Planning Tips for Using Special Needs Trusts and Stretch IRAs

Have you considered using a special needs trust in your estate planning? When you have a loved one facing a significant disability or other challenge, your experienced Florida estate planning attorney may recommend a special needs trust, or supplemental needs trust, as a planning tool to reach your goals. Through a special needs trust, you can ensure your beneficiary is protected in the future and does not lose access to the vital public benefits he or she needs for support.

The special needs trust itself is designed for assets to be held in trust for the benefit of your loved one with disabilities. Instead of your loved one receiving this money outright, and potentially losing valuable government benefits such as Medicaid and Supplemental Security Income (SSI), the trust exists to hold this money and provide for your loved one’s necessities as needed. Since there is no direct access to the money when you use this carefully created trust agreement, your loved one will not be at risk as the trustee will cover services that do not violate the government benefit rules.

While the special needs trust can be created by the disabled individual, this is not the form of special needs trust we are discussing in this blog. The type of trust we are referring to is a third-party special needs trust. It is funded with assets that belong to someone else, such as a parent or grandparent. When our clients are considering this type of planning, we also look beyond the first goal of creating the special needs trust to determine what assets to use to fund it that can help both the intended beneficiary and our client, the trust creator.

Often, for our clients, we consider a stretch IRA in this type of planning. A stretch IRA is a retirement account that allows beneficiaries to extend the period over which they can withdraw the funds from the account, potentially minimizing the tax impact of the distributions. The term “stretch” refers to the ability to stretch out the payments over a long period of time. In a traditional IRA, the owner must begin taking required minimum distributions (RMDs) at age 72. If the IRA is left to a non-spouse beneficiary, however, the beneficiary can take distributions over his or her own life expectancy, allowing him or her to stretch out the payments over a longer period of time.

There were important, recent changes to tax laws. Specifically, under the SECURE Act, which was passed in December 2019, most non-spouse beneficiaries of IRAs must now withdraw the entire balance of the account within 10 years of the original account owner’s death. Under the SECURE Act 2.0 of 2022, however, the new rule broadened the tax deferral avenues specifically for disabled or chronically ill beneficiaries. The Act now allows for the stretch treatment to be retained for the disabled or chronically ill beneficiary’s lifetime, which will reduce income tax on these assets.

We understand this blog will raise more questions than it answers. If you have a special needs trust right now or need to create one, we encourage you to meet with one of our attorneys to discuss the impact of this rule on your legacy planning. Our estate planning law firm takes a very different approach from what you might have come to expect. Our goal is to create lifelong relationships with each of our clients, to guide and manage your legacy for the rest of your life. Please contact our offices in Stuart and in Palm City to learn more.