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Special Needs Children and the Beneficiary Designation Trap

In a recent blog, we discussed a vital planning tool for families caring for a child with special needs– the Special Needs Trust. In this blog, we’ll focus in on one of the many potentially thorny issues facing parents of special needs children that can be solved by use of a special needs trust. It is important to know how to direct private retirement savings plans such as 401ks and IRAs, annuities and other tax-deferred savings vehicles and the death benefits of life insurance policies, to your special needs child at your death without negatively affecting his or her receipt of public benefits.

It’s a common misconception that assets in retirement plans pass under your Will, and that if you have a Special Needs Trust in your Will you have protected your child’s benefits.  The reality is that assets in these types of retirement accounts do not pass under your Will at death, but rather are distributed according to the beneficiary designations that you have made with the account administrator. The same is true for assets held in annuities and death benefits paid by insurance policies.

If a child with special needs is the designated beneficiary, the child will inherit the assets outright,and those funds may compromise the child’s access to greatly needed public benefits, such as Supplemental Security Income, Medicaid or Affordable Housing.  You can use a Special Needs Trust can eliminate this problem by naming the trust as your designated beneficiary.  If correctly drafted, the trust can receive these monies without negative tax implications while also ensuring that the child remains eligible for his/her public benefits.

If you are planning for a special needs child, be sure to review your beneficiary designations with your estate attorney – and make any changes necessary to protect your child’s inheritance and future benefits. For more information on any aspect of special needs legal and financial planning, please contact Timoney Knox LLP.

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