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Naming A Trust As An Ira Beneficiary Post-secure Act, Special Needs Trust Edition

On Behalf of | Aug 15, 2021 | Firm News

As we discussed in our most recent newsletter, although the SECURE Act eliminated the ability of most beneficiaries to “stretch” required minimum distributions from an inherited IRA account over their lifetimes, it did preserve this favorable payout option for certain “Eligible Designated Beneficiaries,” including, notably, disabled persons.

To determine whether an intended beneficiary meets the definition of “disabled,” one need look no further that the SECURE Act itself. The Act cites the definition of “disability” as “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long continued and indefinite duration,” which is virtually the same definition as is used to determine eligibility for Social Security disability benefits.

Of course, when planning for the care of a disabled beneficiary, estate planners rarely advise that assets, including IRA benefits, be left outright to him or her, as doing so will likely lead to the beneficiary’s disqualification from participation in any government programs (at least until such time as the assets are spent down); rather, some type of “special needs” trust arrangement is recommended so that financial support can be provided in such a way that will not interfere with whatever benefits the beneficiary may be receiving, or may be qualified to receive in the future.

So, can the “stretch” payout option for a disabled beneficiary be utilized if the named beneficiary is not the disabled individual him or herself, but instead a special needs trust for his or her benefit? The consensus amongst practitioners and scholars alike appears to be yes, and, even more notably, that the special needs trust does not need to contain “conduit” provisions (which require that IRA distributions received by the trust be passed through to the beneficiary, potentially undermining the purpose of the trust), but rather can provide for the accumulation of such IRA distributions within the trust itself.

In short, for clients looking for guidance on the allocation of their assets at death among both disabled and non-disabled beneficiaries, the savvy planner may want to consider the possibility of utilizing IRAs and other retirement benefits to fund a trust for disabled beneficiaries in order to secure the advantages of the “stretch” payout option that may not be available for the clients’ non-disabled beneficiaries.

For more information concerning how and when to allocate IRA or other retirement benefits to a special needs trust for a disabled beneficiary, please contact John R. Tullio, Jr. at 216.472.4619, or [email protected].

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