Tips on Using Second to Die Life Insurance and Special Needs Trusts

Posted by Haddad Nadworny on Sat, Aug 05, 2017 @ 08:22 AM

The Special Needs Financial Planning Team  Cynthia Haddad, CFP | John  Nadworny, CFP | Alexandria Nadworny, CFP


nature-people-girl-forest-12165.jpgVery often, the use of estate planning tools (especially wills and special needs trusts) coordinated with some form of life insurance (second to die insurance or individual life insurance) provides a simple and easy to implement solution to filling the legal and financial gaps that will arise upon the death of one or both parents.   

An interview with our own Cynthia Haddad by Next Avenue, offers tips about special needs planning and specifically about second to die life insurance. 

Tips on Last-to-Die Policies from Next Avenue:

Haddad offers some pointers on what to look for when funding a second-to-die insurance policy:

  1. Parents should make sure their own policies and retirement planning are in good order. “Put on your own oxygen mask first,” she says. “You have to take care of Mom and Dad first.”
  2. Make sure ownership of the assets and beneficiary are properly allocated. She recommends naming a contingency beneficiary to the trust so that any leftover funds would go to that designee.
  3. If the adult child is living at home and paying a “fair share” rent to the parents (perhaps from SSI income), this money can potentially be used to pay for the last-to-die policy since the parents are acting as de facto landlords. “They have that money to use however they want,” says Haddad. “It could be used toward the premium for second-to-die life insurance.”
  4. Be sure to factor in the cost of the annual premium as part of your retirement planning. “You can handle it now,” she says, “but maybe not when you’re retired. Watch what you’re doing.”
  5. Buy what you can afford. If money is no object, Haddad advises looking at the child’s lifestyle — where he will live, what kind of caregiving needs he might have, where he will work — and running a financial accounting out for his potential lifetime. If the trust includes owning a house, account for potential upkeep. Remember: any leftover trust funds, assuming it’s a third party trust, could potentially go to the other siblings if they are named as contingency beneficiaries. “It can take out of the equation why are Mom and Dad leaving more money to Johnny,” she says. “Everybody else still gets their inheritance.”
  6. Build a team to carry on. “Mom and Dad do a lot,” Haddad says. “When they’re gone, it takes more than just one or two people to replace them. Who’s handling all that day-to-day stuff?” she says, noting that sometimes siblings don’t want to be trustees. “Make sure there is enough to pay for professional trustees, professional guardians.”
  7. Work with financial planning and insurance specialists. “You don’t go to your primary care physician for a cancer issue. You need to go to cancer specialist,” Haddad says. “You’re ratcheting up your need for special advisers. You want to know you’re working with people who understand your child’s unique needs more than you do. It’s a different world you’re entering in.”

 

Tags: Life Insurance

Financial Q & A: Special Needs Trust

Posted by Patty Manko on Tue, Aug 06, 2013 @ 05:36 PM

family in field illus resized 600The establishment of a special needs trust can provide a false sense of security that you are all set. 

The money that funds the trust will secure the resources for your loved one to be cared for.

What is a special needs trust?

A Special Needs Trust (SNT) is a legal document and a very important part of your child's long-term financial plan.

The trust may be used to hold money:

  • that you save
  • that others give your child as gifts
  • that you receive from an insurance settlement

Funds in the SNT will not interfere with your child's eligibility for federal benefits like Medicaid and Supplemental Security Income (SSI).

Who are the parties involved?

The individual who funds the trust is the Donor. The individual who benefits from the trust is the Beneficiary. The individual who oversees the trust is the Trustee

When should families fund the SNT ?

 In most circumstances the SNT is funded at the death of the parent(s) or primary care giver, rather than during their lifetime. The term used for a trust that is funded at the death of an individual is a Testamentary Trust.

Reasons for not funding the trust during a donor’s lifetime include:

  •  Once a trust is funded, the money can only be used to meet the  beneficiary’s supplemental needs. 
  •  A separate tax return must be filed.
  •  Taxes on any earnings must be paid by the trust. Income earned in  the trust is usually taxed at a higher tax rate than an individual rate.
  •  Once a trust is funded, it becomes irrevocable. This prevents you  from making any changes to the terms of the trust.
  •  Overall, there is no flexibility in your plan.

Although funding the trust may reduce flexibility, the following are some of the reasons why one may consider funding a SNT during the lifetime of the donor as a planning strategy:

  •  If an individual has more than enough money to meet his/her  personal needs and will not jeopardize their personal financial  security.
  •  Provides the donor with the comfort of knowing that there will be a  certain amount of money available for the beneficiary.
  •  Parents who have taxable estates and are implementing strategies to  reduce their estate tax liability.
  •  Grandparents or others are trying to reduce their taxable estate by  gifting to your child – the SNT protects the child’s eligibility for  government benefits.
  •  Money in the trust can provide some protection from creditors. 
  •  Money directly received by the child either through an inheritance  and/or a legal settlement which would otherwise disqualify them for  benefits. This would be a “payback” SNT.

Regardless of the timing decision for funding the trust, it is important to do whatever you can to makes sure there will be adequate money in the trust to provide for your child’s security. There are two steps:

  •  identify what the anticipated needs will be
  •  assess what steps you can realistically take to provide what is  necessary in light of your other financial requirements and goals.

How to be sure you are all set: 

Review this checklist carefully. It is very important! If you have any questions, please feel free to email Cynthia and John.

1. What is my vision of the legacy which I wish to leave my child (or other family member) with special needs?

 2. Have I established proper Wills & Trusts that transform my clear vision into an absolute future reality?
 
 3. Does my Executor/trix or Guardian have a Letter of Intent which outlines my wishes for the future care of this person?
4. Will this Letter of Intent be passed to others who may eventually care for my child, should s/he out-live my second caregiver?
 

5. Is the Trust endowed with enough money to assure that distributions will not consume their principal throughout the beneficiary's lifetime?

6. Have I insured that caregiving survivors are financially protected from the future expenses in the care of my loved one with special needs?
 
 So...are you all set? If you answered "No" to any question, your plan is not complete. We encourage you to seek the answers to all these questions.

Contact us

Tags: Special Needs Financial Planning, Special Needs Trusts, Letter of Intent, Life Insurance

Life Insurance and Special Needs Planning

Posted by Patricia Manko on Wed, May 15, 2013 @ 07:23 PM

LIFE INSURANCEAfter legal and estate planning, risk management – or insurance protection – is perhaps the second most important building block to financial security.  In an instant, an unforeseen catastrophe or illness could change your financial picture for life. Not only is it important to protect the family's lifestyle and income needs in the event of a premature death or disability of a parent, but it is also critical to plan for the supplemental lifetime needs of the child with special needs.

Special Considerations for Life Insurance in Special Needs Planning

The use of life insurance in special needs planning is somewhat different than in traditional planning . It is critical to plan for the financial problem of one of the most catastrophic events in life; a parent’s death.

In planning for a traditional family, often the largest amount of life insurance protection is purchased for the wage-earning parent.  Following this same strategy is one of the most common errors a family with special needs tends to make.  One cannot assume there is no financial value lost in the event of death of the primary caregiving parent.  Although it is difficult to place a financial value on the parent that does not work outside of the home, or provide the majority of the income to the family, it is critical to account for this value.  This often means that you have to look at each parent to determine the human life value.  This is ultimately converted to a dollar value to determine the life insurance protection needed.  

Income Replacement:

In the traditional planning model, the amount of life insurance needed is often simplified to be a function of the annual income. For example, to determine the life insurance need of a wage earner, a simple technique is to multiply your annual earnings by 5 or 10 times or the number of years you want to ensure that income for your family is continued.  This means tht if you earn $100,000 per year, you should have from $500,000 to $1,000,000 of life insurance protection.  A more detailed approach would be to complete a capital needs analysis. This is the analysis that most life insurance professionals and financial planners use.  This calculation involves determining the present value of money needed to pay for short-mid-and long-term goals a family identiifies. For families with special needs, insurance coverage requirements often extend well beyond the traditional family's timeline fo having enough money to support children through their school years.  Special needs planning requires planning for two generations, anticipating a possible need to support the child with disabilities beyond the school years and throughout his or her life.

In special needs planning, the first step in determining life insurance needs is to determine the loss of income to the household with the death of a parent. Next it is important to identify the expenses that will continue upon the death of that parent, particularly money needed to address future family goals. Looking at income alone can be misleading because variations in saving and spending affect planning.  In the event that a family spends a larger percentage of their monthly income, they have two options:1. to insure for this larger amount to maintain the family lifestyle, or 2.to anticipate lifestyle changes required by the family due to a decrease in income after the death of a parent.  For families who are diligent at saving for their future – for retirement, education, supplemental needs, etc. – a loss of income may prevent the ability to maintain this saving pattern.  Families must address issues of both current spending to maintain their lifestyle and their savings and investments for the future. 

The other common error in purchasing life insurance is buying only term life insurance.  Term insurance is life insurance that is designed to last for a predetermined number of years, such as 5,10, 20 or possibly 30 years if applied for at an early age. Term insurance works in the event that the need for protection is for only a temporary period of time. In special needs planning, the “need” is not temporary – it is permanent. As we have discussed, the need to address that second generation of financial issues comes into play once again.  There may be a need for permanent life insurance protection, rather than term life insurance that only lasts until the children have grown in 20 years.  A recommended strategy is to acquire a combination of both term and permanent insurance.

Contact us with questions or for help  determining your family's insurance needs.

 

 

 

 

 

 

Tags: Special Needs Financial Planning, Life Insurance

Special Needs Presentations for 2013

Posted by Patricia Manko on Thu, Jan 03, 2013 @ 05:27 PM

We are currently scheduling presentations for 2013.  Please contact us to arrange a date. We have three presentations currently available: 

Presentation 1:

describe the imageA Family Centered Approach to Special Needs Financial Planning

All too often families are presented with the same solution to address the unique circumstances of their own personal situation. There is a great deal of information about planning for "when you are gone" or "who will care for them when you die". The use of a Special Needs Trust and funding it with life insurance is only one solution. Realizing this, it is important to develop workshops to educate and address the issues that families face at different points in their lifetime.

We plan to finance the vision families have for their loved one.  We do this through comprehensive financial planning including asset management, life insurance and the monitoring and coordination of government services.


Presentation 2:

describe the image“Creating a Home for a Lifetime”

Residential Planning for Individuals with Special Needs Transitioning to Adulthood

This presentation outlines a process a family may follow to evaluate the housing alternatives most appropriate for their child transitioning to aulthood. The presentation is meant to elaborate on the Special Needs Planning Housing Checklist, our exclusive resource.  

 

Presentation 3:

No Sibling Left Behind

describe the imageA presentation done in conjuction with the MA Sibling Support Network (MSSN). To read more about Siblings, click here to see our October Newsletter, Planning is a  Family Matter. The first presentation is Thursday, January 10th at the Sudbury Senior Center conference room, 40 Fairbank Road in Sudbury, MA at 7:30. Click here to register

 

 

If you are interested in a presentation or additional information on any of thes topics ,please contact us .

Tags: Special Needs Financial Planning, Life Insurance, Housing

Pocket Glossary of Life Insurance Terms

Posted by Patricia Manko on Thu, Aug 23, 2012 @ 02:55 PM

describe the imagePermanent Life Insurance

Designed to provide lifelong financial protection; as long as the necessary premiums are paid, the death benefit will be paid. Most permanent policies have a feature known as cash value that increases (tax deferred) over the life of the policy and can be use to help fund financial goals (e.g., retirement, education expenses).

Survivorship or Second-to-Die Life Insurance

This type of life insurance covers two individuals and pays the death benefit at the death of the second insured. The premiums are significantly less than two traditional insurance policies because the policies insure two lives for one benefit. For older individuals with some health considerations, this may be a viable option for coverage. The policy can be designed using either whole-life insurance, term insurance, universal life insurance, or a combination of these. This product is frequently used in the disability market because the major concerns usually develop at the death of the second parent (or caregiver), a time when money is often needed the most.

Term Life Insurance

This type of life insurance covers the insured for a certain period of time, or term. The policy pays death benefits only if the insured dies during the term, which can be 1, 5, 10, or even 20 years.

Universal Life Insurance

A type of permanent life insurance that allows you, after your initial payment, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. This policy also permits you to reduce or increase the death benefit more easily than a traditional whole life policy. To increase your death benefit, the insurance company usually requires you to furnish satisfactory evidence of your continued good health. Unsecured debt: A debt or money owed that is not backed by assets or collateral; such as credit card debt.

Whole Life Insurance

The most common type of permanent life insurance. With this type of policy, premiums generally remain constant over the life of the policy and must be paid periodically in the amount specified in the policy.

Tags: Life Insurance

Survivorship vs. Traditional Insurance in Special Needs Planning

Posted by Patricia Manko on Thu, May 03, 2012 @ 12:48 PM

survivor ins resized 600Most often, a parent’s primary concern is to provide financial security for their child in the event of their death.  Why is this so?  Perhaps it is because death is one of the certainties of life.  This is often the biggest planning gap which can cause a number of problems in special needs planning.  Each of the planning factors is immediately and equally important upon the death of a parent or primary caregiver – there is a major impact on all of the five factors. There are also a variety of strategies available to fill this gap as well as other planning gaps.  The key is to identify the most appropriate strategy to meet your planning goals.

For example, the use of estate planning tools – especially wills and special needs trusts – coordinated with some form of  life insurance – second-to-die insurance or individual life insurance - can provide a simple solution to fill
the financial and legal gaps upon the death of one or both parents. This is a very common planning strategy that is fairly easy to implement.

However, this strategy may not be the most appropriate solution for every family.  It may indeed address the Financial and Legal Factors, protect eligibility for Government Factors and provide the money needed to care for the child with special needs. While at the same time it may also create more gaps in the Family & Support Factors by giving the impression that the parents did not treat all children fairly or equally. It may also create Emotional Factors for the child who did not receive a direct inheritance like his/her siblings.  Coordinating all of the factors must be considered for each planning strategy.

A Special Needs Planning Story:
Who said that money can cure all problems?  When my parents died, my sister Misty was so irate that she did not receive a direct inheritance from their estate like the rest of us that she almost created a schism in our family.  When she learned that my parents intentionally did not leave her anything directly but left her inheritance to a special needs trust, with me as the trustee, she went into a total outrage.  We couldn’t even get her to realize that the life insurance proceeds that went to the trust left her with more money than the rest of us.  It was awful.   Misty had worked so hard to achieve her independence and manage her illness, that this created a set back in her progress.  She interpreted mom and dad’s actions to be condescending of her abilities to manage her own money and to be independent.  She did not understand that it was to protect her eligibility for her SSI and housing benefits and provide extra money for her when she needed it. And the fact that she now needed to ask me for money from her trust added another element of frustration.  It took several months and several thousands of dollars in legal, financial, and family therapy fees to work through this with her.  Clearly, we should have gotten her involved before my parents died.
 - Misty’s sister.

 

Tags: Special Needs Financial Planning, Life Insurance

Special Needs Planning: Changing Life Insurance Needs

Posted by Patricia Manko on Tue, Apr 17, 2012 @ 03:49 PM

couple with child resized 600If you initially purchased all-term life insurance, you may now need to include some additional permanent life insurance coverage. Permanent life insurance protection is important for two reasons: 1) Your health may change in later years, which may prevent you from purchasing more life insurance or prevent you from renewing level term insurance after the guaranteed period is over; and 2) your child with disabilities may need a guaranteed source of money when he or she gets older and you are no longer alive.

 

If your health status has changed since you first purchased your term life insurance policy (or policies), and buying additional permanent insurance is prohibitive (either due to costs or insurability risk), you may be able to convert a portion of your present term life insurance policy to a permanent life insurance policy. You should check with your insurance agent and/or your life insurance company, to determine what conversion options are available to you.

Tags: Special Needs Financial Planning, Life Insurance

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