IRA Beneficiary is a Special Needs Trust for a disabled adult son
Hello:
I have a client, Gary, who is 65 and a widower. He has an adult son who is autistic and can never live on his own. Gary has created a special needs trust “SNT” with the Trust as the Primary beneficiary 100%.
I am concerned about the IRA distributions into the SNT at Gary’s death. I want to confirm if the IRA needs to pay out over a 5 year period or a 10 year period, per the SECURE Act of 2020. Also, since the payout to the SNT would be income to the SNT, would the SNT pay income tax at the Trust rate each year of receipt or if it’s a “pass through” trust, would the income be taxed at the son’s lower bracket?
The SNT has been set up to avoid his son taking constructive receipt of the IRA funds, as it would disqualify him from SSI and Medicaid health insurance.
Thanks for your reply.
John Ernst
Permalink Submitted by Alan - IRA critic on Wed, 2022-07-13 15:05
Client should verify that the SNT is drafted to meet the requirements for a qualified trust. If so, the son will be an EDB and if no other beneficiary can receive distributions during the lifetime of the son, the annual RMDs will be based on the single life expectancy of the son. The SNT would be an accumulation trust and IRA distributions accumulated in the trust would be taxed at the higher trust tax rates. I believe that if some of the IRA income is passed through to the son (not enough to jeopardize govt benefits), the passed through income could be taxed at the son’s lower marginal tax rate.
Permalink Submitted by John J. Ernst on Wed, 2022-07-13 15:44
Hi Alan: Any thoughts on the SECURE Act and how many years to liquidate from the BDA IRA to the Trust?
Permalink Submitted by Alan - IRA critic on Wed, 2022-07-13 16:10
If the trust is qualified, the annual RMDs are based on the single life expectancy of the SNT beneficiary, The initial divisor is for the age that the beneficiary will reach in the year following the year of client’s death. You might estimate that divisor by looking at the new 2022 single life table. Of course, RMDs for the client will begin at age 72 or perhaps a year or two later depending on the pending Secure Act 2.0. Since client is 65, he might be expected to live another 20 years, so beneficiary would also be 20 years older than he is now. If client converts some to Roth before his RMDs begin, his RMDs will be less and if the SNT inherits a Roth IRA, all distributions will be tax free.
Permalink Submitted by John J. Ernst on Wed, 2022-07-13 19:24
Thanks so much, Alan! I appreciate your advice on this client situation.John