For parents of children with special needs, planning for the future goes far beyond drafting a will. One of the most complex — and important — pieces of the puzzle is ensuring that your retirement assets are distributed in a way that provides financial support without jeopardizing your child’s public benefits.
Thanks to recent legislation like the SECURE Act and SECURE 2.0, there are planning opportunities — and potential pitfalls — families should be aware of. Here’s a breakdown of what you need to know.
The Importance of Planning for Retirement Accounts
Retirement savings make up a significant portion of most families’ assets. As of mid-2024, 401(k) accounts held roughly $8 trillion and IRAs more than $14.5 trillion in the U.S. alone. But without proper planning, these assets may pass to a child with special needs and unintentionally disqualify them from essential government benefits like Medicaid and SSI.
The SECURE Act and Required Minimum Distributions (RMDs)
Under the SECURE Act of 2019, most beneficiaries who inherit a retirement account must withdraw the full amount — and pay the taxes — within 10 years of the original account holder’s death.
However, there’s an important exception: Eligible Designated Beneficiaries (EDBs), which includes individuals with disabilities, can still “stretch” distributions based on their life expectancy. This allows for smaller withdrawals over a longer period — preserving tax-deferred growth and reducing annual tax burdens.
Why Supplemental Needs Trusts Are Critical
Directly naming a child with special needs as the beneficiary of a retirement account can result in the loss of public benefits. But naming a 3rd Party Supplemental Needs Trust (SNT) can help avoid this outcome — if done correctly.
SNTs allow assets to be used for things that public benefits don’t cover — like education, therapy, recreation, and transportation — while protecting eligibility for programs like SSI and Medicaid.
The Right Type of Trust: AMBTs and Accumulation Trusts
For retirement accounts, the best structure is usually an Applicable Multi-Beneficiary Trust (AMBT) – a type of see-through accumulation trust that meets specific IRS criteria. This trust:
- Protects public benefits
- Allows the trustee to retain and manage distributions
- Qualifies for the lifetime stretch (based on the disabled beneficiary’s life expectancy)
Note: The trust must name the person with a disability as the sole lifetime beneficiary to qualify.
Conduit Trusts vs. Accumulation Trusts
- Conduit trusts pass income directly to the beneficiary, which is not ideal for special needs planning, as it may disqualify them from benefits.
- Accumulation trusts retain income and give the trustee control, offering much more flexibility and protection. This, however, may result in the trust paying income taxes at a higher bracket.
SECURE 2.0 and Charitable Remainder Beneficiaries
Prior to SECURE 2.0, naming a charity as a remainder beneficiary in an SNT disqualified the trust from using the life expectancy stretch. The 2022 legislation changed that — now, charities can be included as remainder beneficiaries in certain AMBTs without losing stretch treatment, if the disabled beneficiary remains the sole lifetime beneficiary.
Key Takeaways
- Disabled beneficiaries qualify as Eligible Designated Beneficiaries and can stretch inherited retirement distributions over their lifetime.
- Use an Applicable Multi-Beneficiary Trust (AMBT) to protect benefits and preserve tax advantages.
- Work with an experienced special needs planning attorney to ensure your trust documents meet all legal and tax requirements.
