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Naming a Special Needs Child as a Beneficiary of an IRA or Retirement Plan in a Trust

Posted by Susan Katzen | Aug 04, 2022 | 0 Comments

Leaving behind assets to benefit a child with special needs requires careful planning to protect their needs-based government benefits. It is also important to protect those assets against later claims after your death and, in some cases, during your lifetime, for additional available public benefits such as Medicaid. Many parents choose to set up a special needs trust for their child with a disability, but can you put beneficiary-named accounts in this trust? A lot of wealth may be in your IRA and 401(k) that requires naming a beneficiary. Know the risks when naming your special needs trust as a beneficiary of your retirement accounts.

Evaluating Your Specific Situation

The first step is meeting with your special needs planning attorney to review your assets. They will set up a special needs trust, transfer ownership of assets to the trust, and make your child the beneficiary of those assets. Understand that beneficiary designation accounts (think IRAs, 401(k)s, life insurance) and joint tenancy accounts pass through your will and outside of the trust. Also, be aware that if your special needs child is a direct beneficiary of these types of investment accounts, the money passes directly to the child upon your death, not to the special needs trust. Your estate plan requires coordination of your will, trusts, and beneficiary designations to ensure they do not work against each other.

Besides a special needs trust, you may opt to name your “estate” as the beneficiary of life insurance proceeds if you have multiple children. In this manner, the proceeds can divide conveniently into however many portions you need with the caveat that the share for your child with special needs will pass directly to their trust. Essentially, the only downsides of naming your estate as a life insurance beneficiary are any unwanted public exposure during a probate process, and claims by your creditors.

Changes in Legislation

For inherited IRAs and other retirement plans, the SECURE Act of 2019 updated distribution rules for inherited IRAs et al. by eliminating the idea of stretch IRA (expectancy payout) for most beneficiaries. Note that if there was a special needs trust inherited IRA prior to 2019, it is grandfathered under the old stretch rules, and the SECURE Act does not apply. The RMDs will still be based on the IRS Uniform Life Expectancy Tables. Any inheritable retirement plan since 2019 falls under the regulations of the SECURE Act.

A notice of proposed regulations regarding the SECURE Act distribution rules was issued in February 2022 by the United States Treasury. These regulations change how practitioners may interpret distribution rules for inherited IRAs by eliminating life expectancy payout structures and implementing for most beneficiaries a ten-year rule. The clarification by the Treasury Department means an annual track of distributions for years one through nine using life expectancy, but upon the tenth year, the remaining balance must be distributed unless you are an eligible designated beneficiary (EDB).

Eligible Designated Beneficiaries (EDB)

For inherited IRAs and other retirement plans, the SECURE Act of 2019 updated distribution rules by eliminating the idea of stretch IRA (expectancy payout) for most beneficiaries. Note that if there was a special needs trust inherited IRA before 2019, it is grandfathered under the old stretch rules, and the SECURE Act does not apply. The Required Minimum Distributions (RMD)s will still be based on the IRS Uniform Life Expectancy Tables. Any inheritable retirement plan since 2019 falls under the regulations of the SECURE Act.

A notice of proposed regulations regarding the SECURE Act distribution rules was issued in February 2022 by the United States Treasury. These regulations change how practitioners may interpret distribution rules for inherited IRAs by eliminating life expectancy payout structures and implementing a ten-year rule for most beneficiaries. The clarification by the Treasury Department means an annual track of distributions for years one through nine using life expectancy, but by the tenth year, the remaining balance must be distributed unless you are an eligible designated beneficiary (EDB).

If you have any questions or need additional information, please give us a call at (714)374-2244, or fill out our Contact Us form here.

About the Author

Susan Katzen

"I firmly believe our clients should be treated the way I would want my own family members to be treated. As a result, not only have I put together a compassionate and highly skilled team of people, but together we have served families from the grandparents down to the grandchildren. My staff and...

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