Many families planning for the care of their loved one with special needs set up special needs trusts (SNT). These trusts allow assets to be left to a disabled or chronically ill person without disqualifying them for certain benefits, such as Medicaid. SNTs also allow for management and oversight of an inheritance by a trustee designated by the family to assist the beneficiary.
Under the 2019 SECURE Act, beneficiaries inheriting IRAs were required to liquidate the investment according to new RMD rules. The Act set the distribution timeframe for most IRAs inherited to liquidate within 10 years from the owner’s date of death. However, disabled or chronically ill individuals are excluded from this 10-year rule. This made creating a special SNT that held inherited IRAs even more useful as these beneficiaries could have the retirement asset paid out (or stretched) over their lifetime. Potentially, this reduces taxes and allows the beneficiary to supplement their finances for a longer period.
The downside under 2019 SECURE Act was that charities were not included in any beneficiary category that could qualify for this stretch period. The result was that special needs trusts could not preserve the stretch distribution timeframe for disabled loved ones if the trust named a charity as a remainder beneficiary to receive the funds after their loved one was gone.
In late 2022, significant changes affecting the SECURE Act were approved. Among its provisions was the Special Needs Trust Improvement Act which allows charitable organizations to be named as a remainder beneficiary for an SNT holding an inherited IRA. Unless the law changes, it will apply to all calendar years from 2023 onward.
If you have a retirement account you intend to leave to someone with special needs, you may be able to create an SNT to protect your disabled loved one’s continued access to essential government benefits and allow the beneficiary to receive your hard-saved funds over time. You can also now have the comfort of knowing that although your loved one may be gone too soon, your legacy can continue by supporting charities that you designate.