11 Mar Can a special needs trust avoid SECURE Act rules?

Q. Can a special needs trust to avoid the RMD from a parent’s retirement plan so that an adult with a recognized disability can avoid the 10-year withdrawal? Would an inherited Roth IRA avoid the 10-year rule?
— Concerned parent

A. Let’s review your concerns.

They’re based on the Setting Every Community Up for Retirement Enhancement Act of 2019, commonly referred to as the SECURE Act.

This was signed into law by President Trump on Dec. 20, 2019.

Among other things, the SECURE Act makes significant changes to how IRAs and certain qualified retirement benefits, including 401(k) plans, must be treated at the death of the IRA owner or 401(k) plan participant, said Shirley Whitenack, an estate planning attorney with Schenck, Price, Smith & King in Florham Park.

Prior to the enactment of the SECURE Act, beneficiaries who were younger than the IRA owner or plan participant could stretch out the Required Minimum Distributions (RMDs) over the life expectancy of the beneficiary, she said.

This would defer income taxation on distributions and maximize continued tax-deferred growth during the “stretch’ period,” she said.

“As of Jan. 1, 2020, most beneficiaries of retirement plans are no longer able to stretch distributions over their life expectancy,” Whitenack said. “Instead, they will be required to withdraw the entire account balance within 10 years of the death of the IRA owner or the plan participant.”

Certain “eligible designated beneficiaries,” however, are exempt from the 10-year distribution rule.

She said the exemptions apply to surviving spouses, those not more than ten years younger than the deceased account holder or plan participant, chronically ill individuals, disabled individuals and minor children.

These eligible designated beneficiaries, together with any beneficiary that inherited an IRA or 401(k) prior to Jan. 1, 2020, will retain the right to have Required Minimum Distributions paid over their life expectancy.

A special needs trust can still be named as a beneficiary of an IRA or other retirement plan, she said, but there are special rules that apply to such trusts.

“A special needs trust will qualify for the stretch only if the individual with disabilities is the only beneficiary of the trust during his or her life,” she said. “If the trust also allows distributions to a spouse or others, the ten year rule will apply. Accordingly, a trust that benefits several beneficiaries, including a disabled beneficiary, will be subject to the 10-year rule unless the trust is divided into separate shares for each beneficiary.”

Inherited Roth IRAs continue to grow tax-free in the account after the death of the account holder and the distributions can be made without income taxation, Whitenack said. But non-disabled beneficiaries of inherited Roth IRAs who do not qualify for an exemption must withdraw the entire amount in the Roth IRA within 10 years.

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This story was originally published on March 11, 2020.

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