Leaving Your IRA To A Special Needs Beneficiary

Temecula and Murrieta Elder Law Attorneys provide the following advice on how to protect a Special Needs beneficiary when leaving them your IRA.

The Problem

If a Special Needs Beneficiary receives your IRA directly, the required minimum distributions (RMDs) could prevent your child from receiving the government benefits he/she needs, such as Medi-Cal or Supplemental Security Income (SSI).

So how can you leave your IRA to a Special Needs Beneficiary so they can continue to receive government benefits and minimize and or eliminate adverse income tax consequences?

RMD Basics for IRA owners

RMDs are the distributions that must be taken on tax-deferred accounts, such as your IRA. The age at which owners of retirement accounts must start taking RMDs will increase to 73, starting January 1, 2023. The current age to begin taking RMDs is 72. SECURE 2.0 also pushes the age at which RMDs must start to 75 starting in 2033.

RMD Basics for Inherited IRAs

The parts of the SECURE Act that immediately impacted the average American are its new guidelines around inherited IRAs. If you are an IRA non-spouse beneficiary, under the old rules, you were able to withdraw from that retirement account over the rest of your life, but under the SECURE Act, you’ll have to take that money out within 10 years.

However, not all beneficiaries are impacted by this new “10-Year Rule”. Instead, the SECURE Act identifies a distinct group of beneficiaries that are not subject to the “10-Year Rule”, and they are identified as Eligible Designated Beneficiaries. They are:

spouses of account holders

those who have a disability

those with a chronic illness

those not more than 10 years younger than the decedent, and

minor children of decedents

Special Trust Rules

The good news is the IRS is willing to treat a Special Needs Trust as a designated beneficiary and since the beneficiaries of Special Needs Trusts most often qualify under one of the Eligible Designated Beneficiary categories (a person with a disability or with a chronic illness) they would be allowed to take the distributions of the IRA over their life expectancy. The Special Needs Trust would be an “accumulation” trust, which permits RMDs to be held by the trust, rather than requiring their immediate distribution.

Case Study

Father, with proper planning and guidance, had listed as a beneficiary of his IRA, a previously created Third-Party Special Needs Trust for his Son.

Upon the father’s death, the proceeds from his IRA were transferred to the son’s Third-Party Special Needs Trust. This was a non-taxable transfer, the Third-Party Special Needs Trust inherited the IRA. The RMDs were received by the Special Needs Trust and because it was an accumulation trust, the trustee had discretion as to when he would distribute funds for the benefit of the son. Any distributions would be taxable to the son.

Planning for the protection of Special Needs Beneficiaries is extremely complex. Many attorneys and financial planners are not aware of these special rules that protect your Special Needs Beneficiary. We at Copenbarger LLP can assist you in planning in this area of the law. If you have questions, please contact our Temecula office at (800) 244-8814.

If you have any further questions about estate planning and strategies to shield your wealth, or if you’d like to have your current asset protection plan reviewed to make sure it still meets your needs, please contact us at one of our offices located throughout the state of California 800-244-8814 to set up a consultation.