The SECURE Act dramatically changed the required minimum distribution (RMD) rules for non-spouse beneficiaries who inherit retirement plans. Most non-spouse beneficiaries must take their inherited benefits over 10 years.
Congress recognized that this new rule could create a hardship for special needs beneficiaries. The SECURE Act created an exception for disabled and chronically ill beneficiaries. The disabled and chronically ill can take distributions over their life expectancy. Yet, a special needs beneficiary might want a Supplemental Needs Trust (SNT) to assure that the beneficiary does not lose Medicaid or Supplemental Security Income (SSI).
Consequently, Congress created a new trust under Internal Revenue Code Section 401(a)(9)(H)(iv) and (v). The new trust is called an Applicable Multi-Beneficiary Trust (AMBT). The AMBT must have only individual beneficiaries or trusts for them. By December 31st of the year following the death of the retirement plan owner, the trust must be divided between the special needs beneficiary and the other beneficiaries. The other beneficiaries (usually siblings of the special needs beneficiary) can receive their shares either outright or in trust. Only the disabled or chronically ill beneficiary may have an interest in the portion distributed to the SNT. The SNT will allow the Trustee to make withdrawals from the inherited IRA, payable to the Trust. The Trustee is not required to immediately distribute the IRA withdrawal to the special needs beneficiary. Consequently, it is not treated as an available asset for Medicaid or SSI purposes.
An AMBT works well with a family who has adult children, one of whom is a special needs beneficiary. The SNT receives IRA withdrawals over the special needs beneficiary’s life expectancy, and the other children receive their distributions over 10 years. It now means that a retirement plan owner can designate his or her Revocable Trust as the beneficiary of his or her retirement plan. The retirement plan distributions will be more valuable to the special needs child so the Trustee will want to allocate more retirement plan assets to the special needs child and distribute non-retirement assets to the other children. Many more families will need financial planning to make good decisions about the allocation of both retirement and non-retirement assets among family members.
For families with young children, an AMBT might not work as well. Suppose Jennifer has 3 young children, one of whom has special needs. Jennifer will want those of her children, who do not have special needs, to be able to take distributions over their life expectancies until the age of 18, as allowed under the retirement plan regulations. To do so, she will want them to have Conduit Trusts – trusts that requires the Trustee to distribute, to or for the benefit of the child, all withdrawals from a retirement plan. After they reach the age of 18, the Trustee of the Conduit Trust must then take retirement plan withdrawals over 10 years.
Rather than naming her Revocable Trust as the beneficiary of her retirement plan, Jennifer should name each subtrust as a beneficiary on the beneficiary designation form. She will name each conduit trust as beneficiary and the SNT as a beneficiary. Each trust will have its own tax identification number after Jennifer’s death, and the retirement plan administrator will divide the inherited IRA into three separate IRAs. The Trustee will not have the power to favor the special needs child in allocating between retirement and non-retirement assets.
July 2020, Issue # 28
Joe Cipparone wrote the articles in this edition. No taxpayer can avoid tax penalties based on the advice given in this newsletter. This information is for general purposes only and does not constitute legal advice. For specific questions related to your situation, you should consult a qualified estate planning attorney.
