The Secure Act has thrown all estate planners for a loop. It requires, among other things, a beneficiary of an inherited individual retirement account (IRA) to receive required minimum distributions (RMD) over the course of 10-years, rather than stretching out distributions over the life expectancy of the beneficiary. Luckily, those who are chronically ill or disabled are deemed eligible designated beneficiaries under the IRS code. Eligible designated beneficiaries of an IRA are not subject to the 10-year RMD mandate and may continue to stretch an inherited IRA over life expectancy.
Many individuals with special needs receive means-tested benefits such as Supplemental Social Security Income or Medicaid. To receive supplemental income from any source likely disqualifies the individual with special needs from means-tested benefits. To preserve those benefits, special needs trusts (or supplemental needs trusts) are used to shelter assets or a continuous stream of income for a person with special needs. A trustee of the special needs trust has discretion to make distributions towards purchases benefitting the special needs individual.
Special needs trusts are often structured as accumulation trusts. In an accumulation trust, assets or income (like an RMD) of the individual is distributed to the trust but the trustee has the option to hold the distribution and accumulate it with the principal of the trust. Accumulation trusts not only protect the receipt of means-tested benefits; the trust may also protect against creditors of the special needs individual.
The IRS code has made a special rule in the case of accumulation trusts for disabled or chronically ill beneficiaries. An accumulation trust may have more than one beneficiary (all of whom are people) when one or more of the beneficiaries are disabled or chronically ill people. If non-eligible designated beneficiaries are named as beneficiaries to multi-beneficiary trusts, the stretch provision can still apply to the disabled or chronically ill beneficiary only if the trust splits into a separate subtrust for the disabled or chronically ill person immediately upon the death of the IRA account owner. Otherwise, the accumulation trust must be for the sole lifetime benefit of the disabled or chronically ill beneficiary.
A person with special needs inheriting an IRA may continue to protect their means-tested benefits by having RMDs distributed to a special needs trust. A fine tuning of an existing special needs trust may be necessary to comply with the Secure Act requirements.
For more information, please call Dana Rifai.
So I’m confused, if IRA owner names SNT as beneficiary upon death, is the RMD to the SNT on the 10 year payout schedule?
keeping in mind that the trustee has complete discretion upon payment to beneficiary (the disabled child);
A person who fits within the definition of a disabled person is not required to take distribution of an inherited IRA within ten years, even if in trust; however, certain conditions apply. Please call for more information.