Beginning January 1st of 2020, there was a major change in the law with respect to retirement accounts. The new law, known as the Secure Act, requires that most IRAs, 401(k)’s, 403(b)’s, and other retirement accounts be taken out within ten years following the death of the original owner. The Secure Act provides numerous exceptions to this ten year withdrawal requirement for inherited IRAs. In particular, the law provides exceptions for disabled persons, the chronically ill, and trusts for such persons. As a result, if you are naming a Special Needs Trust as beneficiary of an IRA or other Retirement Account, the new law could require changes to your special needs trust plan.
New Law Makes it More Tax Efficient to Name a Special Needs Trust as a Beneficiary of an IRA or Other Retirement Account
Historically, leaving retirement assets to a special needs trust was very difficult. If the Special Needs Trust was not drafted utilizing special language, it would be very tax inefficient. Consequently, many people left retirement money to children who did not have special needs, and left non-retirement money to a special needs trust.
Interestingly, the Secure Act reverses this old logic regarding the tax consequences. The new law specifically allows retirement money that is paid to a Special Needs Trust for a disabled person to be paid out over the lifetime of the disabled person. Whereas, retirement money paid to most adults that is not disabled must be withdrawn over ten years. Accordingly, it may actually be MORE tax efficient now to name a Special Needs Trust as beneficiary of an IRA, and non-retirement money to the children who do not have special needs.
Tax Planning with Special Needs Trusts is always complex. Tax Planning with retirement accounts makes it even trickier. It is imperative that you properly coordinate your estate plan because beneficiary designations on an IRA typically supercede the provisions of a Will or Trust.
New Law May Require Existing Special Needs Trusts to Be Modified
The Secure Act changed many definitions with respect to Inherited IRAs. Accordingly, it is highly likely that you may need to modify an existing Special Needs Trust, if you have one, to better comply with the new law. Specifically, you may wish to change formulas in the old trusts.
Speak With an Attorney to Review Your Special Needs Trust
As a result of the change in the law, we strongly recommend that anyone who has created an estate plan for a disabled person speak with a Special Needs Trust Attorney. You should review the plan that you have in place or see if a new estate plan should be created. The Secure Act can significantly affect other aspects of your estate plan as well. For more information about the new law regarding IRAs, please read my post about the Secure Act.