How Does a Special Needs Trust Work?

Two Main Types of Special Needs Trusts

There are two types of special needs trusts: first-party SNTs and third-party SNTs.

First-party SNTs (also called self-settled special needs trusts) are trusts that are funded with the special needs beneficiary’s own assets. For example, if the beneficiary has a job, earned income can be placed in the trust. If the beneficiary receives an inheritance, the money can be placed in the trust.

Self-settled/first-party trusts are also “payback” trusts. This means that after the beneficiary dies or the trust is terminated, any remaining funds left in the trust are used to “pay back” the government Medicaid program up to whatever amounts were paid out for the individual’s care.

Because these SNTs are payback trusts, it’s not advisable for parents, friends, or other family members to contribute to it. This is when a separate third-party special needs trust comes in.

Third-party special needs trusts (also called supplemental special needs trusts) are created by and funded with the assets of someone other than the person with special needs. Third party SNTs are not subject to the payback rules.

Providing for Your Loved One with Special Needs with Life Insurance After Your Death

Your loved one with special needs may outlive you. Life insurance on yourself is extremely important to have if you care for a person who will be dependent on you his or her entire life.

A permanent life insurance policy is usually the best option for parents caring for a child with special needs. While permanent life insurance is more expensive than term life insurance, term life insurance only lasts a specific period of time. If you have a child who will rely on you their whole life, you need a life insurance policy that is guaranteed to last.

There are many different types of permanent life insurance policies to choose from. A guaranteed universal life insurance policy will likely be the most affordable type. You can see quotes for guaranteed universal life insurance instantly here at Quotacy by using our quoting tool and sliding the Length of Coverage to “Forever”.

» Compare: Guaranteed universal life insurance quotes

You can find out more about the different types of permanent life insurance products here: Types of Permanent Life Insurance.

Consider a Life Insurance Child Rider

When you’re looking to buy life insurance, you may also want to consider adding a child rider onto your policy. A child rider provides a small amount of life insurance on any dependent, minor children you have when you apply and includes any children you may have in the future.

A child rider costs only a few dollars extra per month. The coverage is typically $10,000 – $25,000 on each child. One child rider covers all minor children. You don’t need to buy a child rider separately for each child.

Most insurance companies ask for a medical questionnaire to be completed on each child eligible for coverage and would then end up excluding any child that has special needs or a disability. However, there are a few companies out there that don’t require any medical information.

Be sure and let your Quotacy agent know that you want to add a child rider and want it to include your child with special needs. They can help make sure you’re applying to the right company. A child rider will not jeopardize your child’s SSI or Medicaid benefits.

Permanent life insurance can be quite complex. A Quotacy agent can help you figure out your life insurance needs so you adequately protect your loved one’s future. As a broker, we’re your advocate, not the insurance company’s.

But, remember, to protect your loved one’s government benefits, your child with special needs cannot be named the beneficiary of your life insurance policy. The trust can be the beneficiary of the life insurance policy instead of your child directly.

Work with an attorney who is knowledgeable with trusts to draft a special needs trust for you. The trust needs to be designed properly to ensure your loved ones with special needs are still eligible for government benefits and to financially protect any other children you may have.

A special needs trust can be created before or after you purchase life insurance. Even if you already own a life insurance policy, you can change your policy’s beneficiary at any time. Your Quotacy agent can assist you in changing the beneficiary to a trust.

This information is for educational purposes only and is not intended to be tax or legal advice. Life insurance quotes used in this article are accurate as of March 4, 2022. These are only estimates and your life insurance cost may be higher or lower.