Special needs inheritance situation: whole life insurance?

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smith234
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Joined: Tue Dec 22, 2015 11:12 pm

Special needs inheritance situation: whole life insurance?

Post by smith234 » Sun May 13, 2018 9:30 pm

Hello,

My mother is in her early 60's. She has a portfolio of about $1.5 million split between 70% taxable, and 30% tax deferred/roth. She currently lives in a paid off house worth about 200k with my disabled sister. She is planning to retire in a few years and collect social security.

My sister is in her early 20's and disabled from a head injury when she was a baby. My sister's disability is both mental and physical, but she is able to handle most normal daily life tasks (e.g. cooking, cleaning, etc.). She doesn't need to live in a group home, and only requires minimal help to live independently. However, her disability makes it very difficult to keep a steady job reliably.

My sister collects SSDI benefits and medicare. She qualified because she was disabled very young and my late father had a social security work history. She will continue getting SSDI unless she gets a job, gets married (!), or if the law changes.

My mother would like to leave my sister an inheritance for her basic needs, but there are two problems:
  • My sister will not be able to handle large amounts of money herself because of her disability. She would not know how to manage it, and is susceptible to scams. So, having the inheritance go to her directly is not an option. If the money is in her name, the risk of falling to scams is high.
  • My mother's healthy now. But, in the case she needs nursing home care cost, the inheritance can be much reduced. For example, a 10 year nursing home stay would cost $1 million. We have no idea what my mother's future nursing home cost would be, if any.
How can we balance my mother's retirement living expenses, possible hypothetical nursing home spending, and my sister's future needs?

An acquaintance of ours in insurance recommended whole life insurance. The idea is that the life insurance payout can be used to fund a special needs trust which then would cover my sister's basic needs. He said whole life insurance would allow my mother's retirement and medical costs to be covered, and also have a payout to my sister. Is that true? Seems too good to be true. I'm suspecting there are fees, other costs, and gotchas here that I'm not understanding.

Another option is to open a special needs trust immediately and fund it with a portion of my mother's portfolio. Then, the hypothetical nursing home cost for my mother can be paid in part by Medicaid. But in this option my mother would lose access to part of her money in an emergency, and plus trusts have very high taxes, so it seems wasteful to set it up now while my mother's healthy.

Any advice? I've spoken to a lawyer, but it wasn't very helpful. The lawyer said it is difficult to find a lawyer who understands elder law, special needs child inheritance, and investing tax issues.

bsteiner
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Re: Special needs inheritance situation: whole life insurance?

Post by bsteiner » Sun May 13, 2018 9:47 pm

She'll come out better with the life insurance if she dies substantially before life expectancy. She'll be better off without the life insurance if she lives close to, to, or beyond life expectancy.

She should (in her Will) provide for her children in trust rather than outright, to keep her children's inheritances out of their estates for estate tax purposes, and to better protect their inheritances against their creditors, predators and spouses, and Medicaid.

If she gives away her assets, she'll be able to get Medicaid after 5 years. Most people in their early 60s and of modest means wouldn't want to give up flexibility and control in order to do this, but that's up to her.

Any good trusts and estates lawyer should be familiar with this. A significant percentage of clients have a child with special needs.

BruDude
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Re: Special needs inheritance situation: whole life insurance?

Post by BruDude » Sun May 13, 2018 10:26 pm

A large whole life policy at her age is going to be incredibly expensive. A guaranteed universal life policy will accomplish the same goal at a much lower cost, probably less than half the whole life cost. Whole life builds cash value. GUL is designed to maximize the death benefit guaranteed for life at the lowest possible cost. You can think about it as term insurance guaranteed for life.

I’d suggest looking at American General or one of the other companies that allows you to get 100% of the premiums back after 25 years. If at that point she no longer needs it she could cash out the policy. Some extra flexibility in case the situation changes.

aristotelian
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Re: Special needs inheritance situation: whole life insurance?

Post by aristotelian » Mon May 14, 2018 8:48 am

Simplest option would be for your mom to purchase Long Term Care Insurance to protect her estate. Then she retains control for now and is guaranteed to leave something behind for your sister.

I also think she should start gifting to your sister and consider setting her up with an annuity.

I definitely think an estate lawyer is called for in this situation.

MtnBiker
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Re: Special needs inheritance situation: whole life insurance?

Post by MtnBiker » Mon May 14, 2018 10:02 pm

bsteiner wrote:
Sun May 13, 2018 9:47 pm
If she gives away her assets, she'll be able to get Medicaid after 5 years. Most people in their early 60s and of modest means wouldn't want to give up flexibility and control in order to do this, but that's up to her.
Is there not an exception from the 5 year Medicaid lookback for gifts to disabled adult children? If such an exception does exist, she could wait to gift until there are no options left but to apply for Medicaid.
A Medicaid applicant can transfer any resources (including a house, as discussed above) to a disabled child without running afoul of the transfer rules. No transfer penalties will be imposed when an asset was transferred to the applicant's child, or to a trust established solely for the benefit of the applicant's child, as long as the child is either blind or permanently and totally disabled as defined by the individual state program or as defined by Supplemental Security Income rules.
from: https://www.nolo.com/legal-encyclopedia ... -care.html

See also: http://www.paelderlaw.com/no-medicaid-p ... led-child/

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Nestegg_User
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Re: Special needs inheritance situation: whole life insurance?

Post by Nestegg_User » Tue May 15, 2018 10:41 pm

definitely DON’T work with the “acquaintance”!!

whole life is NOT for that case; in our trust we set up a special needs trust for a siblings adopted special needs child. there is specific verbiage in the trust to basically say that it doesn’t replace SSDI or any other benefits but rather is a supplement FOR them (they actually don’t own it, so it can’t be attached). any good attorney experienced in drafting trusts should be able to accomplish your goal

mrsbetsy
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Re: Special needs inheritance situation: whole life insurance?

Post by mrsbetsy » Wed May 16, 2018 10:48 am

How much per year will the sister need? Will she continue living in a paid-for house?

Research ABLE accounts. It's possible to contribute $15,000 a year into one and use it for basic needs. Between her SSDI, ABLE funds, and a paid off home, would that be enough for her to live? ABLE account funds do not interfere with medicaid and other public services.

I would start building it up to it's maximum 100K and make sure it's invested wisely.

A SNT is also an important play in this situation.

We have looked into Whole Life, but decided against it because the above should be enough in our situation.

Will your sister be able to rely on you to manage her finances after your mother passes?

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