Very often, the use of estate planning tools (especially wills and special needs trusts) coordinated with some form of life insurance (second to die insurance or individual life insurance) provides a simple and easy to implement solution to filling the legal and financial gaps that will arise upon the death of one or both parents.
An interview with our own Cynthia Haddad by Next Avenue, offers tips about special needs planning and specifically about second to die life insurance.
Tips on Last-to-Die Policies from Next Avenue:
Haddad offers some pointers on what to look for when funding a second-to-die insurance policy:
- Parents should make sure their own policies and retirement planning are in good order. “Put on your own oxygen mask first,” she says. “You have to take care of Mom and Dad first.”
- Make sure ownership of the assets and beneficiary are properly allocated. She recommends naming a contingency beneficiary to the trust so that any leftover funds would go to that designee.
- If the adult child is living at home and paying a “fair share” rent to the parents (perhaps from SSI income), this money can potentially be used to pay for the last-to-die policy since the parents are acting as de facto landlords. “They have that money to use however they want,” says Haddad. “It could be used toward the premium for second-to-die life insurance.”
- Be sure to factor in the cost of the annual premium as part of your retirement planning. “You can handle it now,” she says, “but maybe not when you’re retired. Watch what you’re doing.”
- Buy what you can afford. If money is no object, Haddad advises looking at the child’s lifestyle — where he will live, what kind of caregiving needs he might have, where he will work — and running a financial accounting out for his potential lifetime. If the trust includes owning a house, account for potential upkeep. Remember: any leftover trust funds, assuming it’s a third party trust, could potentially go to the other siblings if they are named as contingency beneficiaries. “It can take out of the equation why are Mom and Dad leaving more money to Johnny,” she says. “Everybody else still gets their inheritance.”
- Build a team to carry on. “Mom and Dad do a lot,” Haddad says. “When they’re gone, it takes more than just one or two people to replace them. Who’s handling all that day-to-day stuff?” she says, noting that sometimes siblings don’t want to be trustees. “Make sure there is enough to pay for professional trustees, professional guardians.”
- Work with financial planning and insurance specialists. “You don’t go to your primary care physician for a cancer issue. You need to go to cancer specialist,” Haddad says. “You’re ratcheting up your need for special advisers. You want to know you’re working with people who understand your child’s unique needs more than you do. It’s a different world you’re entering in.”