Life Insurance in the Estate
Plan and Incapacity
Planning
Session 9
DePaul University CFP® Program
Life Insurance and Estate Planning
Objectives
 Financial protection for survivors by replacing the insured’s lost
income.

Frank bought life insurance to help ensure that his survivors
wouldn't suffer financially when he died. When Frank died and his
paycheck stopped, his family had enough money to maintain their
lifestyle and live comfortably for years.
 Replace wealth that is lost due to estate settlement expenses
and taxes.

Frank bought enough life insurance to cover the potential costs of
settling his estate, including taxes, fees, and other debts.
 Charitable giving - estate enjoys tax deduction
 Using life insurance, Frank was able to leave a substantial and fully
deductible gift to his favorite charity at death or before.
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Estate Planning
and Risk Management
A complete financial/estate plan must consider:
 income protection during the client’s earning
years
 future needs – income replacement, and
 protection of estate.



Life insurance
Disability insurance
Long-term care insurance
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3
Life Insurance in the Estate Plan
If, at death or within 3-years of death, an
individual holds incidents of ownership in a life
insurance policy under which s/he is the
insured, the entire face value of the policy is
included in the insured’s gross estate.

Incidents of ownership include:




The right to name/change beneficiaries
The right to assign ownership of the policy
The right to policy loans from cash value
The right to surrender the coverage
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Question 9-1
All of the following represent “incidents of
ownership” in a life insurance policy except:
A. The right to change the beneficiary from your spouse
to your child.
B. The right to assign ownership of your policy to an
irrevocable life insurance trust (ILIT).
C. The right to borrow from the policy’s cash savings
account.
D. The right to pay the premium.
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Term Life Insurance
Term insurance pays policy’s face amount if
insured dies during coverage period.
 Temporary protection
 Typically lowest cost when insured is
young
 Premiums generally rise as insured
ages
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Convertible Term Life Insurance
Convertible term life insurance allows changing a term policy to a
permanent policy (such as whole-life or universal life) without
penalties.
 Most term policies issued today are renewable and convertible,
allowing the insured to adjust coverage needs to changing
circumstances.
 Many young, healthy policyholders choose a convertible term
insurance policy initially because of the low cost premiums and
basic coverage.

In the future, may policyholders may decide that a cash value policy
is better suited to their financial plan.
 Conversion typically accomplished at attained age
 In some policies, owner may pay a lump sum to maintain the
original issue age premium going forward.
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First-to-Die (Joint Life) Insurance
First-to-die (joint life) covers >2 insureds,
paying benefits at the first death.
 Benefits may be used for:

Survivor income





Survivor spouse
Surviving business owners/partners
Mortgage protection
Funding business buy/sell agreements
Covering consumer and other debt
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Second-to-Die
(Survivorship Life) Insurance
Second-to-die (survivorship) life insurance covers two
lives, paying benefits at the second death




Typically used to provide funds to pay federal estate
tax on death of second spouse
May be term policy or permanent coverage
Cost:
 Greater than on a single life, but
 Lower than with two individual policies
Underwriting
 Typically less stringent than with individual policies
 May present insurance opportunity for insured in
questionable health
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Question 9-2
Which of the following statements about
second-to die life insurance is true?
A. For a couple, it is typically used to pay federal estate
taxes on the estate of the first spouse to die.
B. It is seldom held in trust.
C. An individual who would be denied coverage under
an individual life insurance policy may be covered
under a second-to-die policy.
D. A second-to-die policy is typically more expensive
than two policies on two spouses.
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Whole Life Insurance
Whole life insurance provides protection at a level
premium for the entire life of the insured. Policy
typically endows (pays face value) at age 100
 Types
 Straight whole life (ordinary life, continuous
premium life)


Premiums paid throughout insured’s life
Limited-pay whole life


Premiums limited to specific number of years
Examples
 20-pay life
 Paid-up at age 65

Higher premiums than ordinary life because later
(riskier) years must be “prepaid”
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Universal Life Insurance
Similar to whole life insurance but cost of
insurance inside the UL policy is based on
annually renewable term life insurance.
Advantages include:
 premium flexibility
 adjustable death benefits.
at the policy owner's request, subject to
insurability.

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Two Universal Life Insurance Policy
Designs
Most universal life insurance offered today
reflects one of the two benefit designs below:

Level death benefit (aka Option A)

Death benefit constant unless cash value
exceeds certain amounts
 Over certain cash value amounts, death benefit
increased

Increasing death benefit (aka Option B)

Death benefit increases to correspond with
increasing cash value
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Increasing Death Benefit Universal
Life Insurance Example
Mike is covered for $200,000 under an
increasing death benefit (Option B) universal life
insurance policy. Its cash value has grown to
$50,000.


Death benefit grows by $50,000 to $250,000
total
Thus, $250,000 will be included in Mike’s
gross estate if he holds incidents of ownership
in the policy within 3 years of his death.
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Suicide Clause
If the insured commits suicide within the suicide
period, only the aggregate premiums are paid to
beneficiary
 If insured holds incidents of ownership, only
the premium refund amount (not the death
benefit) is included in the gross estate
 Suicide period typically 2 years

Following suicide period, the death benefit is
payable even if insured commits suicide
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Question 9-3
Due to the recession, Bruno committed suicide
18 months after his $1MM life insurance policy
was issued. He had paid $30,000 in premiums.
Approximately what amount will be included in
Bruno’s gross estate?
A. $1,000,000
B. $970,000
C. $30,000
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Accidental Death Benefit
(Double Indemnity)
 The accidental death benefit rider pays
double (if double indemnity) or triple, (if triple
indemnity) if the insured’s death accidental
 Assuming the insured holds incedents of
ownership, the rider will double (or triple) the
amount to be included in the gross estate
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Simultaneous Death
The Uniform Simultaneous Death Act specifies
that, if two or more people die within 120 hours
of one another, and no will or other document
provides for this situation explicitly, each is
considered to have predeceased the other.
 The USDA, as adopted by various States,
varies from jurisdiction to jurisdiction
 The statute creates a rebuttable presumption
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Simultaneous Death
(continued)
Linda is insured under a life insurance policy.
Her husband, Alex, is its beneficiary. They are
both killed in a plane crash, dying at or near the
same time. If the policyholder named a
secondary beneficiary in the policy, that person
will receive the life insurance benefit. If no
secondary beneficiary has been named, then it
is assumed that she outlived Alex, and the
benefit is inherited through Linda’s estate.
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General Rules for Life Insurance
Inclusion in Gross Estate
Life insurance will be included in an individual’s gross
estate for federal estate tax purposes if:
 The decedent held incidents of ownership at death,
or
 The insured transferred ownership of the policy within
the three year period preceding death
 The policy’s death benefit is payable to the insured’s
estate
 Or the primary beneficiary predeceases the
insured and no contingent beneficiary exists,
making the estate the default beneficiary
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Policy Ownership by the Insured
 If it is reasonably certain that the insured’s estate will
not be taxable, the client owning the policy on his/her
own life is not problematic.
 However, if federal estate tax is likely the client
should consider alternative owners including:



The spouse
 Policy’s interpolated terminal reserve is included in the
spouse’s estate if he/she predeceases the insured
Another family member
 Typically adult children
Irrevocable Life Insurance Trust (ILIT)
 Generally the most appropriate choice
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Estate Taxation of Life Insurance on
Another’s Life
For federal estate tax, the interpolated terminal
reserve (approximate replacement value) is
includible in the estate of an individual owning a
life insurance policy under which another
individual is insured.
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Owning a Policy on an Insured Spouse
If one spouse dies owning a life insurance
policy on the other, the amount included in the
gross estate of the decedent/owner (NOT the
insured) will be:


For a term life policy, the unused premium
For a cash value policy, the interpolated
terminal reserve and the unused premium


Similar to replacement value
Insurance company provides figures
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Question 9-5
Laura dies owning a $1 million (face value) whole life
policy on her husband, Scott. It has an interpolated
terminal reserve of $160,000 and an unused premium
of $11,000. Approximately what amount, if any, is
included in Laura’s gross estate?
A. $-0- because the insured is still living.
B. $1million
C. $171,000
D. $160,000
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Income Taxation of Death Benefits
Under general rule, insurance death benefits
are received income tax free by the beneficiary
 Exception for life insurance “transferred for
value”

Death benefit less premiums paid (basis) is
taxable to the beneficiary
 Exception for corporate-owned life insurance

Gain from death benefit may be subject to
alternative minimum tax (AMT)
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Exceptions to Transfer for Value Rule
Even where the policy is acquired for
consideration, the death benefit remains income
tax free under these exceptions to the rule:
 Policy is transferred to the insured
 Policy is transferred to a partner of the
insured

May occur with buy/sell agreements
 Policy is transferred to corporation in which
insured is shareholder or officer
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The Irrevocable Life Insurance
Trust (ILIT)
Estate taxes on insurance proceeds may be
avoided by creating a properly executed
irrevocable life insurance trust ILIT.
 May include policies on one life or second-to
die policies
 With a married couple, the second-to-die
policy is popular due to the marital deduction


taxes only due at the second death
less costly than two separate policies.
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ILIT May Be Funded or Unfunded
 An ILIT may be funded

Other income producing assets are transferred
to the trust to generate money for the premium


Income is taxed under grantor trust rules
Transfer of assets triggers gift tax consequences
 Or, an ILIT may be unfunded

The grantor makes gifts so trustee can pay the
premiums


Annual gift tax exposure
Usually avoided using Crummey powers
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Paying the Premiums
Although though the ILIT owns the policy, the
grantor can still (and typically must) pay the
premiums.
 The grantor can annual make gifts of cash to
the trust, and the trustee can use this money
to pay policy premiums.

Even with Crummey powers, gifts in excess of
$13,000/beneficiary power holder are taxable
gifts.
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Giving Up Control
If your trust purchases and owns the policy(s),
the grantor typically has no right to change the
beneficiary or borrow from/against the policy.


The grantor names the beneficiaries of the
trust and the trust/policy owner is the
beneficiary of the proceeds.
Because the ILIT is irrevocable, the grantor
would typically not serve as trustee,
eliminating any potential incedents of
ownership.
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Transferring Current Policies
A grantor can transfer ownership of a policy he
owns to an ILIT in order to shield the proceeds
from estate taxes.
 This is a taxable transfer.
 Grantor’s death within three years of transfer
forces gross estate inclusion of proceeds.
 If the proceeds increase the value of the
estate to more than $5.12 million tax will be
due.
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Beneficiaries Can Still Enjoy
Proceeds
When the ILIT receives the death benefits from
its policy(s) at the insured grantor’s death, thay
are income and estate tax free. The trustee
may:
 Distribute funds beneficiaries
 Use funds to provide estate liquidity
Purchase assets from estate
 Usually no gain due to basis step-up
 Often trustee of ILIT is also executor of estate

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ILIT Example
Robert and his wife Sally accumulated a small real
estate empire throughout California, including a Lake
Forest home ($4,000,000), a vacation home in Lake
Tahoe ($2,120,000) and three rental properties in
Hawaii (together worth $5,500,000). Robert’s liquid
assets were mostly spent by the end of his life,
amounting to $150,000. Sally has died and Robert has
not remarried. $6 million of the estate will be subject to
the federal estate tax at a rate of 35% and Robert’s and
Sally’s children, Peter and Ruth, will not have sufficient
cash to cover the bill unless they sell off some of the
properties.
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ILIT Example (continued)
Robert establishes a qualifying ILIT, funding it with an
insurance policy, and naming his children, Peter and Ruth,
as remainder beneficiaries of the trust. Robert makes gifts
to the trust covered by his $13,000 annual gift tax
exclusion times the two beneficiaries, who each hold a
Crummey power. The gifts are used to pay the policy
premiums. When Robert dies, the proceeds of the life
insurance policy are received by the trustee estate taxfree. The trustee then purchases one or more parcels from
the estate. There is no (or little gain), the estate has cash
and the children are beneficiaries of the trust which hold
the transferred property.
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Question 9-6
Most irrevocable life insurance trusts:
A. Name the grantor as trustee
B. Are designed to keep life insurance proceeds
out of the insured owner’s gross estate.
C. Testamentary
D. Asset free until death.
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Gifting One’s Policy
Under the three rule, even gifts of life insurance to a
spouse must be included in the donor’s gross estate if
they are made within 3 years of death.
Example: Sharon dies within two years of transferring
ownership of a life insurance policy (under which she is
the insured) to her husband, Jerry.
 The FACE VALUE of the policy must be included in
Sharon’s gross estate.


Offset by marital deduction if Jerry is the beneficiary
Same result where policy is gifted but insurance
company was not notified of the change in ownership.
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36
Business Buy-Sell Agreements
Death or disability of a business owner or
partner may jeopardize continuation of that
business. Often the optimal plan is for the
surviving partner(s) or shareholder(s) to buy the
business interest of a deceased or disabled
partner.
 Contractual agreement sets terms for both
buyer(s) and seller(s)
 Purchase can be funded by


Life insurance (common)
Other assets
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Two Types of Buy-Sell Agreements
Buy-sell agreements are typically designed as
either:
 Cross purchase arrangements

Individual owners purchase life insurance on
one another

Cumbersome with many owners/partners
 Entity (stock redemption) arrangements
 Entity owns life insurance on major
shareholders (or partners)


Typically, closely held corporation
One policy per insured shareholder/partner
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Advantages to Buy-Sell Agreements
Properly designed buy-sell agreements typically
provide the following advantages:



Higher probability that business will continue
Ready market for business interests
Liquidity for



Disabled owner’s expenses
Deceased owner’s estate tax and expenses
Establishes value for decedent’s estate

If reasonable
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Cross Purchase Buy-Sell Example
Hugh, Sue, and Stu own Taco Swell, a chain of
fast food restaurants recently appraised to be
worth $3,000,000. Under a cross purchase
arrangement, they would own life insurance as
follows:
Owner
Insured
Insured
Hugh
$500K on Sue
$500K on Stu
Sue
$500K on Hugh $500K on Stu
Stu
$500K on Hugh $500K on Sue
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Stock Redemption (Entity Purchase)
Buy-Sell Agreements
 Under a stock redemption (entity purchase)
agreement, the business (typically a
corporation) agrees to purchase a deceased
(or disabled) owners’ interest(s) in the
business.
 The business owns and is beneficiary of the
life insurance policies funding the agreement
 May be best arrangement when > 3 owners
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Tax and Other Implications to Stock Redemption
(Entity Purchase) Buy-Sell Agreements
 Premiums are not deductible to business
 Death benefits not taxable to business as beneficiary
 However, benefits may be exposed to corporate
alternative minimum tax (AMT)
 Remaining owners receive increased business value
 No step up in basis to remaining owners
 Life insurance can be attached by business creditors
 Transfer for value exposure if policies sold to parties
other than the insured
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Death-Activated Buy-Sell Agreement
Example
Red signed a buy-sell agreement before his
death. His interest in the business was
appraised at $1,000,000. His basis in the
business is $100,000.


When Red dies (assuming agreement remains
in force), business (or partners) buy Red’s
interest from his estate for $1,000,000
Red’s estate enjoys full step up in basis


Avoids $900,000 capital gain
$1,000,000 in Red’s gross estate

Possible estate tax exposure
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Transfer for Value Exposures with
Buy-Sell Agreements
If the business closes, eliminating the need for
insurance policies on others, individuals can
purchase the life insurance policies.
 If owners purchase (or exchange) policies, thus
owning insurance on lives of others, transfer for value
occurs
 Death benefits then taxable at ordinary rates
 If owners purchase policies on their own lives
exception from transfer for value rules applies

Death benefits remain nontaxable (income tax)
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Question 9-7
Jack and Mack, both married, own Jack and Mack’s
Landscaping. They enter into a cross purchase buy/sell
agreement funded with life insurance. How should their
policies be owned?
A. Jack owns on Mack’s life and vice versa.
B. Jack and Mack’s Landscaping owns the policies on its
two owners.
C. Jack and Mack’s spouses own the policies respectively.
D. The policies are not considered “owned” for purposes of
the buy/sell agreement.
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Key Person (Key Employee) Life
Insurance
A business may own life insurance on the life of
one or more key employees
 Business has insurable interest due to:


Possible lost income on key person’s death
Possible increased expenses due to key
person’s death
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Estate Tax Implications of
Key Person Life Insurance
In a key person life insurance arrangement, the
owner of the policy is the employer, who names
itself beneficiary of the policy’s proceeds.


Thus no amounts attributable to the policy
covering the insured employee is includible in
that employee’s gross estate.
Proceeds will increase stockvalue.
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Incapacity
Incapacity describes the inability to engage in
legal matters (contracts, generally) due to lack
of intellectual or physical ability.
 An incapacitated person may be legally
incompetent.
 Minors lack capacity to contract

This means that a contract is voidable by the
minor – not by the other party
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Powers of Attorney
Incapacity planning may be addressed through
powers of attorney for property or for health
care.
 A power of attorney is a written document
under which an individual, known as the
principal, empowers another adult, known as
attorney-in-fact, holder of the power, or agent,
to act on that principal’s behalf.
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Durable versus Nondurable Powers of
Attorney
 A nondurable power of attorney becomes
invalid upon the incapacity of the principal.

Thus ineffective for incapacity planning
 A durable power of attorney survives the
principal’s incapacity


Principal must be competent when DPOA is
executed
Power holder called “attorney-in-fact” or
“agent”
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Powers Terminate on Death
Whether durable or nondurable, powers of
attorney become invalid upon the death of the
principal.


At this point the executor (if one is named)
takes over
Often the same individual is named to both
fiduciary offices.
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Question 9-8
The intent of making a power of attorney
“durable” is to:
A. Make it last beyond the death of the
principal.
B. Name successor attorneys-in-fact.
C. Make it valid through the principal’s
incapacity.
D. Make it limited to financial matters only.
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Durable Power of Attorney for Health
Care (DPOAHC)
A durable power of attorney for health care
(DPOAHC) empowers an attorney-in-fact to
make a variety of health care decisions for a
principal unable to make such decisions for
him/herself.


DPOAHC may be immediately effective but
will only be honored if principal is unable to
communicate his or her wishes
DPOAHC generally a document separate from
property/financial-related powers of attorney
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Durable Power of Attorney for
Property
The durable power of attorney for property can
be designed to empower the attorney-in-fact
immediately or only upon the incapacity of the
principal (a springing power).
 Such powers typically enable the attorney-in-fact to:




Buy, sell or lease the principal’s assets
Collect debts on the principal’s behalf
Sue on the principal’s behalf
Operate the principal’s business
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Powers of Attorney
Transfer and Tax Functions
Under a power of attorney, the attorney-in-fact may:
 Make gifts to members of the principal’s family to
accomplish
 Estate equalization with spouse
 Maximization of annual gift tax exclusion(s)
 Create living trusts to benefit principal and principal’s
family
 Transfer principal’s property to a previously
established living trust
 Sign joint tax returns (with spouse) on principal’s
behalf
 Exercise special powers if appointment
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General versus Limited
Powers of Attorney
 General powers of attorney (durable or
nondurable) authorize the attorney-in-fact to
act on the principal’s behalf in all legal and
financial matters
 Limited powers of attorney authorize the
attorney-in-fact to perform only certain acts or
control specified property

Example: Trading authorization for a
brokerage account is a limited power of
attorney addressing that account only
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Springing Power of Attorney
A springing power of attorney authorizes the
agent to act on the principal’s behalf only if the
principal becomes incompetent/ incapacitated.


Possibly appropriate in circumstances the
where principal wishes to maintain control as
long as s/he is able
Can be problematic if principal fails to
communicate intent to agent or POA fails to
identify what constitutes incapacity
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Question 9-9
What is the most likely reason why Elizabeth
made her power of attorney a “springing”
power?
A. She wants to control her own affairs presuming she
is able to do so.
B. She wants the power of attorney only to activate
upon her death.
C. She wants her power of attorney to be revocable.
D. All the above.
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Advance Medical Directives
Living wills and durable powers of attorney for
health care direct physicians and hospitals as to
the medical choices of the principal and should
be part of a clients’ estate plan.
 Living will addresses life-ending decisions only
Example: Unplug the respirator
 Durable powers of attorney for health care grant
broader powers
 Example: Surgical authorization for patient unable
to communicate by speech or writing

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Guardianships/Conservatorships
Guardians and conservators are persons appointed by
the Court for a ward when the Court determines that
one of the following circumstances exists:
 The ward is a minor (less than 18 years old)
 The ward is mentally ill, as evidenced by the opinion
of a qualified physician
 The ward is mentally retarded, as certified by a
qualified physician
 The ward, because of excessive drinking, gambling
and the like, wastes or lessens his estate, commonly
called a "spendthrift."
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Guardian/Conservator of the Person
A second individual may be appointed to
represent an incompetent (the ward). The
guardian of the person is responsible for the
ward’s daily well being and addresses such
matters as the ward’s:
 Living situation
 Medical care
 Food and clothing
 Etc.
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Guardian/Conservator of the Estate
The guardian of the estate is responsible for the ward’s
financial well being and addresses such matters
including:
 Pay the ward's debts
 Represent the ward in all lawsuits
 Control and manage the ward's property
 Invest the ward's funds
 Collect funds due the ward
 Support the ward and his family from the ward's
funds
 Sell, lease or mortgage the ward's property, given
Probate Court approval
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Question 9-10
The ultimate supervisory responsibility in
conjunction with a guardianship/conservatorship
rests with:
A. The guardian
B. The family of the ward
C. The court
D. The trustee
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Revocable Trusts
for Incapacity Planning
While most transferors select themselves as
trustees of their own revocable living trusts, a
successor trustee should be named to succeed
the grantor as trustee in the event of incapacity
 The trust should set forth the criteria for
determining incapacity
 Named successor should have a copy of the
trust document

Also, ideally, a current statement of accounts
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Revocable Trusts versus Powers of
Attorney
For incapacity planning, the living revocable
trust has two advantages over the power of
attorney:
 The trust continues beyond death

Facilitates orderly post mortem transfer

Probate avoided for property actually titled in the
name of the trust
 Trusts are universally honored

Acceptance of power of attorney documents
may vary from State to State
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Medicaid
Medicaid is a federally-funded, state-run program that
provides medical assistance to individuals and families
with limited assets and resources. Each state sets its
own guidelines regarding eligibility and services.
 In most states Medicaid is not available to individuals
owning >$2,000 in assets.
 Medicaid pays for:
 Health care costs, including doctor's visits
 Long-term care, including custodial care
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Lookback Rules Impact Eligibility
The Deficit Reduction Act of 2005 increased the
Medicaid look-back period to 5-years. Thus, asset
transfers for less than FMV within the 5-year period
before an individual applies to Medicaid for long-term
care assistance will reduce benefits. Example:
 Within the previous 5-years, Grandpa gifted $40,000
to various family members. If the average nursing
home cost in Grandpa’s state is $4,000 per month,
Grandpa is denied 10 months of Medicaid nursing
home assistance.
 Had Grandpa gifted $400,000, he would be denied
100 months of Medicaid long-term care
assistance.
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Medicaid Home Equity
Eligibility Rules
Any individual with home equity above
$500,000 is now ineligible for Medicaid
 Exception where applicant’s spouse resides
in the home or the home is occupied by a
child under age 21, blind or disabled
 States may raise the threshold to up to
$750,000.
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Medicaid Eligibility and Annuities
If a Medicaid applicant has any interest in an
annuity, the purchase of the annuity will be
treated as an uncompensated transfer subject
to a penalty period unless the state is named as
the primary remainder beneficiary for at least
the total amount of medical assistance paid for
on behalf of the Medicaid applicant

Or the state is named as the contingent
remainder beneficiary after the community
spouse or minor or disabled child.
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Medicaid and the Community Spouse
Federal law does not require that a married
couple impoverish themselves before one
spouse may gain eligibility for Medicaid.
 Instead, the spouse of a Medicaid enrollee, called a
“community spouse,” is entitled to a specific portion
of the combined income and assets owned by the
couple.
 Generally, a community spouse is entitled to half of
the couple’s combined resources (up to a maximum),
and at least a minimum amount of the combined
monthly income.
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Question 9-11
Medicaid rules would be least likely to require
that:
A. The community spouse hold assets of no more than
$2,000.
B. The recipient’s assets and income fall below stated
thresholds.
C. Assets given away within five years of applying for
Medicaid benefits may jeopardize such benefits.
D. The recipient must be unable to complete certain
ADLs in order to receive long-term care benefits.
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The Special Needs Trust
A special needs trust (SNT) is a means to leave money
to a disabled family member, without interfering with
public benefits such as Medicaid or Social Security
Disability benefits.
 The most common special needs trust is a familytype trust, set up by the parents. The parents fund
the money for the trust, often by will, and sometimes
using life insurance payable to the trust.
 In most cases, the disabled child/beneficiary has a
discretionary life interest. After the beneficiary’s death
the remainder passes to other family members.
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Maintaining Benefit Eligibility
The key to a family-type special needs trust is
that the money CANNOT be used for housing,
food, or clothing. Those are considered "basic
needs" under SSI and Medicaid laws.
 If the disabled person is receiving free
housing, food or clothing from a family
member or a trust, government benefits will
be reduced or eliminated.
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Appropriate Special Needs Trust
Design
The trust can be used to purchase a home, and
perhaps rent it to the disabled person.
 The trust can pay for repairs, utilities and taxes for a
home; it can purchase furnishings for the home.
 The SNT can pay for vacations, summer camp, or
trips. It can buy bowling shoes or other sporting
equipment.
 The SNT can pay medical costs not otherwise
covered by Medicaid, such as vitamins.
 It can pay for funeral and burial costs.
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The Payback Trust
A court-ordered trust, also called a “Type A” or
“Payback” special needs trust, is appropriate where the
disabled person has inherited money, or received a
personal injury settlement.
 Because the disabled person “owns” the money,
the trust is a grantor trust.
 The disabled person must be under 65 years old
and meet the medical standards of Social Security
disability.
 The trust must require that, at the disabled
person’s death, remaining assets will first
reimburse the State for assistance it provided to
the disabled beneficiary
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