The SECURE Act, passed in December 2019, brought significant changes to retirement account rules, offering unique opportunities for special needs planning. For families looking to leave retirement assets to loved ones with disabilities, the SECURE Act provides ways to do so in a tax-efficient manner, while also ensuring that the beneficiary’s access to government benefits like Medicaid or SSI is not jeopardized.

Here’s how you can use the SECURE Act to leave retirement accounts to persons with disabilities effectively:

1. Utilizing Special Needs Trusts (SNTs)

One of the most effective ways to leave retirement accounts to a person with a disability is through a Special Needs Trust (SNT). The SECURE Act allows for inherited IRAs to be distributed over the life expectancy of the beneficiary in limited cases. Beneficiaries with disabilities, as “eligible designated beneficiaries,” are permitted to stretch distributions over their lifetime, rather than being subject to the 10-year distribution rule.

By placing the retirement account assets into an SNT upon your death, you can ensure that the beneficiary receives the benefits of the retirement account without disqualifying them from vital government assistance. This trust can be designed to manage the funds for the disabled individual’s benefit, while protecting their eligibility for programs such as Medicaid or SSI.

2. Understanding the 10-Year Rule

The SECURE Act eliminated the stretch IRA for most non-spouse beneficiaries, requiring them to withdraw inherited retirement accounts within 10 years. However, for beneficiaries with disabilities, the rules are more lenient. These beneficiaries can still stretch the distributions over their life expectancy, which offers more time for tax-deferral and allows funds to grow longer before being taxed.

3. Maximizing Tax Deferral

One of the primary benefits of retirement accounts like IRAs and 401(k)s is tax deferral. When you leave these accounts to a person with a disability (or their properly drafted and administered third-part Special Needs Trust), they can continue to benefit from this tax deferral, allowing the account to grow without incurring taxes on the earnings each year. Although distributions will eventually be taxed as ordinary income, having the funds distributed over an extended period can help spread out the tax liability, making it more manageable.

4. Coordinating with Other Estate Planning Tools

The SECURE Act’s provisions for special needs planning should be coordinated with other estate planning tools, such as trusts or guardianship arrangements. Working with an experienced special needs planning attorney can help you balance the needs of your disabled loved one with tax efficiency, asset protection, and long-term financial security. A well-structured plan will help ensure that your loved one receives the retirement account benefits in a way that complements your overall estate plan.

Conclusion

The SECURE Act offers powerful opportunities for leaving retirement assets to persons with disabilities, especially when combined with a third-party Special Needs Trust. By taking advantage of the law’s tax-deferral provisions and ensuring that assets are distributed in a way that protects eligibility for government benefits, you can provide a secure financial future for your loved ones. Always consult with a qualified special needs planning attorney to make sure your plan aligns with your goals and meets the unique needs of your disabled beneficiary.

In AZ? Interested in learning how you can best structure your estate upon your death to provide for your loved one with disability or special needs? Call us at 480-922-1010 or email info@bivenslaw.com to schedule your consultation. We are here to help.