At the end of 2019, the Setting Every Community Up for Retirement Enhancement Act, (the SECURE Act) was signed into law. The overall objective was to improve access to retirement accounts such as IRAs and 401(k)s to ensure older Americans don’t outlive their assets and continue to receive tax-deferred benefits.
One important impact of the SECURE Act was the elimination of stretch IRAs that allowed people (other than spouses) who inherited an IRA to receive disbursements over their entire lifetimes. Under the new Act, non-spouses who inherit an IRA must receive a full payout of that account within 10 years from the death of the original account holder.
The new timeframe means the recipient of an inherited IRA must take the funds sooner and pay taxes sooner. Under the terms of the SECURE Act, people who have created a large IRA or 401(k) hoping to pass along the tax-deferred benefits for the full length of their beneficiaries’ lives now need to reconsider their estate planning.
An Important Exception to the SECURE Act
The drafters of the SECURE Act realized there are certain situations where the 10-year payout timeframe would cause more harm than good. One of those situations involved retirement accounts left to a person with disabilities. The definition of a person with disabilities under the SECURE Act is the same as the IRS definition. So if your family member has already qualified as a person with disabilities under the IRS rules, they also qualify under the SECURE Act.
Under an exception to the SECURE Act, a person with disabilities can still inherit retirement funds and take “Required Minimum Distributions” (RMDs) over their lifetime, rather than the 10-year time period required of other beneficiaries.
How Does a Special Needs Trust Work Under the SECURE Act?
If an IRA owner intends to leave the IRA funds to a person with special needs, and if a Special Needs Trust is already established for that person, the IRA owner can, and should, designate the Special Needs Trust as the beneficiary of the retirement plan instead of the person individually so as to protect essential government benefits.
Then, upon the death of the original IRA owner, the IRA fund proceeds are paid to the Special Needs Trust where the trustee is obligated to remove from the inherited IRA and pay taxes on the RMDs each year. Importantly the trustee is not required to spend the money. They could, instead, take the after tax proceeds and save them in a taxable investment account. In the alternative they could use the RMD to provide for the care and support of the Trust beneficiary that year, thereby likely reducing the tax burden of the RMD.
Special Needs Planning is Constantly Evolving
Planning for the future of your family member with special needs is a complex and detailed endeavor. A misallocation of funds or using the wrong planning structure can result in the loss of thousands of dollars in family and government benefits for your loved one with special needs. We know you have questions. The compassionate team at Rubin Law has the answers.
Rubin Law is the only law firm in Illinois exclusively limited to providing compassionate special needs legal and future planning to guide our fellow Illinois families of children and adults with intellectual disabilities, developmental disabilities, or mental illness down the road to peace of mind. For more information, email us at firstname.lastname@example.org or call 866-TO-RUBIN.