In January 2020, a new law went into effect, known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act, that fundamentally changes the distribution and taxation requirements for beneficiaries of retirement accounts. Families with special needs members should pay close attention, as these changes will have an impact on their estate planning.
The biggest change eliminates “stretch” IRAs in most cases. The SECURE Act requires most beneficiaries of an IRA to withdraw all the money—and pay the applicable income taxes—from the IRA within 10 years of the IRA holder’s death. In many cases, these withdrawals will take place during what are already the beneficiary’s highest earning years – effectively serving as a tax increase on many Americans.
An Exception for Beneficiaries with Special Needs
The SECURE Act makes exceptions for IRA beneficiaries who are considered disabled according to the IRS. These individuals can receive the funds in the form of required minimum distributions based on their life expectancy rather than within 10 years. Also excluded from the 10-year rule are beneficiaries who are considered chronically ill or who are less than 10 years younger than the account owner. To protect such beneficiaries, it is advisable to establish a special needs trust (SNT) for the disabled individual and designate the SNT as the beneficiary.
Complications Arise with Multiple Beneficiaries
Planning gets complicated if there are multiple IRA beneficiaries (siblings and grandchildren, for example). The SNT trust will only be exempt from the 10-year rule if the individual with special needs is the only beneficiary of the trust during his/her life. If the trust also permits distributions to a spouse or children, it won’t qualify and the IRA will have to be completely withdrawn within 10 years. The best solution is to establish a SNT for the disabled beneficiary, and to set up a separate trust for other heirs or name them as separate beneficiaries.
In light of the new rules, review the language in your special needs trust if you have one or strongly consider creating one to protect the money you have set aside for your loved ones.