The Great Lakes Special Needs Planning Symposium: A one-day immersion course dedicated to building a foundation of knowledge in special needs planning for professionals who plan for persons with disabilities and those who administer special needs trusts. This course is for those who want to learn more about this area of practice as well as experienced planners. Lead by national experts in special needs planning, you will have an opportunity to learn, chat, and mingle with them and top resources to help you in your practice as you are Moving to Mastery™ in this complex and rewarding field.
Retirement plans often make up a significant portion of the assets of parents of children with special needs, or of individuals who have become disabled as adults. In such cases, the question arises as to whether the retirement plan can be put into a special needs trust. The answer, as with many legal questions, is “it depends.” Also, the answer has changed significantly since passage of the SECURE Act at the end of 2019.
There are three different questions that need to be answered:
Can You Transfer Your Own IRA or 401(k) into a Special Needs Trust?
This question normally comes up for people who become disabled, whether due to injury or illness, after they have worked and accumulated retirement savings. The answer is a clear no. A disabled person cannot transfer a retirement plan into a special needs trust without first liquidating it and paying taxes on the realized income. If paying the taxes owed is necessary in order to shield the funds in a special needs trust and receive important public benefits, it may well be worth the cost. In fact, the tax cost may not be as high as it seems at first depending on the size of the retirement plan, the individual’s other income, and whether medical expense or other deductions are available.
Should You Name a Special Needs Trust as Beneficiary of Your Retirement Plan?
More often, parents would like to leave all or part of a retirement plan to a trust for the benefit of their child with special needs. This can be done, but it’s a bit complicated. Before passage of the SECURE Act, special needs planners would advise clients to avoid doing so, if possible, to keep the trust simpler. In order to be the beneficiary of a retirement plan and spread the plan withdrawals out over the beneficiary’s lifetime, the trust must qualify as a so-called “accumulation” trust, which presents certain challenges. To avoid this, clients might name their non-disabled children as beneficiaries of their retirement plans and name the special needs trust as beneficiary of other assets.
However, the SECURE Act made it more difficult to stretch out retirement plan withdrawals for the lifetime of most beneficiaries, limiting the withdrawal period to the 10 years following the death of the primary owner. One of the exceptions is beneficiaries who qualify as disabled. So now, in many cases, planners give the opposite advice. If possible, the retirement plan should be payable to the special needs trust so withdrawals and the payment of taxes can be spread out over the disabled beneficiary’s lifetime. In each case, the special needs planner and the client must balance the potential tax savings with the added complication of creating and managing an accumulation trust.
Can You Transfer an Inherited IRA to a Special Needs Trust?
Perhaps you have a special needs trust and have inherited an IRA. Can the IRA be transferred to your trust without having to be liquidated first? Here the answer is less definite. There’s no regulation that directly answers this, but there are IRS rulings that have permitted such a transfer without having to liquidate the IRA first in individual cases. Absent a regulation that directly addresses this, the challenge may be less the law and more the willingness of the bank or investment firm where the account is located to permit such a transfer to the trust. They may well first require that the account owner obtain a ruling from the IRS that is specific to the account in question. The cost of obtaining such a private “revenue ruling” in most cases would outweigh the potential benefit of making the transfer to the trust.
As you can see, the subject of retirement plans and special needs trusts is a complicated one. If you want to know how a retirement plan can fit with your or a loved one’s special needs trust, talk to your special needs planner.
Parents or other family members establishing a special needs trust for their child often want to name a professional — usually a bank, trust company, attorney, certified public accountant or non-profit — as one of the trustees of the trust in order to take advantage of that individual’s experience with investments, money management and tax planning. The professional trustee can also be a great option for families looking for a “disinterested party” to provide a counterweight to a family trustee who may be much more familiar, and much more emotionally invested, in the beneficiary’s day-to-day life. If your child is about to receive a large cash settlement, hiring a professional trustee may even be essential in order to preserve and manage the trust’s assets for the long-term, especially if you have little investment experience.
But not every trustee recommended by a personal injury attorney or that advertises trustee services provides the best services for trusts designed for children with special needs. Here are some questions to ask while searching for the right professional trustee for your new trust.
This list is by no means exhaustive; to download a list of 34 questions that one law firm gives to family members hiring a private professional trustee, click here. Your special needs planner can help you select an appropriate professional trustee, and he or she may even have the names of certain companies or people who have performed this work well for other clients in your situation.