Special Needs Trust Beneficiary of IRA

Submitted by Maureen O'Connell on Tue, 2020-12-29 17:53

My parents estate gives 1/4 to my special needs adult sister into a SNT. She is not a beneficiary of the IRA, however, I have recently learned that the SNT can be designated a beneficiary of the IRA. What are the pros and cons of naming the SNT beneficiary of the IRA? What tax implications flow to the SNT upon withdrawing funds from the IRA? Is there a concern that this option may be eliminated with the incoming administration? What is the best option in this situation?

Thank you!
Maureen.



Submitted by Alan - IRA critic on Tue, 2020-12-29 20:44

  • A properly drafted SNT according to state law should be named as the beneficiary of the IRA, and that means that the IRA should be partitioned into 2 accounts, one naming the SNT as beneficiary and the other for other individuals who do not qualify as EDBs and therefore will be subject to the 10 year rule. Having two IRAs eliminates several possible unintended conquences. The following will only address the SNT.
  • A disabled beneficiary is considered an EDB (eligible designated beneficiary) under the Secure Act. Having an EDB as the beneficiary of the SNT named as the IRA beneficiary will allow the SNT to receive life expectancy RMDs from the IRA based on the age of the disabled beneficiary. Typically, the SNT will be an accumulation trust allowing the trustee to accumulate the IRA RMDs and other distributions in the trust, although taxes on the IRA distributions will be due at the higher trust rates.
  • For the trust to qualify as an EDB it is also critical that the trust is drafted to meet the IRS look through requirements. This is needed to allow the SNT beneficiary to be treated as the IRA beneficiary for purposes of calculating the RMD, basically preserving the stretch for the SNT beneficiary. 
  • Another benefit of naming the SNT as direct IRA beneficiary is that generally the funds left in the trust upon the SNT beneficiary’s death can be distributed to successor beneficiaries of the trust.  Instead, if the SNT were funded by the beneficiary’s own assets (a self settled trust), remaining assets in the SNT are subject to Medicaid and possibly other govt benefits recovery. 
  • There is no pending or proposed legislation to change this, but the IRS has still not released detailed Regs for the Secure Act passed 1 year ago with relation to certain types of trust arrangements, particularly those with multiple beneficiaries. This is another reason to partition the IRA into an amount for the SNT, and another IRA for the other beneficiaries.
  • I don’t think the IRA is being left to the estate. That is almost always a bad idea.
  • Not a trust attorney, so confirm this with the attorney who drafted the SNT according to state law.

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