The Setting Every Community Up for Retirement Enhancement (SECURE) Act went into effect on January 1, 2020. The SECURE Act affects special needs planning, in particular, inherited IRAs owned by third-party special needs trusts. Historically, these types of trusts provide effective asset management, maintain the receipt of public benefits, and allow a lifetime payout of traditional retirement accounts or IRAs over the lifetime of the oldest contingent beneficiary of the special needs trust.
A third-party special needs trust, also known as a supplemental needs trust, is funded by assets from a third party on behalf of a person with a disability.
It is well known that cash payments directly to a person with a disability jeopardize that individual’s right to specific benefits. The preferred planning method for IRA assets to name the beneficiary a third-party special needs trust that qualifies as a “designated beneficiary” of a retirement account or IRA. Before the SECURE Act, all individual “designated” beneficiaries could receive payouts for their lifetime, thus, minimizing their income tax burden on such payouts.
However, the SECURE Act now mandates that subject to some exceptions, traditional retirement accounts or IRAs must be paid out within 10 years if there is a “designated beneficiary” or within 5 years if there is not a designated beneficiary. In the case of the latter, the assets must be paid out within 5 years if the owner died before the age of 72 or must be paid out over the owner’s life expectancy if the owner died on or after the age of 72.
Fortunately, persons with disabilities may qualify as an exception to the rule changing the lifetime payout to five or ten years. The SECURE Act created a new class of beneficiaries known as an “eligible designated beneficiary” (EDB). This allows persons with disabilities to continue to receive payouts from traditional IRAs over a lifetime. The Act provides that EDBs for which a lifetime payout is possible are (1) a surviving spouse, (2) a minor child of the participant, (3) a disabled beneficiary (or a trust for their benefit), (4) a chronically ill individual, and (5) a beneficiary less than 10 years younger than the participant.
As it affects special needs planning for persons with disabilities, a disabled beneficiary (or their properly drafted third-party special needs trust) qualifies as an EDB. A well-drafted third-party special needs trust that benefits a disabled beneficiary likely to be able to “stretch the Required Minimum Distribution (RMD) payments from a traditional retirement account or IRA over the lifetime of the individual with disabilities rather than five or ten years.
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