Strategic Funding: Can a Third-Party SNT Own and Benefit from Life Insurance?

As a financial planner specializing in special needs planning, I am frequently asked how families can ensure their loved one’s trust remains well-funded long after the primary caregivers are gone. One of the most effective, yet often overlooked, strategies involves the intersection of life insurance and third-party Special Needs Trusts (SNTs). Specifically, many wonder if a third-party SNT can legally purchase a policy on a caregiver and name itself as the recipient of the death benefit. The answer is a resounding yes, and it is a sophisticated way to build a lasting legacy.

Understanding the Ownership Structure

In a typical third-party SNT arrangement, the trust is established using assets that do not belong to the person with a disability. When we introduce life insurance into this mix, the trust itself acts as the applicant and owner of the policy.

How the Arrangement Functions:

• The Owner and Beneficiary: The SNT (via the trustee) owns the policy and is named as the beneficiary. This means the trustee is responsible for premium payments and holds all legal rights to the policy.
• The Insured: This is usually a parent, grandparent, or another relative whose financial support is vital to the beneficiary.
• The Trust Beneficiary: The individual with a disability remains the beneficiary of the SNT itself, rather than the insurance policy. This distinction is vital for maintaining government benefit eligibility.

Plan for the Long Term: Are you concerned about how your trust will be funded in the decades to come? Click here to schedule a consultation] with a Special Needs Certified Financial Planner® to explore advanced funding strategies.

The Advantages of This Financial Design

Utilizing an SNT to own life insurance offers several protective layers for a family's financial plan.

Shielding Public Benefits

The most significant hurdle in special needs planning is the strict asset limit for programs like Supplemental Security Income (SSI) and Medicaid. Because the life insurance proceeds flow directly into the SNT rather than to the individual, these funds are never "seen" by the government as personal assets. This allows the beneficiary to enjoy a higher quality of life without losing their essential healthcare or income support.

Creating Guaranteed Liquidity

Life insurance provides a "pre-funded" inheritance. It ensures that a specific, predictable sum of money will be available to cover supplemental needs—such as specialized therapies, private caregivers, or modified housing—at the exact moment it is needed most.

Efficient Estate Planning

For many families, their primary wealth is tied up in a home or retirement accounts. Using life insurance as a tool within the SNT allows parents to leverage relatively small premium payments into a substantial future windfall for their child's care, often leaving other estate assets for siblings or other heirs.

Get Expert Guidance: Structuring an insurance policy within a trust requires technical precision. Contact our financial plannin team today to ensure your policy and trust language are perfectly aligned.

Essential Legal and Financial Requirements

While this strategy is powerful, it must be executed correctly to satisfy legal standards.

Insurable Interest

A trust cannot simply buy insurance on a random person. There must be an "insurable interest," meaning the trust would suffer a financial setback upon the death of the insured. Since the SNT is designed to provide for a beneficiary who relies on the care or financial support of a parent or guardian, this requirement is almost always met in special needs scenarios.

Trustee Power and Authority

Before a trustee applies for a policy, we must verify that the trust document explicitly grants the power to invest in life insurance. If the language is too restrictive, the trustee may be barred from using trust liquidity to pay premiums.

Professional Coordination

This is not a "do-it-yourself" project. It requires a collaborative effort between your Special Needs CFP® and your estate attorney to ensure that the policy type (term or permanent) and the trust provisions work in harmony with tax laws and Social Security regulations.

Take the First Step: Don't leave your loved one's future to chance. Reach out to a Special Needs CFP® today to build a comprehensive roadmap that includes secure, long-term funding.

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