Parents that have children that have special needs are aware of the fact that the children will need providing when they (parents) pass away. This thought is what leads these parents into setting a special needs trust. However, most are unsure of how they will fund these trusts. In this piece, we shall look at some of the common ways to fund a special needs trust and show you why life insurance is the best possible way.
401(k) s and IRAs
Since such parents are under a retirement account such as a 401(k) or an IRA, their liquid assets might be tied to this. However, these retirement accounts are not the best to fund a trust. The main reason for this is because these accounts have never been subjected to tax, and this means that they will now be taxable just like ordinary income when withdrawals begin. Furthermore, if the trust has undistributed income that is beyond $12,000, taxes will be under the federal rate of 39.6 percent. Additionally, other taxes might come to play such as the Medicare surtax and state income taxes. On the other hand, these taxes can avoided through the distribution of income to the beneficiary. However, this could place the public benefits at jeopardy for the child with the special needs.
The more efficient ways to leave assets to a special needs trust is through IRAs and life insurance death benefits. The beneficiary will receive them income-tax free and there won’t be tax hurdles to evade.
Now, there are two types of insurance to consider when funding an SNT: universal life and whole life insurance.
A universal life policy is the right choice if the goal of the parents or guardians is to leave the child as much money as possible. However, when purchasing this policy, there are two factors to be aware of. One is the premium that is to be put into the policy annually. Two is the interest on the crediting rate.
If the goal of the parents or guardians is to come up with a significant cash value in addition to the death benefit to be used later on, whole life insurance is the better option. This policy will last the whole lives of the policy owners’ so long as the premiums get paid. Additionally, it is good for building a substantial cash value which can be accessed while the policyholders are alive.
In conclusion, the ideal life insurance to take up is the second-to-die insurance which pays out when the insured people pass. This way, the child will be catered for even after the parents pass.