The SECURE Act’s accelerated distribution rules to non-spouse beneficiaries provide estate planning opportunities for individuals with disabled loved ones. The SECURE Act requires most non-spouse beneficiaries of an inherited IRA to withdraw all of the funds and pay the applicable taxes within a 10-year period after the death of the IRA owner. However, a disabled beneficiary who meets certain requirements, will be able to stretch the IRA distributions over their life expectancy.
In order to qualify as disabled, the beneficiary must meet the IRS definition under IRC 72(m)(7) which states, “For purposes of this section, an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.”
The IRS’s definition of disability is similar to the definition used by the Social Security Administration to determine whether or not a person is disabled for the purpose of receiving a disability benefit under social security rules (SSI or SSDI). These rules define disabled as “the inability to engage in any substantial gainful activity (SGA) by reason of any medically determinable physical or mental impairment(s) which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.”
Families with members who qualify as disabled under either of these definitions should consider estate planning which would segregate various assets to certain beneficiaries, rather than utilizing a traditional plan of equal distribution of all assets to all beneficiaries upon a family member’s death. For example, individuals may choose to leave IRA assets to a disabled beneficiary in order to maximize tax savings while leaving non-retirement assets to other beneficiaries who would otherwise be subject to the IRA’s 10-year distribution period.
Before changing the beneficiaries of an IRA account to name a disabled individual, the family should also consider the impact that IRA distributions to the beneficiary may have on any public benefits they receive or may receive in the future. Many disabled individuals receive government benefits, including Supplemental Security Income, Medicaid, and housing subsidies. These particular benefits are “means-tested,” which means that there are income and asset limits a disabled person must meet to be eligible. Inheritances (including distributions from an IRA), if not properly passed to the disabled person, may result in their benefits being disrupted or terminated.
However, the SECURE Act allows the owner of an IRA to designate the beneficiary’s Special Needs Trust (SNT) as the beneficiary of the IRA. This designation will allow the distributions to be made to the trustee of the SNT for the benefit of the disabled beneficiary. This prevents the required minimum distribution (RMD) from flowing directly to the disabled individual and possibly interfering with their benefits.
To direct traditional IRA distributions to a disabled beneficiary (which would allow stretching the tax liability over their lifetime) and to ensure the distributions do not disrupt their benefits, you need to plan appropriately. This involves having up-to-date special needs trusts in place and correctly naming beneficiaries on your IRA accounts. If your family has disabled loved ones, discuss these planning options with your Warner attorney.
