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SECURE Act and special needs heirs: Why it’s time to revisit your estate plan

Considering an individual with a disability in your estate planning? New SECURE Act legislation paves the way to leave retirement assets to special needs trusts. Here’s what you should know.
Child playing the piano while their mother watches and smiles.The goal for most estate plans is to pass along your personal property, money, and real estate with the most privacy and the largest financial legacy for family members. But in the case of special needs estate planning, there are many more considerations in play. If your family member is an individual with a disability, adequately managing any funds they receive may require a little more attention. Even worse, direct ownership or control of those assets may disqualify them from receiving means-tested benefits, while not leaving them enough to cover their living expenses or pay for any specialized care they may need in the future.

While appropriate estate planning is always important, the impact of special needs planning is even more significant. This is a problem because only one out of five Americans with disabilities is employed, according to the Bureau of Labor Statistics. As such, government benefits such as SSI (Supplemental Security Income) and Medicare are essential to those with disabilities. If you have a poorly crafted estate plan, or none at all, your family member’s inheritance could make them instantly ineligible for state or federal assistance programs for a year or longer — without providing them with enough to meet their needs.

Congress partially addressed these issues with the passage of the SECURE Act and SECURE 2.0. While not a comprehensive fix-all, the legislation provides a beneficial option for estate plans, and recent updates could enhance certain advantages for estates. Here are three important changes that can benefit your family member with a disability, and one that could enhance your entire family’s legacy.

Inherited IRA accounts

Most nonspouse beneficiaries of inherited IRAs and other qualifying retirement accounts have 10 years to deplete the account and pay the resulting income tax liability after the death of the account owner. This could be a problem for beneficiaries with a disability because required minimum distributions (RMDs) over a 10-year period could negatively impact the recipient’s eligibility for means-tested benefits, as noted above.

The SECURE Act created an exception for disabled or chronically ill eligible designated beneficiaries (EDBs), allowing them to receive distributions based on their life expectancy, which could extend for decades beyond the 10-year window. This reduces the annual RMDs and allows them to defer the associated income tax liability to a much greater extent.

Note that EDB status is determined as of the date of the employee’s or IRA owner’s death. The status of the beneficiary with a disability or chronic illness must be documented by October 31 of the year following the IRA owner’s death. If the beneficiary was already qualified under the Social Security Administration (SSA) disability rules, this same determination can be used to document their status. If the beneficiary is a minor who wasn’t yet qualified under SSA rules, the SECURE Act provides a definition for disability and other means of documenting their status.

IRAs and special needs trusts

Many families create special needs trusts (SNTs) to manage bequests for heirs who may require assistance managing finances, both to protect the assets and to prevent them from being considered in means testing for government benefit programs. While it was legal to name a SNT as a beneficiary to a retirement account before the SECURE Act and SECURE 2.0, IRS rules made it cumbersome for SNTs to qualify for lifetime “stretch” distributions.

Under the new legislation, an SNT with a primary beneficiary who’s a qualified EDB can now receive stretch distributions based on their own life expectancy, which results in a lower annual tax burden for the trust. The trustee is then able to maximize funds available to pay for the care and support of the SNT beneficiary while still preserving their eligibility for means-tested public benefits.

ABLE accounts

Achieving a Better Life Experience (ABLE) accounts are tax-advantaged savings accounts for special needs beneficiaries that also protect their eligibility for public benefits. Funds placed in an ABLE account don’t count as a resource per SSA guidelines. These accounts are often used in conjunction with SNTs to allow the beneficiary or caregiver more flexibility in paying for some everyday items and expenses. Under prior rules, a person had to be disabled before age 26 to open an ABLE account. The new regulations increase that age limit to 46 beginning in 2026.

Charitable giving through SNTs

Before these changes in the regulations governing SNTs, naming a nonprofit charitable organization as a remainder beneficiary of the trust eliminated EDB status and thus the life expectancy distribution. New rules under SECURE and SECURE 2.0 have eliminated this consequence, allowing families to include nonprofit organizations in their estate planning.

Was your estate plan drafted before 2022?

If your estate plan was drafted years or even decades ago, or you don’t have one at all, it’s vital to your family members that you speak to an estate planning professional with special needs experience to take advantage of the SECURE Act and SECURE 2.0 changes to the legislative landscape. Doing so could position your beneficiary and family for a secure future, enduring benefits, and lasting peace of mind.

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