This article is not intended to provide investment, legal, tax, or accounting advice. Before making decisions involving investing, legal, tax, or accounting concerns, you should consult appropriate professionals regarding your specific situation.

If you have a child or family member with a disability, it’s important to understand how The Setting Every Community Up for Retirement Enhancement (SECURE) Act could impact how you save for their future. In January of 2020, this law ushered in some important changes around how unearned income of children is taxed and how IRAs can be distributed over a lifetime. These are changes that experts say will go a long way in better protecting people with disabilities. 

With the SECURE Act now in place, Peter J. Wall, Director of Fiduciary Services for True Link Financial Advisors, encourages parents to check in with their estate or financial planners to make sure their plans are sound. “It’s important for people to have an understanding of this legislation, and its implications for estate planning, especially for beneficiaries with a disability. People need to get up to speed, so they can make informed decisions,” he says.

Taking advantage of the IRA stretch provision

The most important change resulting from the SECURE Act is that after January 1, 2020, designated beneficiaries who inherit an IRA must take out the funds within 10 years of an IRA account holder’s death. “That really defeats the goal of a parent with a large retirement account who’s trying to protect it for a beneficiary over the long term,” says Attorney Brad Frigon, principal of the Law Offices of Bradley J. Frigon serving Colorado, Wyoming and Kansas.

“But the good news is that the lawmakers created an exception for disabled or chronically ill people.” That means these beneficiaries are eligible to receive IRA distributions over their lifetimes. He recommends that trustees look into what is referred to as the  “stretch” option and that attorneys draft a trust that allows beneficiaries to receive payments based on their life expectancy. This can result in the beneficiary paying lower annual income taxes while enjoying a tax-advantaged asset appreciation in an IRA. 

Every estate planning situation is unique and requires a thoughtful approach

Frigon cautions that the mix of old and new rules can be complicated, so trustees should consult an expert to make sure beneficiaries and their lifetime income are adequately protected. “These Special Needs Trusts need to be carefully drafted because if you don’t avoid all the traps of the new rules, you could lose the stretch provision and end up jeopardizing their benefits,” he says, Frigon explains that either all the money would have to come out within 10 years, or it could be taken out at once and potentially taxed at the top trust and estate tax rate of 37 percent. “That’s why it’s so important to get back into your estate planning attorney’s office as soon as possible.”

For example, parents with several children might consider how they would distribute their assets within a family. “If I have three kids and I have one with a disability and the other two are working individuals, that tells me in my estate plan that maybe I should focus my retirement on the Special Needs Trust, so that child can get the stretch and earmark life insurance for the other two,” says Frigon.

These are just some of the decisions experts can help you sort through to make sense of the SECURE Act’s maze of new provisions. “You need a knowledgeable administrator to set up these trusts and guide parents about how these trusts work. You need a knowledgeable trustee to be able to administer these trusts after the parent has passed away,” adds Frigon. “And then you need someone like True Link that gives the trustee the tools necessary to make sound decisions.”