Need Advice on Permanent life insurance and special need trust

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seattenighthawk
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Need Advice on Permanent life insurance and special need trust

Post by seattenighthawk »

Hi community,
I am trying to setup a Special Need Trust for my autistic kids. To finance the SNT, considering to get an Permanent life insurance in form of IUL or UL to finance it in my absence or death.

I am new into this community and looking for advise on what is a best way to finance special need trust with close to $2M.
Best,
Dad from Seattle
bsteiner
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Re: Need Advice on Permanent life insurance and special need trust

Post by bsteiner »

There's a very high probability that if you were to instead buy term insurance and invest the difference, and keep the term insurance until the investments reach $2 million, (i) if you live to, close to, or beyond your life expectancy, the investments will grow to substantially more that $2 million, or (ii) if you die substantially before life expectancy you'll still get $2 million from the term insurance.

However, that probability is less than 100%. There's some chance that you could live beyond the period of the term insurance and die at a time when the investments are less than $2 million. At the cost of most likely ending up with much less money, the whole life insurance guarantees that you'll end up with $2 million (or more if there are dividends on the policy and you use them to increase the coverage).

Unless you expect to have a taxable estate (in which case you probably wouldn't be asking this question), why would you want to create the trust now rather than in your Will so as to get a basis step-up for the assets at your death?
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Stinky
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Re: Need Advice on Permanent life insurance and special need trust

Post by Stinky »

bsteiner wrote: Sat Sep 25, 2021 9:52 am There's a very high probability that if you were to instead buy term insurance and invest the difference, and keep the term insurance until the investments reach $2 million, (i) if you live to, close to, or beyond your life expectancy, the investments will grow to substantially more that $2 million, or (ii) if you die substantially before life expectancy you'll still get $2 million from the term insurance.

However, that probability is less than 100%. There's some chance that you could live beyond the period of the term insurance and die at a time when the investments are less than $2 million. At the cost of most likely ending up with much less money, the whole life insurance guarantees that you'll end up with $2 million (or more if there are dividends on the policy and you use them to increase the coverage).

Unless you expect to have a taxable estate (in which case you probably wouldn't be asking this question), why would you want to create the trust now rather than in your Will so as to get a basis step-up for the assets at your death?
Seattlenighthawk, welcome to the Forum!

I agree with all of bsteiner's comments above. There is a very high probability that a "term insurance and invest the difference" strategy will beat a permanent life insurance strategy.

At most issue ages, term insurance is available for periods from 10 to 30 years. The premiums are death benefits would be guaranteed level for the entire term period, which will give you some certainty as to the costs of the insurance.

I wouldn't advise permanent life insurance in your situation. However, if you do want to go in the direction of permanent life insurance, I'd suggest guaranteed universal life (GUL) rather than regular UL or IUL. GUL will deliver the maximum death benefit for the smallest amount of money, since it builds little or no cash value, and the coverage period can extend to an intermediate age like 90, which would be cheaper than insuring you for your entire potential lifetime.
It's a GREAT day to be alive! - Travis Tritt
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3CheersforLkyJack
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Re: Need Advice on Permanent life insurance and special need trust

Post by 3CheersforLkyJack »

We faced the same questions as you a couple years ago and took the approach as noted by bsteiner for our special needs son, currently age 5. Term policies for us both, 20 yr for me, 30 yr for my wife. We max all tax advantaged space, then save everything else we can for him in a separate taxable account owned by us that we consider untouchable. The special needs trust is currently setup but won't be funded until we pass.

Also look into a 529 Able. They are subject to some max balances (100k or so before benefits are reduced) and depending on the state, Medicaid can recover leftover funds if the beneficiary passes. Fortunately our state doesn't have Medicaid recovery on 529 Able accounts. They do on special needs trusts though.
bsteiner
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Re: Need Advice on Permanent life insurance and special need trust

Post by bsteiner »

3CheersforLkyJack wrote: Sat Sep 25, 2021 10:48 am ... Fortunately our state doesn't have Medicaid recovery on 529 Able accounts. They do on special needs trusts though.
They can recover from trusts created with the beneficiary's own money, but not from trusts created by others (unless it mandates distributions, which a well-drafted trust wouldn't unless necessary to obtain a tax benefit, or it was created by the spouse other than by Will).
MrsBDG
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Re: Need Advice on Permanent life insurance and special need trust

Post by MrsBDG »

If you do choose a lifetime UL policy, look into second to die options, that insures both spouses and only pays on the second death so is cheaper as it'll be paying out later. You can usually even get this type of policy if one of the parents has health issues.
BruDude
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Re: Need Advice on Permanent life insurance and special need trust

Post by BruDude »

A no-lapse UL will be the lowest cost way to guarantee lifetime coverage. Traditional UL or IUL won’t have the same guarantees, and setting them up to be guaranteed for life will be a lot more expensive.

The second-to-die no-lapse UL would be the lowest cost if you have a spouse. Premiums could be 30-50% of what a policy on just your life would cost.
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seattenighthawk
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Re: Need Advice on Permanent life insurance and special need trust

Post by seattenighthawk »

3CheersforLkyJack wrote: Sat Sep 25, 2021 10:48 am We faced the same questions as you a couple years ago and took the approach as noted by bsteiner for our special needs son, currently age 5. Term policies for us both, 20 yr for me, 30 yr for my wife. We max all tax advantaged space, then save everything else we can for him in a separate taxable account owned by us that we consider untouchable. The special needs trust is currently setup but won't be funded until we pass.

Also look into a 529 Able. They are subject to some max balances (100k or so before benefits are reduced) and depending on the state, Medicaid can recover leftover funds if the beneficiary passes. Fortunately our state doesn't have Medicaid recovery on 529 Able accounts. They do on special needs trusts though.
Thanks a lot for the suggestion. I live in WA State. I see WA state able as an option for me.
https://www.washingtonstateable.com/
I love to know what other options I can use that is considered untouchable. is UTMA considered untouchable?
Topic Author
seattenighthawk
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Re: Need Advice on Permanent life insurance and special need trust

Post by seattenighthawk »

Stinky wrote: Sat Sep 25, 2021 10:35 am
bsteiner wrote: Sat Sep 25, 2021 9:52 am There's a very high probability that if you were to instead buy term insurance and invest the difference, and keep the term insurance until the investments reach $2 million, (i) if you live to, close to, or beyond your life expectancy, the investments will grow to substantially more that $2 million, or (ii) if you die substantially before life expectancy you'll still get $2 million from the term insurance.

However, that probability is less than 100%. There's some chance that you could live beyond the period of the term insurance and die at a time when the investments are less than $2 million. At the cost of most likely ending up with much less money, the whole life insurance guarantees that you'll end up with $2 million (or more if there are dividends on the policy and you use them to increase the coverage).

Unless you expect to have a taxable estate (in which case you probably wouldn't be asking this question), why would you want to create the trust now rather than in your Will so as to get a basis step-up for the assets at your death?
Seattlenighthawk, welcome to the Forum!

I agree with all of bsteiner's comments above. There is a very high probability that a "term insurance and invest the difference" strategy will beat a permanent life insurance strategy.

At most issue ages, term insurance is available for periods from 10 to 30 years. The premiums are death benefits would be guaranteed level for the entire term period, which will give you some certainty as to the costs of the insurance.

I wouldn't advise permanent life insurance in your situation. However, if you do want to go in the direction of permanent life insurance, I'd suggest guaranteed universal life (GUL) rather than regular UL or IUL. GUL will deliver the maximum death benefit for the smallest amount of money, since it builds little or no cash value, and the coverage period can extend to an intermediate age like 90, which would be cheaper than insuring you for your entire potential lifetime.
Thanks a lot for the suggestion. I ended up taking $2M Term LI for 20 years and wanted to invest the difference into an untouchable account for him. I am looking into WA stable able program. Love to hear suggestions from the community on what are the other options to consider as untouchable account for him.
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Stinky
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Re: Need Advice on Permanent life insurance and special need trust

Post by Stinky »

seattenighthawk wrote: Wed Oct 06, 2021 5:18 pm
Stinky wrote: Sat Sep 25, 2021 10:35 am
bsteiner wrote: Sat Sep 25, 2021 9:52 am There's a very high probability that if you were to instead buy term insurance and invest the difference, and keep the term insurance until the investments reach $2 million, (i) if you live to, close to, or beyond your life expectancy, the investments will grow to substantially more that $2 million, or (ii) if you die substantially before life expectancy you'll still get $2 million from the term insurance.

However, that probability is less than 100%. There's some chance that you could live beyond the period of the term insurance and die at a time when the investments are less than $2 million. At the cost of most likely ending up with much less money, the whole life insurance guarantees that you'll end up with $2 million (or more if there are dividends on the policy and you use them to increase the coverage).

Unless you expect to have a taxable estate (in which case you probably wouldn't be asking this question), why would you want to create the trust now rather than in your Will so as to get a basis step-up for the assets at your death?
Seattlenighthawk, welcome to the Forum!

I agree with all of bsteiner's comments above. There is a very high probability that a "term insurance and invest the difference" strategy will beat a permanent life insurance strategy.

At most issue ages, term insurance is available for periods from 10 to 30 years. The premiums are death benefits would be guaranteed level for the entire term period, which will give you some certainty as to the costs of the insurance.

I wouldn't advise permanent life insurance in your situation. However, if you do want to go in the direction of permanent life insurance, I'd suggest guaranteed universal life (GUL) rather than regular UL or IUL. GUL will deliver the maximum death benefit for the smallest amount of money, since it builds little or no cash value, and the coverage period can extend to an intermediate age like 90, which would be cheaper than insuring you for your entire potential lifetime.
Thanks a lot for the suggestion. I ended up taking $2M Term LI for 20 years and wanted to invest the difference into an untouchable account for him. I am looking into WA stable able program. Love to hear suggestions from the community on what are the other options to consider as untouchable account for him.
I think that you've made a great choice in buying a 20 year term life policy.

I am not a lawyer, so I have no advice on an "untouchable account". If you don't get more replies on this thread, I'd suggest that you either (a) post a new question on the Forum titled something like "Untouchable account for disabled child" or (b) consult with an attorney in your state, who will understand the laws and practices available to you and can give you advice that you can count on. Or maybe do both, since you should want to get the best advice possible.

Best to you.
It's a GREAT day to be alive! - Travis Tritt
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3CheersforLkyJack
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Re: Need Advice on Permanent life insurance and special need trust

Post by 3CheersforLkyJack »

seattenighthawk wrote: Wed Oct 06, 2021 5:11 pm
3CheersforLkyJack wrote: Sat Sep 25, 2021 10:48 am We faced the same questions as you a couple years ago and took the approach as noted by bsteiner for our special needs son, currently age 5. Term policies for us both, 20 yr for me, 30 yr for my wife. We max all tax advantaged space, then save everything else we can for him in a separate taxable account owned by us that we consider untouchable. The special needs trust is currently setup but won't be funded until we pass.

Also look into a 529 Able. They are subject to some max balances (100k or so before benefits are reduced) and depending on the state, Medicaid can recover leftover funds if the beneficiary passes. Fortunately our state doesn't have Medicaid recovery on 529 Able accounts. They do on special needs trusts though.
Thanks a lot for the suggestion. I live in WA State. I see WA state able as an option for me.
https://www.washingtonstateable.com/
I love to know what other options I can use that is considered untouchable. is UTMA considered untouchable?
You don't want to use a UTMA. Those assets will be considered theirs when they turn 18 and will disqualify them from Medicaid and SSI until they have been spent down. That is my understanding. Basically you don't want them to own anything.
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TomatoTomahto
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Re: Need Advice on Permanent life insurance and special need trust

Post by TomatoTomahto »

3CheersforLkyJack wrote: Thu Oct 07, 2021 6:26 am You don't want to use a UTMA. Those assets will be considered theirs when they turn 18 and will disqualify them from Medicaid and SSI until they have been spent down. That is my understanding. Basically you don't want them to own anything.
I agree in principle otherwise, but I believe that the relevant age in Washington state is 21 for a UTMA.
I get the FI part but not the RE part of FIRE.
humblecoder
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Re: Need Advice on Permanent life insurance and special need trust

Post by humblecoder »

seattenighthawk wrote: Wed Oct 06, 2021 5:18 pm Thanks a lot for the suggestion. I ended up taking $2M Term LI for 20 years and wanted to invest the difference into an untouchable account for him. I am looking into WA stable able program. Love to hear suggestions from the community on what are the other options to consider as untouchable account for him.
You may get higher quality answer if you can explain what you mean when you say an "untouchable account". I never heard that term before. For the purposes of my response, I am assuming you just mean a generic account that you plan on not touching. However, if you have something else in mind, feel free to set me straight!

If you have extra money that you want to invest on his behalf, certainly an ABLE account makes sense. Money accumulates tax free, and any withdrawals on behalf of your son are tax free (similar to a Roth IRA). Keep in mind that anything over $100K in an ABLE account will be counted as assets towards your son's ability to qualify for government benefits (ex: SSI), so if this is a consideration (which I assume it is since you are setting up a SNT) be aware of that. If are using the account to "invest the difference", then it is likely that it will grow beyond that amount. Also some states (not all) can claw back any money in the account to reimburse the state for Medicaid benefits after your son dies. Again, not sure if that is a consideration.

Another option would be a taxable brokerage investment account in your name where the SNT is the beneficiary. You wouldn't get the tax free growth of an ABLE account, but it wouldn't impact government benefits if the balance is over $100K.

I would not, repeat not, keep any investment accounts in your son's name if you care about your son qualifying for government benefits. The asset threshold for SSI is very low ($2K).
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3CheersforLkyJack
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Re: Need Advice on Permanent life insurance and special need trust

Post by 3CheersforLkyJack »

TomatoTomahto wrote: Thu Oct 07, 2021 6:49 am
3CheersforLkyJack wrote: Thu Oct 07, 2021 6:26 am You don't want to use a UTMA. Those assets will be considered theirs when they turn 18 and will disqualify them from Medicaid and SSI until they have been spent down. That is my understanding. Basically you don't want them to own anything.
I agree in principle otherwise, but I believe that the relevant age in Washington state is 21 for a UTMA.
21 is probably right in our state too.
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TomatoTomahto
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Re: Need Advice on Permanent life insurance and special need trust

Post by TomatoTomahto »

3CheersforLkyJack wrote: Thu Oct 07, 2021 11:41 am
TomatoTomahto wrote: Thu Oct 07, 2021 6:49 am
3CheersforLkyJack wrote: Thu Oct 07, 2021 6:26 am You don't want to use a UTMA. Those assets will be considered theirs when they turn 18 and will disqualify them from Medicaid and SSI until they have been spent down. That is my understanding. Basically you don't want them to own anything.
I agree in principle otherwise, but I believe that the relevant age in Washington state is 21 for a UTMA.
21 is probably right in our state too.
https://finaid.org/savings/ageofmajority/
I get the FI part but not the RE part of FIRE.
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seattenighthawk
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Re: Need Advice on Permanent life insurance and special need trust

Post by seattenighthawk »

You don't want to use a UTMA. Those assets will be considered theirs when they turn 18 and will disqualify them from Medicaid and SSI until they have been spent down. That is my understanding. Basically you don't want them to own anything.
Thanks for this great advise. I did not go for UTMA for my disable kid.

I am planning to work with a estate attorney to setup a SNT and how to set aside asset for him. The advise i got so far is superb! thanks to the community.
Valuethinker
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Re: Need Advice on Permanent life insurance and special need trust

Post by Valuethinker »

3CheersforLkyJack wrote: Thu Oct 07, 2021 6:26 am
seattenighthawk wrote: Wed Oct 06, 2021 5:11 pm
3CheersforLkyJack wrote: Sat Sep 25, 2021 10:48 am We faced the same questions as you a couple years ago and took the approach as noted by bsteiner for our special needs son, currently age 5. Term policies for us both, 20 yr for me, 30 yr for my wife. We max all tax advantaged space, then save everything else we can for him in a separate taxable account owned by us that we consider untouchable. The special needs trust is currently setup but won't be funded until we pass.

Also look into a 529 Able. They are subject to some max balances (100k or so before benefits are reduced) and depending on the state, Medicaid can recover leftover funds if the beneficiary passes. Fortunately our state doesn't have Medicaid recovery on 529 Able accounts. They do on special needs trusts though.
Thanks a lot for the suggestion. I live in WA State. I see WA state able as an option for me.
https://www.washingtonstateable.com/
I love to know what other options I can use that is considered untouchable. is UTMA considered untouchable?
You don't want to use a UTMA. Those assets will be considered theirs when they turn 18 and will disqualify them from Medicaid and SSI until they have been spent down. That is my understanding. Basically you don't want them to own anything.
I believe this is precisely the situation Arthur Miller (writer of "Death of a Salesman" and other plays) got himself into. His Down's Syndrome son -- the State of Connecticut asked for its money back, when Miller died and left an inheritance. They said they were legally compelled to do so.

This is an area that is subject to state law, I believe, and needs professional advice.
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nedsaid
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Re: Need Advice on Permanent life insurance and special need trust

Post by nedsaid »

seattenighthawk wrote: Fri Sep 24, 2021 10:35 pm Hi community,
I am trying to setup a Special Need Trust for my autistic kids. To finance the SNT, considering to get an Permanent life insurance in form of IUL or UL to finance it in my absence or death.

I am new into this community and looking for advise on what is a best way to finance special need trust with close to $2M.
Best,
Dad from Seattle
You need legal advice. There are knowledgeable posters here but this is beyond what an anonymous internet forum can do for you. Lots of things to consider, there is complexity in the laws, this is not a do-it-yourself project. Good to see you are getting legal help. You might consider looking around to see if there is a financial planner who specializes in Special Needs situations like this.
A fool and his money are good for business.
Soon2BXProgrammer
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Re: Need Advice on Permanent life insurance and special need trust

Post by Soon2BXProgrammer »

nedsaid wrote: Wed Oct 13, 2021 4:56 am
seattenighthawk wrote: Fri Sep 24, 2021 10:35 pm Hi community,
I am trying to setup a Special Need Trust for my autistic kids. To finance the SNT, considering to get an Permanent life insurance in form of IUL or UL to finance it in my absence or death.

I am new into this community and looking for advise on what is a best way to finance special need trust with close to $2M.
Best,
Dad from Seattle
You need legal advice. There are knowledgeable posters here but this is beyond what an anonymous internet forum can do for you. Lots of things to consider, there is complexity in the laws, this is not a do-it-yourself project. Good to see you are getting legal help. You might consider looking around to see if there is a financial planner who specializes in Special Needs situations like this.
I have to reinforce this post.. I have a ChFC/RICP but i'm not qualified to help. I would suggest a combination of a financial planner that has a practice which is focused on special needs families or at least has the ChSNC designation: https://www.theamericancollege.edu/desi ... rees/ChSNC

One can search for ChSNC on: https://www.youradvisorguide.com/find-a-professional

However you will need to do the due diligence to make sure they are still a competent advisor that will put you and your needs first (consider a fiduciary relationship)

and/or one might investigate these planners who hold themselves out as having a practice that specializes in special needs:
https://www.xyplanningnetwork.com/?_adv ... cial-needs

--------------

Furthermore some things for you to think about... Are you trying to get some of your wealth out of your estate? I am not sure if $2m is your total wealth, or what you want to ear mark for your special needs child.

WA has an estate tax that starts to kick in after about $2m... and there is no spousal portability, so if your married, there is definite planning needed. Are you trying to use the annual exclusion to move money to your child today? i do NOT know if you can have a combination ILIT/Special needs trust.. this is something you would have to ask an attorney..

Do you have enough wealth that you can actually fund your child's trust and still provide for your spouse? or do all your money need to go to the surviving spouse then to your child? etc.

Lots of things to think through with respect to how much do you have, and how do you want it to work, and how that might play into what trust instruments to use and what investments/insurance might make sense.

Hopefully these questions can help you rationalize why you might need a comprehensive financial plan, to be able to design how you will provide for a spouse and a child, etc.
Earned 34 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
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