The SECURE (Setting Every Community Up for Retirement Enhancement) Act, passed at the end of 2019, changed a number of rules regarding inherited IRAs, making it more difficult for most beneficiaries to save on taxes by “stretching” distributions over many years. However, an exception to the new rules changes the advice that special needs planners often give clients.

Prior to the passage of the SECURE Act, it was, typically, not advisable to make an individual with special needs the beneficiary of an IRA or 401(k) plan. They may not be able to manage the funds, and owning the account may render them ineligible for vital public benefits.

This is why planners always recommend that parents with children with special needs leave their share of their estates in a special needs trust for the child’s benefit. But parents are often encouraged to leave their retirement plans to other children because holding a retirement plan in a special needs trust gets complicated.

New IRA Laws, New SNT Advice

In light of the SECURE Act’s new rules, this advice may no longer apply, especially in the case of people with larger retirement plan accounts. Under the terms of the SECURE Act, most people who inherit retirement plans now must withdraw all the funds, and pay income taxes on them, within 10 years of inheriting them.

Exceptions to this new law are persons with a disability. They can withdraw the funds over their life expectancies, which can be several decades, both postponing tax payments and potentially paying at lower rates for two reasons:

  • First, by spreading out the withdrawals over many years, the withdrawn funds are less likely to push the recipient into a higher tax bracket.
  • Second, a beneficiary with a disability is likely to be in a lower tax bracket in the first place than a non-disabled beneficiary.

Happily, the new law states that the retirement plan owner can designate an SNT as the beneficiary, and the trustee can use the required minimum distributions to pay for the care and support of the person with special needs. In a nutshell, the SECURE Act changed how retirement accounts are inherited and distributed, affecting how those assets are directed into a special needs trust. It may be necessary to update the language in an existing SNT to ensure it reflects the new rules and requirements for retirement accounts.

For these reasons, it may well make more sense for some people to have some or all of their retirement plans payable to a special needs trust for their children or grandchildren with special needs. It’s still more complicated to make use of a trust, but now the benefits of doing so are more likely to justify the added expense and complications. Whether it makes sense in your case depends on your exact situation.

SECURE Act 2.0

SECURE 2.0, which became law on 12/29/2022, allows for a qualified charity to be a designated beneficiary of an SNT. The Stretch IRA now applies here—going from the inherited IRA to the special needs trust—based on the life expectancy of the special needs beneficiary requiring special care.

Let’s go over an example of a special needs trust and how these rules from SECURE 2.0 apply. In this example, there is a parent with an IRA and a child with special needs. The parent named a special needs trust for their child as the IRA beneficiary. So, the leftover IRA funds will go to charity once their child passes on. When the parent passes away, distribution is paid to the SNT via the inherited IRA over the course of the child’s life expectancy.

There’s a good chance that the parent of that child would be passionate about supporting charities of their child’s disability. Thankfully, SECURE 2.0 makes it easy to set up a special needs trust with charitable benefits. And there won’t be any unforeseen consequences from the special needs trust that the child would inherit.

Review Your Existing SNT

You should also be aware that if you have an existing special needs trust that was designed to accept retirement plan benefits, it needs to be updated to conform with the SECURE Act. Whether you have questions about your existing plan or would like to consider creating a SECURE special needs trust, contact a special needs planner in your area.

Effects on ABLE Accounts

SECURE 2.0 increases the age at which blindness or disability must occur for an individual to be eligible for an ABLE account from 26 to 46 years old.

ABLE account programs are tax-advantaged savings programs for certain people with disabilities. These programs are created at the state level and provide tax-free distributions if used for qualified disability expenses for the account’s beneficiary. This change would allow more people to access these tax-advantaged savings vehicles and better save for future disability-related expenses.
Effective date: Taxable years starting after December 31, 2025.