Pandemic Planning For Loved Ones With Special Needs

May 14, 2020

By: Kaitlyn A. Blanchard

The COVID-19 health crisis has disrupted our lives and caused a great deal of uncertainty. This is especially true for certain communities, including the disabled community, who may be more vulnerable to the virus’ effects due to underlying health conditions or inadequate resources. Fortunately, there are steps you can take today in planning your estate to ensure your loved ones with special needs will have access to high quality care and capital they may need in the future.

In particular, retirement benefits represent a meaningful asset to most families for estate planning purposes. However, if your beneficiary suffers from persistent disabilities, there are several important issues to be wary of.

Review Your Beneficiary Designations

While a Last Will and Testament is essential to basic estate planning, a Will does not govern assets with specific beneficiary designations or property owned jointly with rights of survivorship. Therefore, it is important to review beneficiary designations on your financial assets, such as bank and brokerage accounts, retirement accounts and life insurance policies, to ensure the ultimate disposition of these assets is consistent with your overall estate planning objectives.

In the context of planning for a loved one with special needs, reviewing your beneficiary designations can help avoid adverse consequences. If, for example, your IRA names a disabled person as a beneficiary, the account will pass by operation of law to the named individual upon your death. This is true, even if your Will directs the payment of retirement assets to a Supplemental Needs Trust (“SNT”), a special trust for the benefit of a disabled person which does not count towards means-tested benefits. The beneficiary designation must also be updated to direct payment to the SNT.

Avoid Triggering a Payback Provision

Ensuring that a disabled loved one will not inherit assets in his or her own name protects their eligibility for critical means-tested benefits such as SSI and Medicaid, in addition to avoiding other unforeseen consequences. According to private letter rulings (“PLRs”) published by the Internal Revenue Service (“IRS”), a disabled individual may be permitted to transfer an inherited IRA to a self-settled SNT to preserve their benefits, without having to liquidate the account and thereby incur significant income tax. However, a PLR cannot be relied upon as precedent by other taxpayers or IRS personnel. Moreover, a self-settled SNT is subject to a mandatory payback provision. Upon the death of the beneficiary, any funds which remain in the SNT must reimburse the State for the cost of medical assistance provided over the individual’s lifetime.

By contrast, a carefully drafted SNT coupled with a properly worded beneficiary designation, can ensure your loved one will benefit from your IRA as intended. Moreover, the trust will be treated as a third-party SNT, with the ability to designate family members to inherit any funds which remain in the SNT upon the death of the beneficiary. Thus, avoiding the so called “payback provision.”

Get to Know The SECURE Act

Recent changes to the federal tax code which took effect in January 2020 have further obscured the landscape when it comes to retirement benefit planning for a loved one’s special needs. These changes contained in what is commonly referred to as the SECURE Act, affect the distribution of retirement assets to beneficiaries upon the death of the account owner. Specifically, the lifetime pay-out of Required Minimum Distributions (“RMDs”) for designated beneficiaries which, under the old rules, allowed for income tax-free growth of the retirement account over the beneficiary’s life expectancy, is now subject to a forced ten (10) year pay-out rule for most beneficiaries.

Importantly, “eligible designated beneficiaries” who are considered disabled [1] or chronically ill within the meaning of IRC Section (401)(a)(9)(E)(ii) are exempted from the ten (10) year rule. [2] Such eligible designated beneficiaries can continue to stretch-out distributions over their life expectancy, deferring the associated income tax and maximizing tax-free compounding of interest over an extended time period.

Choose Accumulation Over Conduit

An SNT also qualifies as an eligible designated beneficiary, thus allowing for RMDs to be stretched-out over the lifetime of the disabled beneficiary. There are two options for a trust which qualifies as a designated beneficiary, it may either be a conduit trust or an accumulation trust. The Trustee of a conduit trust is required to make RMD payments to the beneficiary annually. Such payments, of course, would likely cause the beneficiary of an SNT to exceed the low threshold for most means-tested benefits. An accumulation trust, on the other hand, offers the Trustee flexibility to either pay or accumulate the RMDs to preserve the individual’s benefits.

Consider a Roth IRA

Finally, a Roth IRA or Roth conversion is another option to consider when planning for a disabled beneficiary. While a Roth IRA triggers a large upfront tax bill, there are no future RMDs required by the owner once the account is funded. This increases the tax-free growth potential of the account. When the account owner dies, the inherited IRA becomes subject to the same RMD rules as a regular IRA. However, any future distributions to your beneficiary will be free from income tax. [3]

Be Proactive

In the wake of this pandemic, the trend towards preparedness has been a positive and unifying force. Planning and preparation for an increasingly uncertain future is in the forefront of our minds. For families who have loved ones with special needs, planning is essential. Contact one of our experienced attorneys if you have questions or wish to review your current estate plan.

For additional information, please contact me at (212) 554-7838 or

[1] A “disabled individual,” for purposes of the SECURE Act, is defined under IRC Code Section 72(m)(7) as someone who 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.”

[2] There are five categories of beneficiaries who are exempt from the 10 year pay-out rule, including: (i) a surviving spouse, (ii) disabled individuals, (iii) chronically ill individuals, (iv) individuals less than 10 years younger than the participant and (v) minor children of the participant.

[3] Consult your attorney before making any changes which may have tax implications.