CAN A SPECIAL NEEDS TRUST BE THE BENEFICIARY OF AN IRA? (Part II)

In my last blog post, I addressed the issue of naming a Special Needs Trust (SNT) as beneficiary of a retirement account (e.g., 401k, IRA, qualified plan, etc.).  Normally, as explained in Part I of my prior post, the use of a “conduit trust” is not usually wise and the compulsory distributions to the disabled beneficiary can have a potentially disastrous loss of public benefits. 

A better choice is the use of an accumulation trust which is designed to receive the MRD (Minimum Required Distributions) from the tax deferred retirement account and then to retain them to be used or expended, from time to time, for special needs for the disabled beneficiary.  The most tax-wise way of using the IRA is to withdraw the balance over the life expectancy of the disabled beneficiary.  This slows the consumption of the IRA and also slows the income tax consequences to the accumulation trust.  One would think you could simply choose to use the beneficiary’s life expectancy under the “see through” (the Trust) IRS rules.  However, the see through rules require that all persons who might receive benefits from the trust must be natural persons and determinable as of the date of the death of the IRA owner, or no later than the “Beneficiary Determination Date.”  Thus, an accumulation trust must be drafted carefully to avoid naming a charity (for example) or the estate of the beneficiary as a final remainder beneficiary after the death of the disabled beneficiary, since neither a charity nor an “estate” is a natural person.  If natural persons only are properly named, the trust must eventually distribute outright to “now living person(s).”

The IRS rules require that the person among all named beneficiaries (i.e., the disabled beneficiary, along with all remainderpersons) with the shortest life expectancy (according to the IRS tables) is the “measuring life” to determine the “Applicable Distribution Period” (ADP), which basically means the number of years over which that the minimum required distributions are spread.

The IRS rules are complex when distributions are made to an accumulation trust, but it rarely is advisable to name the disabled child directly or a conduit trust when the source of funds is a tax deferred retirement account.  Funding of a Special Needs Trust accumulation trust via a tax deferred retirement accounts is a hazardous venture and requires very careful document provisions and coordination with IRA beneficiary designation forms.

Curtis J. Shacklett, Esq.
Barber & Bartz, P.C.
525 S. Main St., Ste. 800
Tulsa, OK 74103-4511
Telephone: (918) 599-7755
Facsimile: (918) 599-7756
Email: cshacklett@barberbartz.com
Website: www.barberbartz.com