RETIREMENT ACCOUNTS AND SPECIAL NEEDS TRUSTS

by Thomas D. Begley, Jr., Esquire, CELA

            Under the terms of the SECURE Act, which became law in December of 2019, individuals inheriting retirement accounts generally must withdraw the funds from those accounts within 10 years of the death of the plan participant. Under the former law, the beneficiaries of a retirement account could withdraw those funds over the life expectancy of the beneficiary, which could be thirty years.  Having the ability to extend those benefits over the life expectancy of the beneficiary rather than being compelled to withdraw the funds over 10 years, increase the potential to triple the value of the retirement plan benefits for most beneficiaries inheriting those accounts.  This is because money in the retirement accounts continues to build up tax-free, as long as the money is in the account.  Typically, a beneficiary inheriting a $1,000,000 retirement account who has to withdraw the money over 10 years will received approximately $1,300,000.  If the beneficiary could withdraw those same funds over 30 years, he or she would receive approximately $3,200,000.

An exception to the application of the new law is an individual with disabilities.  A disabled person is considered a “eligible designated beneficiary” and the new law does not apply.  Therefore, naming a Special Needs Trust established for the disabled individual as beneficiary of a retirement account enables the trustee to withdraw the funds over the life expectancy of the individual with disabilities and take advantage of the tax-free build-up over a significantly longer period of time.  In order to prove disability, a Determination of Disability Letter can be obtained from the Social Security Administration or the individual’s physician can sign a certificate with respect to disability.

If an individual has more than one child and wants to leave some assets to the healthy children and some to the child with disabilities, it makes sense to name the Special Needs Trust established for the child with disabilities as beneficiary of the retirement account, and leave non-retirement assets to the healthy child or children.  If there is a spouse involved, the spouse could be primary beneficiary, and the Special Needs Trust contingent beneficiary.

Plan participants should be careful that their Will and Living Trust contain the appropriate retirement account language, and that the Third Party Special Needs Trust contains the language designating the trust as an Accumulation Trust.  Beneficiary designations must be coordinated with the Third Party Special Need Trust.