Third Party Special Needs Trusts & IRAs

There are many ways to provide for your family member with special needs after you are gone. In many cases, one of your largest assets may be a retirement fund.

Since most Individual Retirement Accounts (IRAs) are made up of pre-tax money, future tax implications have the potential to be a hassle for your beneficiaries depending on how you plan to distribute these funds. Although this is the case, there are strategic steps you can take in order to reduce the tax burden inherited by your heirs. 

Components of Financial Planning

Can an IRA be Used to Benefit a Person With Special Needs?

The short answer is yes, but again, you do not want to leave IRA funds directly to your family member with special needs. IRA accounts allow for a designated beneficiary, ultimately removing IRA assets from the probate process. If you wish for your IRA funds to be used to support your loved one with special needs, designate the third-party SNT as the IRA beneficiary, not your loved one individually. 

The IRS has also established complicated regulations that control when IRA funds must be withdrawn and when taxes must be paid. If IRA funds are properly transferred to a SNT, tax rules may allow the funds to be withdrawn over the lifetime of the beneficiary.

In other words, withdrawing funds throughout the beneficiary’s lifetime leads to taxes being paid at a lower rate and over a longer time frame allowing more funds to stay in the SNT and grow tax-deferred.

However, if the process is not correctly executed, the beneficiary could have as few as five years to withdraw all of the funds and pay the related taxes. 

Designating an IRA Beneficiary

If you want to leave your IRA funds to a loved one with special needs without compromising his or her ability to receive public assistance benefits, it is recommended to designate a third-party Special Needs Trust as the beneficiary. While this may sound simple, there are other details to consider.

For example, some people may  want to name multiple people or even charitable entities as IRA beneficiaries. Because of complex IRS rules, if you complicate your IRA beneficiary designation with multiple parties or entities, you may create a tax burden on those you wish to help.

The Special Needs Planning Process

Every family situation is different and every plan requires careful consideration. Your financial plan will take into account your age, the size of your financial portfolio, whether you have a spouse, the number of children you want to provide for, and many other details.

When so much is at stake, it is important to receive personalized guidance from experienced special needs planning professionals.

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