Q: A child of mine has special needs, and I previously created a Supplemental Needs Trust for her benefit. What should I consider in updating my estate plan in order to provide for her future care when my primary asset is my IRA?
A: When planning for the future care of a loved one, it is important to consider the individual’s special needs and any available government assistance programs in order to supplement such programs and enhance the individual’s quality of life through a tax advantaged estate plan.
The SECURE Act (December 20, 2019), which significantly changed the required minimum distribution rules for qualified retirement plans including IRAs, changed the way in which we plan for retirement assets. The IRS issued Proposed Regulations on February 23, 2022 to primarily address changes made by the SECURE Act. The SECURE Act and the Proposed Regulations strengthen the tax advantages afforded to Supplemental Needs Trusts that inherit retirement assets.
Recall that pre-SECURE, the beneficiary of an inherited IRA could stretch the required minimum distributions over a life expectancy, resulting in increased benefits through tax-free growth and lower tax brackets. Post-SECURE, a beneficiary is only eligible for a lifetime payout if the designated beneficiary is (1) the surviving spouse of the employee, (2) minor child of the employee, (3) disabled, (4) chronically ill, or (5) an individual who is not more than 10 years younger than the employee.
The SECURE Act and the Proposed Regulations provide additional guidance in determining an eligible designated beneficiary’s status on the basis that the beneficiary is disabled or chronically ill, and the documentation required. Oftentimes when benefiting an individual with special needs it is important to utilize a Supplemental Needs Trust in order to avoid adversely affecting the individual’s financial eligibility for vital government assistance programs. For this reason, SECURE created two specific types of trusts referred to as Applicable Multi-Beneficiary Trusts, which allow individuals who are disabled or chronically ill to benefit under Supplemental Needs Trusts while still qualifying for the lifetime payout.
If the projected required minimum distributions would be adequate to provide for and enhance the quality of life of a loved one who has special needs, designating a Supplemental Needs Trust as the beneficiary of a qualified retirement plan is an advantageous planning technique.
Know the Law is a bi-weekly column sponsored by McLane Middleton. Questions and ideas for future columns should be emailed to [email protected]. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.