Estate & IRA Distribution Options when one beneficiary has a Special Needs Trust
We have a client with two siblings that has inherited an estate with for illustrative purposes 4 assets – a $750k house, a $25k taxable account, $25k in a Roth IRA and a $250k Traditional IRA. One of the three siblings has a Special Needs Trust. My client is wondering whether they can elect to have 100% of the sibling with the Special Needs trust inheritance be in the form of the inherited IRA which has much better/longer distribution options for her than the other 2 siblings. Did the new SECURE Act 2.0 regulatory guidance impact the executors ability to make non-pro rata distributions of the IRA, as we are considering transferring most or all of the IRA to the siblings Third Party Special Needs Trust to maximize the lifetime stretch out? My understanding is that the changes to SECURE Act 2.0 do not allow a trustee to make non-pro rata distributions of IRAs. Any definitive guidance on this would be much appreciated.
Permalink Submitted by Alan - IRA critic on Wed, 2024-09-11 14:32
How was the beneficiary designated on the IRAs? Were they left to the estate, and did the owner of the IRA pass prior to their RBD?
The Secure Acts made no changes for non designated beneficiaries such as estates, NQ trusts, or charities.
Permalink Submitted by Ted Buchan on Fri, 2024-09-13 20:43
The client’s trust was the beneficiary of the IRA and the owner had already started taking distributions from the IRA as their RBD had passed. How does this affect my question?
Permalink Submitted by Alan - IRA critic on Fri, 2024-09-13 23:53
Well, the SNT should have been named as a beneficiary of the IRA, and then the SNT beneficiary would be an EDB with a LE stretch. In addition, what is left in the SNT would not be subject to Medicaid recoupment after the SNT beneficiary passes.
Since a different form of trust was the named beneficiary of the IRAs, the specific provisions of that trust will have to be applied to the inherited IRAs. If the trust is qualified for look through, it will be subject to the 10 year rule with annual LE RMDs in years 1-9 based on the oldest trust beneficiary. If not qualified for look through, the RMDs will be based on the decedent’s single life expectancy.
The Secure Act Regs do have new separate account rules for trusts drafted to immediately split into separate sub trusts upon owner’s death, which would result in lower RMDs for some, probably the LE stretch for the SNT share. Otherwise, the trust would receive RMDs and could apply them to the various trust beneficiaries. If the trust provisions did allow the trustee to assign the IRA assets out of trust to the trust beneficiaries, the IRA custodians would have to cooperate with the assignment request, but if the SNT was not named as a trust beneficiary, it could not be assigned to the SNT. To confirm that, best to consult with a trust and estates attorney. But even if the inherited IRA could be assigned to the SNT, that would not change the RMD schedule, would not provide the SNT with a LE stretch because the SNT was not named directly as a trust beneficiary.