By Christopher W. Smith, Chalgian & Tripp Law Offices, PLLC
Special needs planners regularly encounter families who have accumulated large retirement accounts. While the initial SECURE Act forced most beneficiaries of an inherited retirement account to take distributions out in 10 years (or fewer), beneficiaries with disabilities (referred to as “eligible designated beneficiaries” in SECURE) remain eligible to take minimum distributions over their entire life expectancies. While planners used to try to keep retirement assets from hitting special needs trusts, many are starting to flip their thinking and leave more retirement assets to special needs trusts to take advantage of this life expectancy payout.
Additionally, a special needs trust is, by definition, an “accumulation trust” for IRA purposes. Thus, before the SECURE Act, if a family member wanted to leave a retirement asset to a special needs trust, we were concerned about the ages of any residuary beneficiaries (i.e., the age of any beneficiaries who would inherit after the beneficiary with disabilities dies). If a residuary beneficiary was older than the beneficiary with disabilities, we had to use the older beneficiary’s age as the life expectancy when calculating minimum distributions. This often led to families naming random nieces and nephews to keep the life expectancy below the primary special needs trust beneficiary.
Under the proposed SECURE regulations, the ages of residuary beneficiaries no longer matter! Suddenly leaving retirement assets to special needs trusts looks even more attractive.
But there was still a problem if the family was charitably inclined. Like the rules before the SECURE Act, a charitable remainder beneficiary of a special needs trust would ruin this life expectancy payout because a charity is not a person. For example, if a family left an asset to a child with a disability and then the Arc of Michigan after that child dies, the child would have lost the ability to stretch minimum distributions over the child’s lifetime. So again, it was typically the best legal advice to have the family name some far-off relative as a remainder beneficiary instead of benefitting a charity that has made a real difference in the family’s life.
Thankfully, the Special Needs Trust Improvement Act within SECURE 2.0 changed this. It’s one small paragraph on page 915 of the recently passed 1,653-page Consolidated Appropriations Act, 2023 (a.k.a. Section 337 of SECURE 2.0). Certain charities can now be the remainder beneficiary of a special needs trust without impacting the life expectancy payout for the beneficiary with a disability.
A small clarification. Under the Special Needs Trust Improvement Act, the residuary beneficiary has to be what would be commonly known as a 501(c)(3) charity. You cannot name a donor-advised fund or a private foundation.
Given the possibility of using the beneficiary’s life expectancy to stretch out minimum distributions, and with only minimal concern over who you name as the residuary beneficiary, have special needs trusts suddenly become the preferred beneficiary of retirement plans? Probably so, even if it will take planners a while to let this massive change in thinking sink in.
We are proud that The Special Needs Alliance, where Roxanne Chang and I are the co-chairs of the Public Policy Committee, led the efforts to pass the Special Needs Trust Improvement Act. In addition to our committee members, we’re very grateful to the bipartisan efforts of Sen. Young (R-Indiana) and Sen. Hassan (D-NH) for first introducing the Special Needs Trust Improvement Act in the Senate and then Rep. Schneider (D-IL) and the late Rep. Walorski (R-IN) for introducing it in the House of Representatives. We’re also indebted to The Arc and The Arc of Indiana for joining us in our efforts.
ABLE Adjustment Act Also Passes. Also, in part of the same bill, Congress finally passed the ABLE Adjustment Act, which will eventually change the eligibility age limit to qualify for an ABLE Account from age 26 to 46. I emphasize “eventually” because the age limit will not change to 46 until January 1, 2026. (Congress generally scores the costs of bills in 10-year timeframes and pushing the start date out nearly halves the age adjustment’s estimated cost.) But while we wait, it is again important to remember that you just need to trace the start of the disability before age 26 for an individual to be eligible for an ABLE Account. A beneficiary does not have to be Social Security Disability eligible before age 26.
Concerns About Meeting The Definition Of Eligible Designated Beneficiary. All is still not perfect. The proposed SECURE regulations have at least two problems for special needs planners ensuring that beneficiaries meet the “eligible designated beneficiary” definition. First, the proposed regulations seem to emphasize that an individual needs to be determined disabled by Social Security. But there are several reasons why an individual may be disabled but have no reason (or ability) to apply for Social Security. There needs to be a non-Social Security method to prove disability to meet the “eligible designated beneficiary” criteria. In the Special Needs Alliances comment on the proposed regulations, we suggested the alternative should mirror the disability certification requirements of ABLE Accounts.
Second, under the proposed rules, disability is determined on the IRA owner’s death date. This, however, can be entirely unfair, particularly to a minor child of a deceased parent. As we are all aware, we often do not know whether a child would meet Social Security’s definition of disability until at least adulthood. Thus, in the Special Needs Alliance’s comments, we suggest that at least for children, a disability certification be delayed until age 21 (the proposed age when a beneficiary is no longer a minor).
Do you have a Michigan pensioner who wants to leave a pension to a special needs trust? We have noted problems with State of Michigan employees who have taken a reduced pension to allow a dependent child to continue receiving the pension after the employee’s death. These retirees cannot assign the pension to a special needs trust before death. If you have a client in this situation, please get in touch with me at firstname.lastname@example.org so we can join them in our efforts to get this changed.