The Single Biggest Blunder Parents Make After They Have a Special Needs Trust Drafted For Their Child with a Disability

You remember the purpose of a special needs trust, right?

• It allows you to leave an inheritance to your child with a disability so your child will still remain eligible for needs-based government benefits such as SSI or Medicaid.
• The money in the special needs trust is safe from the state seizing it for residential or health cost-of-care claims.
• The money in the trust is generally safe from other commercial creditors if say your child with a disability bought something he or she couldn’t afford.
• The trustee (a relative, a friend, a bank) will manage the money for your child and also pay for things your child needs.

The special needs trust is the “heart and soul” of special needs planning.

Well, just because you went to the trouble and expense of having an attorney draft a special needs trust for your child doesn’t mean you’re out of the woods yet.

Here’s the story: You can set up the perfect special needs trust but still blow it.

How?

By not paying attention to any asset you own that has a beneficiary designation such as life insurance, retirement plans, IRAs, or annuities.

Let’s say you own a life insurance policy. You bought it years ago. You named your spouse as your first beneficiary to receive the money on your death and your children as the secondary beneficiaries.

What happens if you and your spouse die in a car crash? Or your spouse predeceases you? That’s right, all your children (including your child with a disability) will receive an equal share outright completely destroying all the reasons you set up the special needs trust in the first place. Your child’s share of the life insurance proceeds will bypass the special needs trust and go outright to your child unless the trust is named as beneficiary.

Here’s what you should do right now: Let’s say you bought your life insurance from the Real Good Life Insurance Company (I thought I’d better not name actual companies for this example). Call them or write them and say “Please send me written confirmation of the beneficiaries on my life insurance policy.” You may be able to get this same information online, as well.

Why should you do this?

Because even if you remember filling out the Change of Beneficiary form just like your attorney advised to make certain your child’s inheritance will end up going into the protected special needs trust, want to know something scary?

Companies lose these records. Or, sometimes they have no record of ever receiving your Change of Beneficiary form.

The written confirmation of the beneficiary designation will also tell you if you have forgotten (easy to do) to fill out a new beneficiary form after you had the special needs trust drafted. Or, if you need to fix the beneficiary designation.

If the financial company’s letter confirms you have the right beneficiary designation, then safely file that letter with your Will and trust. After your death, the trustee of the special needs trust will rely on it when contacting the financial company.

Whew.

Alls well that ends well.

Copyright © 2008 by L. Mark Russell, All Rights Reserved

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