Retirement Accounts and Special Needs Trusts

Posted by Patty Manko on Thu, Feb 20, 2014 @ 04:51 PM


Beneficiary Designations on Retirement Accounts

At the death of the owner of an IRA or company-sponsored retirement plan, the proceeds are distributed according to the beneficiaries that are listed when the application is signed. Generally speaking, if you are married, your spouse is usually listed as the primary beneficiary. At the owner's death, the spouse will be able to transfer the assets into a spousal IRA rollover. This will enable the spouse to defer the taxes until the funds are withdrawn from the account. If you are not married and your intent is for an individual with a disability to receive any portion of the IRA, it is recommended to have those proceeds paid to a trust that has special needs provisions. 

If a special needs trust is used as the beneficiary of a retirement plan account, the income earned in the trust will be taxed to the trust, usually at a higher tax bracket than an individual tax bracket. The proceeds from a Roth IRA are distributed tax free upon death of the owner. If an owner has a Roth IRA in addition to other retirement accounts, it may be advantageous to have the special needs trust named as beneficiary of the Roth IRA and the other children named as beneficiaries of the other IRA and retirement plan assets.

It is not recommended to have an individual with disabilities named individually as the beneficiary of the traditional IRA or Roth IRA, because an account balance greater than or equal to $2,000 will disqualify him or her for government benefits. Instead, if the owner wants the value of all or a portion of the IRA to be received by a person with disabilities, that person's special needs trust should be named as one of the beneficiaries.

Special Needs Planning Pointer

If you have more than one child and you intend to split your retirement account between all the children, including your child with special needs, you should direct his or her share in the beneficiary designation to the special needs trust. An example would be to have Adam Miller name his wife, Justine, as his primary beneficiary. He would then name two of his children, Kyle and Alyssa, as contingent beneficiaries, each to receive 33% of the retirement account; and he would name the special needs trust created for his third child, Alexia, as a third contingent beneficiary to receive the remaining 34% of the retirement account. Adam would list the special needs trust for Alexia on his beneficiary designation form by including the proper registration, "The Alexia Miller Special Needs Trust Dated January 1, 2007."

Read a Whitepaper from the Special Needs Alliance: Government Benefits and Special Needs Trusts

Tags: Retirement Planning, Special Needs Trusts, financial planning