Special needs trusts can be valuable tools to help provide for someone with special needs. One option to fund a special needs trust is to name the trust as the beneficiary of a person’s retirement account. However, there are a number of areas to watch out for that could result in significant unintended costs if not taken care of properly. These pitfalls go beyond the expected knowledge of a general financial planner and require the expertise of an experienced elder law attorney.
A special needs trust, or SNT, is a trust that allows for a disabled person to receive financial support while still maintaining eligibility for government benefits such as Supplemental Security Income (SSI) and Medicaid. The use of a trust allows for assets to be managed by a trustee on behalf of a person with special needs even after the death of the parent or guardian of the trust beneficiary.
The first concern in making a special needs trust the beneficiary of a retirement account is to make sure the transfer is properly set up in the first place. Upon the death of the retirement account holder, the account, and any other bequest for the person with special needs, has to go directly to the special needs trust and not in the name of the person with special needs. Any money that goes directly to person with special needs, however briefly, may endanger their eligibility for government benefits.
Other concerns revolve around the setup of the special needs trust. IRS regulations require the IRA to be distributed fully within the life expectancy of the eldest designated beneficiary of the special needs trust. A poorly drafted trust may not make it clear who is a designated beneficiary and who is a remainder beneficiary for the purposes of IRS regulations. If a charity qualifies as a designated beneficiary, then all distributions have to be made within a five-year period. The major drawback of an accelerated payout schedule stems from the fact that IRA payouts are pretax dollars. Higher distributions over a short period of time will result in a higher percentage of the money going towards paying income taxes instead of benefitting the person with special needs. An accelerated payout schedule may also result if a relative older than the person with special needs also qualifies as a designated beneficiary.
An experienced elder law attorney can properly draft a special needs trust to comply with these IRS regulations, minimize the tax burden paid by all involved, and still make sure that person with special needs maintains their eligibility for benefits. The elder law attorney can also structure the special needs trust so that if the special needs individual dies before the trust assets run out, any remaining assets will go to other relatives or charities in a way that does not inhibit the support available to the special needs individual.
To answer any questions about an existing, or potential, special needs trust for you, or a loved one, please call Martha C. Brown & Associates at (314) 962-0186.