SECURE Act Rules for Some Special Needs Trusts

Wednesday, April 29, 2020

By Sarah Brenner, JD
IRA Analyst
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The SECURE Act was a game changer for trusts named as an IRA beneficiary. Most trusts will be limited to a 10-year payout rule, just like most other non-spouse beneficiaries. However, Congress was careful to carve out some exceptions for some trusts with special needs beneficiaries, specifically eligible designated beneficiaries who meet the definition of either being disabled or chronically ill. When certain requirements are met, required minimum distributions to these trusts may still be done over the beneficiary’s life expectancy.

Applicable Multi-beneficiary Trust

Under the SECURE Act, the ability to use the stretch for chronically ill or disabled beneficiaries is available to a trust that qualifies as an “applicable multi-beneficiary trust.” An “applicable multi-beneficiary trust” can have other beneficiaries of the trust besides the disabled or chronically ill beneficiary. The other beneficiaries must be designated beneficiaries. That includes living individuals with a life expectancy but excludes entities like a charity or an estate. Therefore, a trust with a charity as a beneficiary would not meet the requirements.

Additionally, to qualify as an “applicable multi-beneficiary trust,” the trust would have to be established in one of two ways. The first possibility is that it can provide that it is to be divided immediately upon the death of the IRA owner into separate trusts for each beneficiary.

Example: Luis names his trust as the beneficiary of his IRA. At Luis’ death, the trust is to be divided into two trusts, one for each of his daughters. His daughter, Salma, age 32, is chronically ill and qualifies as an eligible designated beneficiary at Luis’ death. Payments from the inherited IRA to the trust for Salma can be made over Salma’s life expectancy. Luis’ other daughter, Olivia, age 28, is not disabled or chronically ill.  Payments from the inherited IRA to Olivia’s trust are subject to the 10-year rule.

The other possibility is that the “applicable multi-beneficiary trust” can provide that no beneficiary, other the disabled or chronically ill beneficiary, has any right to the IRA funds until the death of the eligible designated beneficiary.

Example:  Catherine names a trust for her disabled daughter, Emma, age 43, as the beneficiary of her IRA. The trust provides that any funds left in the trust at Emma’s death will go to her younger sister, Amanda, age 41. Amanda is not disabled or chronically ill. During Emma’s lifetime, RMDs may be paid from the inherited IRA to the trust based on Emma’s single life expectancy. However, at Emma’s death, payments from the inherited IRA to Amanda would be subject to the 10-year rule and would need to be paid out by December 31 of the tenth year following the year of Emma’s death.

Good Advice Needed

After the SECURE Act, any trust named as beneficiary of an IRA should be reviewed. If the trust beneficiary has special needs this is especially important. For those special needs beneficiaries who are chronically ill or disabled, the SECURE Act does provide some guidance for a way forward that would still allow payments to a trust over the beneficiary’s life expectancy. Consulting with both a knowledgeable financial advisor and attorney is essential to ensure that a trust meets the specific requirements.

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