Can a Third-Party SNT Be a Life Insurance Beneficiary?

Yes, a third-party special needs trust (SNT) can purchase a life insurance policy on another individual and name itself as the beneficiary. This is a common and effective strategy for funding the trust's future.

Understanding the Strategy

This arrangement is a legitimate way to provide for a disabled loved one’s future financial needs without jeopardizing their eligibility for essential government benefits like Supplemental Security Income (SSI) and Medicaid. Here’s how it works:

1. The Parties:
   • The SNT (trustee). The SNT is the policy owner and beneficiary. As the owner, the trustee of the SNT has the legal authority to apply for the policy, pay the premiums, and manage the policy.
   • The insured. This is the person on whose life the policy is taken out, typically a parent, grandparent, or another family member. The insured is not the beneficiary.
   • The beneficiary. The SNT itself is the beneficiary of the policy.
   • The disabled individual. This person is the beneficiary of the SNT, not the life insurance policy directly. The life insurance proceeds go to the trust, which then uses the funds to benefit the disabled individual.
2. The Purpose: The primary goal is to provide a future source of funds for the trust. When the insured person passes away, the life insurance death benefit is paid directly to the SNT. These funds are not considered income or an asset to the disabled individual, so they do not affect their eligibility for Medicaid or SSI.

Benefits of This Approach

• Protects government benefits. The most significant advantage is that the proceeds from the life insurance policy go directly to the SNT, not to the disabled individual. This ensures that the disabled person’s assets and income remain below the strict limits required for government benefits.
• Funds the trust. Life insurance provides a predictable and substantial funding source for the SNT. This allows the trust to cover future expenses for the disabled individual that are not covered by government benefits, such as private medical care, therapy, entertainment, or housing costs.
• Estate planning. It’s an excellent estate planning tool. Instead of leaving assets directly to a disabled child (which could disqualify them from benefits), parents can use a life insurance policy to ensure a steady stream of funds is available for their child’s care through the SNT.

Important Considerations

• Insurable interest. The SNT must have an “insurable interest” in the life of the person being insured. This is a legal requirement that means the SNT would suffer a financial loss if the insured person died. In this scenario, because the trust is dependent on the person’s contributions for funding, the insurable interest exists.
• Trustee authority. Ensure the SNT’s trust agreement explicitly grants the trustee the authority to purchase life insurance and manage it as a trust asset.
• Professional guidance. Setting up this kind of arrangement is complex. It’s crucial to work with an experienced special needs planning attorney or a financial advisor specializing in special needs planning to ensure the trust and the insurance policy are set up correctly according to state and federal laws.