condition or upon their reaching a certain age.
- Whole Life Insurance – This type of policy covers the entire life span of the policy owner and part of the premium is collected in an investment account that grows in value. Whole life is often more expensive than term.
- Variable Life Insurance – This type of policy also provides lifelong coverage, but the cash value fluctuates along with financial markets.
- Second to Die Life Insurance – This type of policy pays out only after the second member of the supporting couple (most often the parents) passes away. It is generally cheaper than other type of life insurance. Proceed with caution with this type of policy however, because funds may be needed after the first parent passes if they were the primary breadwinner or were full-time caregiver of the child.
Real Estate – The family residence may be the only home that the child with special needs has ever known. In that case, parents want to preserve that stability for the child after they pass. But, leaving a home in the child’s name could be a big mistake. In addition to possibly making the child ineligible for government programs, you would also be adding the heavy burden of home ownership on your child or their guardian.
Retirement Plans – Designating a Special Need Trust as the beneficiary of a retirement plan is a good idea, but it should be managed carefully. If not done properly, all the funds could be distributed to the child and taxed during the year of transfer. This could disqualify the child for government benefits and result in unnecessarily high taxes.
Deciding how to fund a Special Needs Trust is complicated. That is why it is critical to consult with an experienced special needs planning lawyer in Virginia who understands disability benefits law. Protecting your child’s eligibility for government benefits while setting aside money to supplement those benefits can make all the difference for their financial security.