The Hidden Risk: Beneficiary Designations

Private retirement savings plans, like IRAs and 401(k)s, have become the main way for American families to save for retirement. But parents of children with special needs need to be vigilant when signing up for a retirement plan or company life insurance program.

Naming Beneficiaries for Retirement Accounts

Most retirement accounts allow the owner to choose a designated beneficiary to receive the funds in the account if the owner dies. This beneficiary designation is especially useful because it allows the funds to pass to heirs without the cost and hassle of probate. Account owners can name a primary beneficiary who is first in line, and a contingent beneficiary who would receive funds if the primary has died or refused the account.

How Beneficiary Designations Can Cause Complications in Special Needs Families

Problems arise when parents name account beneficiaries before having a child with special needs. The retirement account grows over time, but the owner never revisits the beneficiary designation. Many years later, when the account owner dies, the old designation creates havoc for the child with special needs.

For instance, if an employee designates their $200,000 IRA to their children equally and one child has special needs receiving SSI, Medicaid, or housing assistance, that child’s $50,000 share could compromise their access to benefits. Given the strict asset limits for many government programs, even a few thousand dollars can lead to the loss of health insurance worth far more.

Potential Solutions

The easiest solution is to avoid class designations and specifically name beneficiaries, not including a relative with special needs. The drawback is that the child with special needs loses their inheritance.

A better option is to create a special needs trust and name it as a designated beneficiary. If properly drafted, the SNT can receive retirement funds without negative income tax implications, and the funds will assist the person with special needs without compromising their benefits.

Employer-sponsored life insurance carries the same concerns. However, life insurance can be a great option for funding a special needs trust — it provides a relatively low-cost way to guarantee a much larger benefit. Consider naming a special needs trust as the primary beneficiary of your company life insurance policy.