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Sep. 28 2021

Leaving an IRA to a Special Needs Trust Is No Longer Such a Bad Idea

By Steve Elville | Posted in Estate Planning | Comments Off on Leaving an IRA to a Special Needs Trust Is No Longer Such a Bad Idea

By: Stephen R. Elville, J.D., LL.M. – Managing Principal and Lead Attorney – Elville and Associates, P.C.

The SECURE Act, passed at the end of 2019, changed a number of rules regarding inherited IRAs, making it more difficult for most beneficiaries to save on taxes by “stretching” distributions over many years. However, an exception to the new rules potentially changes advice that special needs planners often give clients, and leaving an IRA to a special needs trust is no longer such a bad idea.

For many reasons, it’s usually not advisable to make an individual with special needs the beneficiary of an IRA or 401(k) plan (i.e., leaving an IRA to a special needs trust). She may not be able to manage the funds, and owning the account may render her ineligible for vital public benefits. This is why planners always recommend that parents with children with special needs leave their share of their estates in a special needs trust for the child’s benefit. But parents are often encouraged to leave their retirement plans to other children, if any, because holding a retirement plan in a special needs trust gets complicated.

Why a SECURE SNT Can Save in Taxes

But in light of the SECURE Act’s new rules, this advice may no longer apply, especially in the case of people with larger retirement plan accounts. Under the terms of the SECURE Act, most people who inherit retirement plans now must withdraw all the funds, and pay income taxes on them, within 10 years of inheriting them. One of several exceptions to this rule is recipients who are disabled. They can withdraw the funds over their life expectancies, which can be several decades, both postponing tax payments and potentially paying at lower rates for two reasons.

First, by spreading out the withdrawals over many years, the withdrawn funds are less likely to push the recipient into a higher tax bracket. Second, a beneficiary with a disability is likely to be in a lower tax bracket in the first place than a non-disabled beneficiary.

Happily, the new law states that the retirement plan owner can designate a SNT as the beneficiary, and the trustee can use the required minimum

distributions to pay for the care and support of the person with special needs. Leaving an IRA to a special needs trust is now a viable option.

For these reasons, it may well make more sense for some people to have some or all of their retirement plans payable to a special needs trust for their children or grandchildren with special needs, including leaving an IRA to a special needs trust. It’s still more complicated to make use of a trust, but now the benefits of doing so are more likely to justify the added expense and complications. Whether it makes sense in your case depends on your exact situation.

Review Your Existing SNT

You should also be aware that if you have an existing special needs trust that was designed to accept retirement plan benefits, it needs to be updated to conform with the SECURE Act. Whether you have questions about your existing plan or would like to consider creating a SECURE special needs trust, contact your special needs planning attorneys at Elville and Associates. Through their educational approach to planning, they’ll counsel you on the best approach for you and offer peace of mind along the way. You can also reach out to the firm’s Legal Administrator, Mary Guay Kramer, at mary@elvilleassociates.com or at 443-741-3635, and she’ll gladly work with you to set a convenient time to meet with one of our attorneys to discuss your planning needs.

 

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About

Elville & Associates engages clients in a multi-step educational process to ensure that estate and elder law planning works from inception, throughout lifetime, and at death. Clients are encouraged to take advantage of the Planning Team Concept for leading edge, customized planning. Legal Services Include: Wills, Trusts, Estate Tax Planning, Powers of Attorney, Living Wills/Advance Medical Directives, Medicaid Asset Protection Trusts, Medicaid Planning and Qualification, Estate Administration, Fiduciary Representation, Nursing Home Selection, Guardianships, Special Needs Planning for children and adults, Social Security Disability Income (SSDI), Supplemental Security Income (SSI), and IRS tax controversy.

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