Designating a Special Needs Child as a Beneficiary of an IRA or Retirement Plan in a Trust

The transfer of assets for the benefit of a child with special needs requires careful legacy care planning to protect their needs-based government benefits.

It is also important to protect those assets against later claims after your death and, in some cases, during your lifetime. This includes protecting access to additional public benefits such as Medicaid.

Many parents choose to set up a special needs trust for their child with a disability. But can you put beneficiary-named accounts into this trust?

A lot of wealth may sit in your IRA and 401(k), which require named beneficiaries. It is important to understand the risks when naming your special needs trust as a beneficiary of your retirement accounts.

Evaluating Your Specific Situation

The first step is meeting with your special needs planning attorney to review your assets.

They will help you:

• Set up a special needs trust
• Transfer ownership of assets into the trust where appropriate
• Structure your child as the beneficiary of trust-owned assets

It is important to understand how different assets pass on death:

• Beneficiary designation accounts such as IRAs, 401(k)s, and life insurance pass outside of your will
• Joint tenancy accounts also pass outside of your will and the trust
• If your special needs child is named directly, the funds go to the child and not the trust

Your legacy care plan must coordinate your will, trusts, and beneficiary designations.

This ensures they work together instead of against each other.

Using Your Estate as a Beneficiary

Besides a special needs trust, you may choose to name your “estate” as the beneficiary of life insurance proceeds.

This option may be useful if you have multiple children.

The estate can then divide the proceeds into the required portions.

You can direct the share for your child with special needs into their trust.

However, there are downsides, including:

• Exposure to probate
• Possible delays in distribution
• Potential creditor claims against the estate

Changes in Legislation

The SECURE Act of 2019 changed the rules for inherited IRAs and retirement plans.

It removed the “stretch IRA” option for most beneficiaries.

Some older inherited IRAs created before 2019 may still be grandfathered under the previous rules.

These accounts may still follow life expectancy-based Required Minimum Distributions (RMDs) using IRS Uniform Life Expectancy Tables.

Any retirement account inherited after 2019 is generally subject to SECURE Act rules.

Proposed Treasury Regulations

In February 2022, the United States Treasury issued proposed regulations on SECURE Act distribution rules.

These regulations further clarify how inherited IRAs are treated.

Key points include:

• Most beneficiaries must follow a 10-year withdrawal rule
• Some cases may still allow annual distributions in years one through nine
• By year ten, the full balance must generally be distributed

An exception applies to eligible designated beneficiaries (EDB).

Eligible Designated Beneficiaries (EDB)

Eligible Designated Beneficiaries are a special category under the SECURE Act.

They may include:

• Individuals with disabilities
• Chronically ill individuals
• Minor children (under specific conditions)
• Individuals not more than 10 years younger than the account owner

EDBs may still use more flexible distribution rules compared to most beneficiaries.

Final Note

We hope you found this article helpful.

Contact our Auburn office at 260-925-3738 to create a legacy care plan that harmonises its moving parts, so the gears will work together and you leave the legacy you intended.