Special Needs Trust as IRA beneficiary
Scenario: Dad, age 78 with 2 children ages 54 and 56. Dad has named his Revocable Trust as beneficiary for all assets, including IRA. The asset distribution as 1/2 and 1/2. The 54 yr old has applied for and received approval for SSI and Medicaid. It has been suggested that Dad amend the Trust so the 1/2 allocated to the 54 yr old be used to fund a Special
Needs Trust upon Dad’s death. The 56 yr old believes this may cause the entire IRA to be taxed and prevent him from
“Stretching” in an Inherited IRA.
If the entire IRA would be taxed, then Dad would consider funding an ILIT now to replace the money lost to taxation.
Please comment.
Permalink Submitted by Bruce Steiner on Tue, 2010-09-07 23:07
Assuming the requirements are met (which should be the case), the trustees should be able to stretch the benefits out over the life expectancy of the oldest beneficiary of the trust. That’s likely to be the older child (since if the younger child dies without leaving any issue, his/her share will most likely go to or in further trust for the older child).
Why would Dad leave his IRA to a revocable trust in which the older child receives his/her share outright? That makes no sense. If he wants the older child to receive his/her share outright, he could leave the older child’s share directly to him/her, without running it through the revocable trust.
The family will only come out ahead with the insurance if Dad dies substantially before his life expectancy. The benefits to the beneficiaries of those insureds who die early are paid for by those insureds who live to or beyond or nearly to their life expectancy.
Permalink Submitted by Alan Spross on Tue, 2010-09-07 23:26
Bruce will correct me if this is incorrect, but my impression is that a self settled SNT by the special needs beneficiary or his guardian must include the state as remainder beneficiary to the extent of state funded Medicaid and other benefits. But if the parent creates the SNT prior to death, the remaining assets in the SNT do NOT have to go to the state and therefore can go to other beneficiaries of the SNT. In that case, to avoid any unexpected complications, it would be safer to split the IRA into one with the SNT beneficiary and the other left directly (if that is deemed best) to the other child.
If for any reason the SNT is not qualified for look through treatment and there is just one IRA for both beneficiaries, if the parent (post RBD) passed, the stretch would be limited to the remaining life expectancy of the parent, only 11 years for IRA owner passing at 78.
Permalink Submitted by Bruce Steiner on Tue, 2010-09-07 23:30
This is not a self-settled trust by the child. It’s a trust created by Dad. So the state has no interest in the trust. There’s no need to divide the IRA before death. Dad can leave 1/2 to child A and 1/2 in trust for child B. Or Dad can leave 1/2 in trust for child A and 1/2 in trust for child B.
As is often the case, the revocable trust is a distraction.
Permalink Submitted by Alan Spross on Tue, 2010-09-07 23:49
But at this point Dad has yet to create the SNT. If he leaves the RLT in place and it provides for creation of the SNT after his death, is that enough to avoid the (d)4(a) self settled trust situation? Or must he create the SNT before passing?
Permalink Submitted by Bruce Steiner on Wed, 2010-09-08 02:29
Self-settled means with child’s money. This is Dad’s money.
It doesn’t matter whether he creates the trust for child in his Will, or in a separate trust agreement. But if it is to receive IRA benefits, then in order to take advantage of the stretchout, no one older than the person whose life expectancy is used to measure the stretchout (most likely the older child) can ever receive any accumulated IRA distributions.