How will RMD affect Special Needs Trust

Submitted by Thomas Catto on Mon, 2023-11-27 21:07

My wife and I are retired 70 years old and have a fairly large amount in our IRA’s. We have a Special Needs son 34 years old and we have set up a Special Needs Trust for him. Social Security rules state he can never have over $2,000 in cash or assets or he will lose Medicaid. If we die and still have money in our IRA’s it would go to his trust. The trust then would have to convert so much a year to RMD causing him to receive over $2,000 hence his Medicaid as well.

Has the government considered this penalty for a Special Needs person? How do I avoid this…start converting $$ each year into a Roth?

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Permalink Submitted by Alan - IRA critic on Mon, 2023-11-27 21:54

Does the attorney specialize in SNTs? Many states have listed what the SNT trustee can directly pay for without loss of Medicaid, but the trustee must obviously be competent to handle this added responsibility. If the SNT is named as beneficiary of an IRA, the beneficiary of a qualified SNT will be treated as an EDB and the 10 year rule is avoided, and Medicaid cannot place a lien on the remaining assets of the SNT after the beneficiary passes.

Permalink Submitted by Thomas Catto on Wed, 2023-11-29 20:53

Yes we have a good Special Needs Trust….however this is what is in the current IRS web site regarding inherited IRA’s. This states there is no avoidance of the 10 year rule….IRA Language Ruling on the appeal of an IRA.Internal Revenue Code section 401(a)(9) “ and so that the beneficiary of the trust shall be deemed to constitute a “designated beneficiary” thereunder, and this paragraph shall be interpreted with this intent being paramount to any other direction in it. If either Settlor has designed this special needs trust, as the beneficiary of any account established for his or her benefits individually, then Settlor hereby identify the primary beneficiary of such trust as the designated beneficiary of such account. Any minimum required distribution and additional amounts received by the trustee from the IRA or similar retirement plan shall be distributed immediately to such trust beneficiary as income.”

Permalink Submitted by Alan - IRA critic on Wed, 2023-11-29 21:31

The IRS site does not reflect the proposed their proposed Secure Act Regs. Basically, if your son qualifies as disabled or chronically ill, Secure introduces the AMBT (Applicable multi beneficiary trust). See p 28-30 of the following article by expert Natalie Choate:
Estate_Planning_for_Retirement_Benefits_post_SECURE_and_Prop_Regs-OCT-1-2022.pdf (ataxplan.com)

Permalink Submitted by Jim O'Grady on Wed, 2023-11-29 22:10

The way it was explained to me is that the point of a special needs trust is that it generally cannot distribute funds to the beneficiary in a way that would result in them losing benefits. The only thing it can do is spend money on behalf of the person at the discretion of the trustee. Thus, most special needs trusts can retain earnings as they are not required to spend them, (so they are accumulation trusts). When an RMD comes along, the trustee could, at their discretion, use the RMD on behalf of the beneficiary or put the RMD into a non-IRA account owned by the trust. Taxable RMD’s retained by the trust can be taxed at high trust tax rates, so tax planning around this can be useful. Inherited Roth IRA would still have RMD so even if the IRA was 100% roth, the trust would still potentially need to retain even the non-taxed RMD so as to avoid distributions to the individual.

Permalink Submitted by William Tuttle on Thu, 2023-11-30 04:20

An ABLE account can be funded, if the son meets the disabled requirements.
There is far more flexibility in what counts as an ABLE qualified distribution, than what is permitted with a SNT.
Generally, the balance is limited to $100K and maintain Medicaid eligibility.
Any remaining balance will be used to reimburse Medicaid at the beneficiary’s death.
There are far more details, but it is definitely worth looking into and considering.