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Is a special needs child the beneficiary to your life insurance?

If so, you risk denying your child access to government benefits and programs he or she needs in order to thrive after you pass away. The government could reduce or deny benefits to a special needs child who owns more than $2,000 in assets for a significant period. Instead, you should make a special needs trust the beneficiary of the policy and name your child as the beneficiary of the trust.

How does a trust protect my child's access to benefits?

The special needs trust actually owns the life insurance policy, along with any other assets in the trust, not your child. In fact, any assets that you want your special needs child to inherit should be held by the trust. This keeps your child's assets below the required threshold. Make sure that any other family members or friends who want to make bequests to your child understand that a direct inheritance could jeopardize your child's right to benefits. Instead, let them leave your child's inheritance to the trust.

Furthermore, the trust protects the assets from creditors, financial predators and lawsuits. The trust pays certain expenses allowed under Texas and federal law, such as transportation, education and rehabilitation. Other allowed expenses include computers, dental and medical care not already covered, and home health aides. This list does not encompass all allowed expenses but gives you an idea of how the trust works for and protects your child.

What type of special needs trust does my child need?

That depends on your child's needs and your wishes. Three basic types of special needs trusts exist:

1. A third party settled trust remains the most common type of special needs trust because of its advantages. It allows the child to continue to receive government benefits. The trust then pays for expenses associated with his or her quality of life.

2. A disabled adult might create his or her own trust (a self-settled trust). This allows him or her to continue receiving government assistance during life. However, upon death, any assets remaining in the trust could end up serving as repayment for that assistance.

3. A general support trust provides all of a special needs child's support. Unfortunately, it also disqualifies your child for government benefits.

Who serves as trustee of a special needs trust?

Like any other trust, you choose who serves as its trustee. This remains a crucial element of any trust, but perhaps more so in the case of a special needs trust. You must trust whomever you choose without question. The trustee essentially controls the purse strings, and you want to ensure that person wants the best for your child and understands your intentions.

Moreover, undertaking the future care of a special needs child or adult requires dedication, compassion and commitment. Make sure that the person you choose fully understands his or her duties as trustee.

Finally, this article only touches the surface regarding these trusts. Special needs trusts must meet certain legal requirements in order to remain valid. An improperly drafted or executed trust could jeopardize your child's future and access to benefits. Therefore, it would be a good idea to consult with an attorney who understands the requirements of a special needs trust and routinely prepares them.

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