Saving for retirement is about more than just planning for one person’s future – for many of your clients, passing on retirement savings is also an important part of how they will leave money to the next generation. 

Making up 34 percent of all U.S. retirement assets, Individual Retirement Accounts (IRAs) can be a valuable asset to pass along to beneficiaries, particularly individuals with disabilities. And with the recently passed SECURE Act 2.0, the opportunity to administer inherited IRAs for the benefit of Special Needs Trusts (SNTs) is even more significant. 

Benefits for SNTs

Before the passage of the SECURE Act 2.0 (“Setting Every Community Up for Retirement Enhancement”) a beneficiary of an inherited IRA could generally choose to take distributions over their lifetime and pass any remaining funds onto future generations. The most notable change brought about by the SECURE Act 2.0 is that most beneficiaries of inherited IRAs must take any distributions within 10-years of the decedent’s passing, even if that IRA is left to a non-Special Needs Trust trust. 

For parents of children with disabilities, this short time frame makes it difficult to stretch funds they want to last a beneficiary’s full lifetime. However, the SECURE Act 2.0 makes exceptions in these cases by preserving the life-expectancy timeframe for Required Minimum Distributions (RMDs) for certain beneficiary classes, including beneficiaries with disabilities and chronic illness.

This presents a fantastic planning opportunity for families that have beneficiaries with disabilities. When withdrawals can be made over many years, funds within the IRA are allowed more time to grow tax-deferred. Additionally, withdrawals spread out over time are less likely to push beneficiaries into a higher personal income tax bracket (as distributions from an IRA are taxed as income to the recipient).

The SECURE Act 2.0 also allows the IRA holder to designate an SNT as the beneficiary of the IRA, and the SNT trustee may use the IRA to fund the SNT for the beneficiary’s supplemental needs. When the SNT pays nothing to anyone other than the beneficiary with a disability (this person is known as the “Eligible Designated Beneficiary,” or EDB, in SECURE Act 2.0 regulations), the life expectancy payout rules apply. This provision allows the SNT beneficiary to continue to qualify for means-tested public benefits and stretch the inherited IRA over their lifetime.

How to take advantage of these benefits

While the potential benefits loom large, administering an inherited IRA for an SNT is a complex process – each type of IRA has different rules regarding taxation, eligibility, and withdrawal requirements that must be adhered to. The SECURE Act 2.0 outlines further trust requirements to qualify for the life-expectancy option. 

In general, SNTs will need to be structured and drafted in a way that complies with the updated guidelines. For fiduciaries who manage SNTs, now is the right time to consider adding a policy and procedure in regards to inherited IRAs. Because there are often time limits on when different steps in the process need to occur to qualify for the life-expectancy option, planning ahead is key – as is working with an investment advisor who is experienced at marshaling and managing IRA assets under these new requirements. 

The SECURE Act 2.0 presents a pivotal opportunity for fiduciaries to assist more people with disabilities. If you have questions about how to take advantage of inherited IRAs for SNT beneficiaries, please reach out to me directly: peter.wall@truelinkfinancial.com. 

Please note that the views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of True Link Financial Advisors, LLC.

¹- ICI Research Perspective, Jan 2021, Vol. 27, No.1
²- I.R.C. § 401(a)(9)(H)(iv)