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 the advice that special needs planners often give clients.
For many reasons, it's usually not advisable to make an individual with special needs the beneficiary of an IRA or 401(k) plan. They may not be able to manage the funds, and owning the account may render them 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 because holding a retirement plan in a special needs trust gets complicated.
New IRA Laws, New SNT Advice
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- First, by spreading out the withdrawals over many years, the withdrawn funds are less likely to push the recipient into a higher tax bracket.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 an 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.
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. 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 a special needs planner in your area.