Charities May Now Be Named as Special Needs Trust Remainder Beneficiaries
Many parents and families planning for the care of their loved one with special needs will consider setting up a special needs trust (also referred to as supplemental needs trust or SNT). These trusts allow assets to be left to a disabled or chronically ill person without disqualifying them for certain benefits, such as Medicaid. A common asset that may be left to an individual living with a disability is a retirement account. However, families who had previously sought to establish an SNT for a loved one with a disability could not effectively designate a charitable organization as a remainder beneficiary. Thanks to legislation passed by Congress in late 2022, this is no longer the case.
Under the original SECURE Act, signed into law in 2019, beneficiaries were mandated to liquidate certain inherited retirement accounts (IRAs) according to required minimum distribution (RMD) rules. The original SECURE Act set the distribution timeframe for most IRAs inherited after 2019 to 10 years from the owner’s date of death, with some exceptions. However, particular beneficiaries are excluded from this 10-year rule, including disabled or chronically ill individuals. These beneficiaries may instead have the retirement asset paid out to them over their lifetime. This means that the inherited retirement funds can be left to an SNT and distributed over the course of the beneficiary’s lifetime allowing for continued tax deferred growth and potentially minimizing income taxes.
Typically, in third-party SNT planning, when a grantor (the person creating the trust) considers a charity as a beneficiary, it is as a “remainder beneficiary.” This designation is where a party is named as a beneficiary upon the death of the individual with the disability. The remainder beneficiary of a first party SNT is often going to be the state in the first instance. Because of the differing rules for charities and disabled beneficiaries, if the SNT named a charity as a remainder beneficiary, then the retirement funds had to be paid out within shorter timeframes. Possibly as short as five years from the anniversary of the original account owner’s death.
In late 2022, significant changes affecting the SECURE Act (SECURE Act 2.0) were approved. Among its provisions was the Special Needs Trust Improvement Act of 2022. Now the law allows charitable organizations to be named as remainder beneficiaries of special needs trusts holding inherited retirement accounts while also preserving the ability of SNT beneficiaries to benefit from the special lifetime payout rule that is available to them.
If you are wondering how a SNT works under the SECURE Act 2.0, it is best to speak with your special needs planning attorney.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.