If something were to happen to you today, who would be there to protect the needs of your loved ones — especially those with special needs? A Special Needs Trust can help ensure they will have the resources necessary to live complete and fulfilling lives.

 According to “The National Survey of Children with Special Health Care Needs,” conducted in 2005-2006, 13.9% of U.S. children under the age of 18 (about 10.2 million children) have special health care needs.[1] This study found nearly 22% of households with children include at least one child with a special health care need.[2] In the past 25 years, the definition of “special needs” has broadened, making financial and estate planning vital for the parents of these children. Think of all your current and possible future special needs-related expenses, such as special residential homes, employment assistance and other costs. And, while it may be tough to meet these obligations now, imagine the implications after you’re gone.

 There is Some Help from Uncle Sam …
How does the average caregiver meet expenses and ensure a special needs loved one’s continued care? Fortunately, you don’t have to do it alone. The government provides several programs offering financial assistance.

Supplemental Security Income (SSI) and Medicaid are two sources of government benefits available to eligible individuals. SSI provides monthly cash benefits used for food, shelter and clothing.

One of the most important benefits of SSI is that it automatically makes a recipient eligible (and in some states, qualified) for Medicaid. For those not receiving SSI, Medicaid eligibility is determined by state law that varies with each state. SSI may also entitle an individual to other benefits and services, such as food stamps and payment of Medicare premiums, depending on the state of residence. Medicaid provides comprehensive coverage, covering such items as medical care, physical therapists, occupational therapists, medical equipment, recreational and social programs, rehabilitative services and custodial services.

 … But Not Without Conditions
The government also puts a major condition on the receipt of these benefits. If an individual with a disability receives funding for any of the aforementioned purposes from an alternate source, the government cuts back support. For example, if more than $2,000 worth of assets are titled in the name of the individual with special needs, his or her eligibility for SSI payments can be jeopardized.[4]

If you are a caregiver who needs to ensure government funding for a loved one to whom you are not legally obligated to support (e.g., an adult child), you may be limited in what you can “spend” on that person – or in what you can leave to your special needs family member as part of your estate. Funds used to place a loved one in the residence of your choice, for example, can be deemed income and jeopardize eligibility for government benefits. Additionally, gifted funds, inherited assets and unstructured beneficiary designations on such assets as life insurance, IRAs and pension plans can affect eligibility.

 Supplementing Federal Support
Supplementing federal support is why many people turn to a Special Needs Trust. This estate-planning tool can offer an affordable way to help meet the ongoing needs of a person with a disability — or to provide a substantial gift — without affecting eligibility for government funding. More importantly, if something happens to you, a Special Needs Trust can help provide financial security for your loved one’s continued care.

Specifically designed to provide funds to supplement the basic necessities (food, shelter and clothing), a Special Needs Trust may help pay for additional items such as medical therapy or procedures not covered by SSI or Medicaid, including:

Appointing Guardians
Guardianship is another pressing issue for people currently caring for individuals with special needs and also contemplating their potential replacements. Often siblings, aunts or uncles, or the child’s grandparents are the first choice. Guardianship, however, requires a substantial amount of consideration.

Unfortunately, guardianship practices vary by state, and there is no unifying federal guideline on which to rely. Also, depending on state guidelines, guardianship may result in a special needs adult losing any right — even limited — to self-determination in medical care, housing choices, etc. That’s why a lawyer specializing in family law should always be consulted and asked to draft any binding documents.

Selecting Trustees
A trustee must be designated to oversee the financial management of funds in the special needs trust in the event of your death. You can appoint an individual trustee, joint trustee and/or a corporate trustee.
Ideally, the trustee should have the following skills:

• Understands public benefits;
• Conforms to all statutory fiduciary requirements;
• Has sound investment management skills and resources;
• Uses discretion in the best interest of the disabled beneficiary;
• Understands taxes and the implications of taxes regarding a special needs individual;
• Keeps detailed and accurate books and records; and,
• Coordinates and monitors needed services such as care managers and nursing care that the disabled beneficiary receives.

Letter of Intent
A Letter of Intent, written by the parent/guardian of a special needs individual, comprises instructions to a trustee/guardian about the type and level of care you want to be provided, including specifics about health care, education and living arrangements. While not a legal document, Letters of Intent should be witnessed and notarized.

 Funding a Special Needs Trust
The funding vehicle you select for your Special Needs Trust can have a dramatic impact on the amount of resources available for your loved one. Investments or other financial resources can potentially multiply the value of your trust fund over the years. But at the same time, today’s fluctuating market and evolving tax laws can lessen the value of these savings.

Permanent life insurance is a vehicle that can provide a death benefit as well as a host of short- and long-term advantages. These include the opportunity to accumulate cash value for the future, on a tax-deferred basis, and the ability to access cash value through withdrawals and loans to help meet expenses over the years. In addition, since the face amount of the policy is often greater than the premium cost, the amount that a beneficiary (including a Special Needs Trust), receives down the road could be substantial. In other words, with life insurance, every dollar may go a long way.

Whole or Universal Life: A Permanent Solution
There are a wide variety of life insurance policies to choose from, but a permanent whole life or universal life policy can be used to fund a Special Needs Trust. Both provide death benefit protection and allow tax-deferred cash value accumulation — and universal life also offers flexibility as well as other features that you can tailor to suit your changing needs and budget.

Irrevocable Special Needs Trust: Using Permanent Life
The trust is established to initially own the life insurance policy by purchasing a new policy or transferring an existing policy into the trust. The trust is the owner and beneficiary of the insurance policy. This ownership arrangement prevents the special needs beneficiary from having direct control or management over the funds, which could otherwise put him/her at risk of losing government benefits such as SSI and Medicaid.

The face amount of the life insurance policy should be at least equal to, if not more than, the estimated amount necessary to meet your loved one’s special needs over his/her lifetime. Your understanding of your loved one’s diagnosis, prognosis, functional skill level, earning potential and abilities will assist in determining the appropriate amount of life insurance that will be required. The life insurance policy can insure the life of either one or two individuals. A single life policy pays a death benefit after the individual insured’s death. A survivorship policy pays the death benefit after both insureds have died.[9]

The premium payments begin to create cash value for the trust, which may be accessed by the trustee through loans during the insured’s lifetime. You may want to name other children or relatives as successor beneficiaries of the trust to receive any remaining funds in the event that your special needs loved one dies before the trust principal is depleted, or even before the insured’s death. You might also consider naming a qualified charity as the successor beneficiary.

The trustee(s) you select will be responsible for administering the policy proceeds after your death. It’s generally wise to choose at least one individual who is quite familiar with those needs to serve as trustee or co-trustee of the trust.

Types of Trusts Testamentary Trust. For older parents or long-term caregivers — or for anyone looking to create a bequest to a special needs beneficiary upon his/her death — a testamentary Special Needs Trust may be most suitable. Established through a will and at the grantor’s death, a Special Needs Trust is created based on the terms and conditions speci?ed in the will. The trust receives the proceeds from any life insurance policies and all other assets that are given to the trust. This option offers a secure way to lock in a lump sum for your disabled loved one’s continued care.

Inter-vivos (Living) Trust.In certain situations, an inter-vivos (living) Special Needs Trust may be more appropriate. With this trust, the trustee can access the liquid funds in the trust (including withdrawing or borrowing against the cash value in a permanent life policy)[11] to help pay any special medical or supplemental expenses while you are still living — and at the same time, create savings for the future. (Your attorney will help you determine how much you can borrow at any particular time without affecting a loved one’s eligibility for government assistance.)

With regard to permanent life insurance, it’s also important to ensure the amount and frequency of premium payments and loans leave adequate funds in the policy to cover your loved one’s expenses should you die prematurely.  As your financial situation or ongoing needs change, you can add or reduce coverage to ensure the funding in your trust is sufficient to meet these expenses for life.[12]

Providing Gifts Through a Trust

Both a testamentary and inter-vivos trust can also offer a viable way for friends, grandparents or other relatives to make a substantial gift to a loved one. By gifting assets or a life insurance policy to a testamentary trust designated in a will, friends or relatives can help pay for a disabled person’s care. In order to gift funds to an inter-vivos trust, friends and relatives can either contribute to a caregiver’s existing trust or create a new trust that addresses the immediate and future special needs of their loved one.

One example is where a grandparent or other relative leaves money to a special needs child by will but the appropriate trust has not been established.  Not only can such a gift impact eligibility for government assistance, but also if placed in trust after the gift, many states reserve the right to recapture their costs from the trust upon the child’s death.

It is, of course, always best to work with an attorney who can coordinate planning and determine the approach that works best for all.

New York Life: The Company You Keep^®
If you provide care for a person with special needs or wish to create a substantial gift, a Special Needs Trust can be of tremendous help. It’s one of the few estate-planning strategies that may not affect your loved one’s eligibility for Federal assistance.[13] And, when funded by life insurance, a Special Needs Trust can provide an affordable solution that may multiply the value of your savings over the years. It’s an opportunity to ensure the care you give now will last a lifetime.

To learn more about the use of life insurance in funding a Special Needs Trust, contact your New York Life agent.

This writing is provided for informational purposes only. This response is based on the specific details and information provided by the agent and my understanding of generally applicable rules related to the subject matter. Neither New York Life Insurance Company nor its employees are in the business of providing tax, legal or accounting advice, and none is intended nor should be inferred from the foregoing comments and observations. Clients should be advised to seek the counsel of their own tax, accounting and legal advisors who must form their own independent opinions on these matters based upon their independent knowledge and research.

This material includes a discussion of one or more tax-related topics. This tax-related discussion was prepared to assist in the promotion or marketing of the transactions or matters addressed in this material. It is not intended (and cannot be used by any taxpayer) for the purpose of avoiding any IRS penalties that may be imposed upon the taxpayer. Taxpayers should always seek and rely on the advice of their own independent tax professionals. Please understand that New York Life Insurance Company, its affiliates and subsidiaries, and agents and employees of any thereof, may not provide legal or tax advice to you.

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[1] U.S. Department of Health and Human Services, Health Resources and Services Administration. See www.mchb.hrsa.gov/cshcn05 (last reviewed 2/25/2011).
[2] See note 1, supra.
[3] Known as Medi-Cal in the State of California.
[4] Check the Social Security Web site: www.ssa.gov for more detailed information on SSI and Social Security Disability insurance, as well as a more complete definition of “disability” for Social Security purposes. For more information about disability benefits for children, request the booklet, “Benefits for Children with Disabilities” Publication No. 05¬10026.
[5] Check with your state laws to ensure that guardianship is applicable.
[6] Loans and withdrawals reduce any available policy cash values. In addition, loans against a policy accrue interest at the current rate and decrease the death benefit by the amount of the outstanding loan and interest.
[7] Provided premium requirements are met.
[8] Ibid.
[9] A Survivorship Purchase Option Rider (SPO) on a survivorship policy can allow a surviving spouse to purchase more insurance after the death of the first¬ to ¬die, usually for up to three months. (Note: This would increase the required premium payments) The availability and/or terms of this rider may vary by state.
[10] See note 6, supra.
[11] See note 6, supra.
[12] This will affect the premium requirement.
[13] Consult with local tax and legal advisors to see if state benefits may be affected.