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update: I may not have explained it clearly in my post below but I don't believe the intent is to close out the 401k or fund the life ins. policy using it. I will clarify with the consultant what the 401k proposal involves.

update 2: confirmed the 401k is a rollover and not a taxable event. Also, the universal policy was recommended due to a term policy not having survivorship

I have a couple special needs kids. My partner recently attended a seminar about setting up a Special Needs Trust for the kids so they have money to cover medical expenses when both of us die. The guy giving the seminar works in the insurance business and offered to do free consulting to help us get our finances in order. We've not signed anything yet.

We've met with him a couple times. The direction he thinks we should go is set up a SN trust and buy a universal life insurance policy to fund the trust. Is this a standard practice?

I've got around $50k in an old 401k account which I've not touched in over a decade. He is recommending that be moved into something to do with Morning Star involving a 404A5 form I need to fill out and bring to him at our next meeting. The 401k is basically allocated 30% High Risk and 70% stable return. both of us are in our late 40s.

I have very little knowledge on these subjects. I've tried to do some research on the topics we've covered but it's an abyss. Between working full time, and crisis mgmnt with the kids, I have very little cognitive function left by the end of the day to do little more than exhale.

I don't know enough about the subject to be comfortable making a decision right now. My partner would like things to already be done and in place. What kinds of questions should I be asking the consultant? Does any of this sound like a reasonable path to take for special needs financial planning? Thanks for any info. It's really appreciated.

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    Do not fill out that 404A5 form. Without actually seeing it, I suspect that it is you approving the move of that 401K money from its current tax-sheltered status to a new tax-sheltered status --- transitioning through a non-sheltered option while the advisor takes his cut. That form is you agreeing that he takes his cut. (Basically I agree with Pete B.'s answer: great that you're in a position and thinking about this, not so great on what this guy is suggesting, given the lack of detail).
    – Peter K.
    Commented Feb 27, 2018 at 13:57
  • The person's entire purpose is to make money. All the money he will make will come from one source. That source, is you. He is literally a salesman. That's it. Proceed with extreme caution. Sign nothing.
    – Fattie
    Commented Feb 27, 2018 at 14:25
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    "offered to do free consulting" usually if something is free, you're the product.
    – Dan C
    Commented Feb 28, 2018 at 0:53
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    Using life insurance to fund the trust seems like a poor choice, devised by someone who sells life insurance. I have two concerns: 1. What about the possibly lengthy period of time during which your children require support, but you are too advanced in age to provide it? 2. Life insurance is expensive. In my experience, the fees of the policy in its later years are often hidden while they grow slowly for 20-30-40 years.
    – Glen Pierce
    Commented Feb 28, 2018 at 3:38
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    @PeterK. the 404A5 seems to be a form allowing disclosure of the fund allocations but I've not been able to find it online yet to review it. Still looking. And yeah, we've not ruled out the guy may not have our best interests in mind.
    – Rich J
    Commented Feb 28, 2018 at 11:28

2 Answers 2

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The special needs trust is a great idea for children like yours, and if you have the financial means then it most certainly should be done.

Suggesting that you withdraw money from a 401K to fund a universal life product is nearly criminal. Run from this person. The tax implications are enormous. However, he will make a nice fat commission.

I would advise you to roll this 401K into your current 401k or better yet a rollover IRA opened with Fidelity, Schwab or Vanguard. This money means something.f Not that many households (in the US) have that much saved for retirement. Withdrawing it now will reduce the balance by 40-50%.

You should fund the trust with term life insurance. It is very inexpensive for people that are young and healthy. You can buy a 20 or 30 year policy that will have premiums remain the same during that time. Then you can invest in good growth stock mutual funds from current income in the event you or your partner do not die prematurely. This will not make a salesman rich, but it will do the job of properly funding the trust(s).

Starting and having a plan for funding the trust is a great idea. Doing it in the way this dope suggested is terrible for you and your children.

BTW you are very wise to ask this question.

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    I don't see anywhere in the OP that the advisor is recommending closing out the 401k to fund the life insurance policy. Using universal life is actually a common recommendation for funding a special needs trust as far as I can see. Using term life is fairly risky if the OP survives the term and is not diligent in setting aside the additional money to fund the SN trust through a different mechanism.
    – Eric
    Commented Feb 27, 2018 at 13:54
  • @Pete B we are both in good health so far (non smokers). My understanding is the universal policy builds equity which is used to fund the trust. A term policy does not. Is this correct?
    – Rich J
    Commented Feb 28, 2018 at 3:04
  • My current employer only offers a 403B. I've read that the best option would be an IRA rollover but since it's not employee sponsered, I have to pay the tax on the 401k in order to do it. IIRC, the cost of paying the tax to move it was prohibitive since we didn't have the cash to do it.
    – Rich J
    Commented Feb 28, 2018 at 12:15
  • @RichJ investing with insurance companies tends to be a very poor decision, please search this site or others. Term insurance is just insurance, and about 1/10 the cost. Much like auto insurance, the money is gone if you do not make a claim, but that is okay. You really don't want to make a claim on Life Insurance. :^) Invest with a brokerage firm, and buy term life insurance. Sorry about the misunderstanding about the 401K. Just roll it over.
    – Pete B.
    Commented Feb 28, 2018 at 13:23
  • @RichJ: rollovers from 401k to IRA in same status (trad 401k to trad IRA and Roth 401k to Roth IRA) are not taxed. Employee 'sponsership' is completely irrelevant. If you don't do a 'direct' aka 'trustee-to-trustee' transfer, the sending trustee withholds for tax because they can't assure the transaction status; you get that unneeded withholding refunded but only when you file your tax return, which for a transaction now you would wait a year maybe more. It is conversion of trad to Roth, in either 401k or IRA, where you actually owe tax.
    – dave_thompson_085
    Commented Mar 1, 2018 at 2:32
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From my own research, a special needs trust is on the expensive side if you don't have much money to put into it. One common option seems to be to fund it with your estate if you pass on or with any inheritance you may receive from other family.

A newer option that you might look into and discuss with the planner is opening a 529 ABLE account. This is similar in spirit to a 529 account for education, but is an account designed for those with special needs. It is gradually being rolled out by states now. Many states are running the same program so there are about 4 or 5 different options to choose from right now.

The upside to these accounts is that they are a bit more flexible and they don't impact Medicaid eligibity. If the balance is over $100k, they can impact the ability to receive SSI, but Medicaid eligibility is not impacted. There also usually lifetime maximum contribution limits around $350k so they may not represent a full solution. I went with the TN ABLE option as it has low fees and good investment options.

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