When a Special Needs Trust is the Beneficiary of a Retirement Account

Posted by Haddad Nadworny on Sat, Feb 22, 2020 @ 06:00 AM

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stretching into the futureThe SECURE Act* eliminates the “stretch” IRA distribution option for non-exception beneficiaries. It requires all assets be distributed to beneficiaries by the end of 10 years however annual RMDs (Required Minimum Distributions) are no longer required from these accounts.

What was the “stretch” IRA anyway?  

Prior to the SECURE act, retirement account beneficiaries were able to “stretch” the distributions from inherited accounts over the course of their lifetime.  This practice was an especially great benefit to young heirs and heiresses, as RMDs from the inherited accounts were based upon the age of the beneficiary.  The younger the beneficiary, the smaller the RMD, allowing the bulk of the assets to grow tax-deferred over the course of their lifetime and to potentially be inherited by the next generation.  

What it means:

Non-exception beneficiaries inheriting 401(k)s and other defined contribution plans, traditional IRAs and Roth IRAs from individuals who died after 1/1/2020, are subject to the “10-year distribution rule”; they are required to receive a full distribution of all assets of an inherited retirement account by the end of 10 years.

Who is effected: 

Non-exception beneficiaries of people inheriting 401(k)s and other defined contribution plans, traditional IRAs and Roth IRAs from individuals who died after 1/1/2020, are subject to the “10-year distribution rule”. 

If you own an inherited IRA from a person who died before 12/31/2019, the 10-year rule does not apply to that IRA over your lifetime. At your death, beneficiaries of this IRA will be subject to the 10-year rule.

Exception beneficiaries are NOT subject to the 10-year rule. They may treat the inherited IRA as their own and take distributions over their lifetime.

  • Spouses
    • A designated beneficiary will inherit the account, and overrides any provisions in a will.
    • If there is no will or beneficiary designation, the spouse will generally inherit the IRA. 
    • There are some exceptions, specifically in community property states.  
  • Disabled or chronically ill individuals
  • Individuals who are not more than 10 years younger than the account owner
  • Minor children. But once the child reaches the age of majority, he or she has 10 years to withdraw the money from the account.

   (Source: Elder Law Answers) 

Impact on the retiree/ IRA owner's planning:

The elimination of the stretch provision impacts both the retirement account owner and the beneficiaries. Given the current demographics, many recipients of inherited IRAs will have to take distributions during their peak earning years, potentially bumping them into a higher marginal tax bracket. It may make sense for retirees to consider strategies to mitigate this effect. Individuals with sizable retirement accounts are advised to speak with their tax advisor to discuss the impact of this change on their estate planning 

When a Special Needs Trust (SNT) is the beneficiary of the IRA.

There are 2 types of trusts that are often set up as beneficiaries of a retirement account: (1) a conduit or pass-through trust and (2) an accumulation or complex trust. The diagram below depicts the treatment of distributions from the inherited IRA when a trust is the beneficiary.



Special Needs Trusts (SNTs) are accumulation or complex trusts. The trustee will have the authority to use the funds on behalf of the beneficiary over their lifetime. The RMD will be calculated using this “stretch” formula.

Even though the stretch provision still applies for beneficiaries with special needs, the elimination of the stretch provision for beneficiaries who do not have special needs may necessitate a change in planning strategy. In the past, many estate planners recommended that non-qualified assets be designated for funding a SNT upon a parent’s death. Individuals who have pursued this strategy may want to revisit both their own and their beneficiaries’ situations to determine if this still makes sense given the eligibility of the family member with a disability for the “stretch’ provision of an inherited IRA.

New Strategy: The SNT, with the family member with a disability as an exception beneficiary of the SNT, will inherit the IRA and become the owner.

In addition to the inherited IRA, the SNT will also own a non-retirement account for the purposes of receiving distributions (annual RMDs) from the inherited IRA and will pay taxes on this distribution.  The trustee may utilize this money to pay for expenses for the individual while also protecting their eligibility for government benefits.

Upon the death of the beneficiary with special needs, proceeds of the IRA will flow to the contingent beneficiary and the 10-year rule will go into effect.


Stay tuned for Part 2 next week with further discussion of planning considerations and strategies in light of the SECURE Act.

* The Setting Every Community Up for Retirement Enhancement or SECURE act was signed into law on December 20, 2019, becoming effective January 1, 2020. The law provides important changes for individuals and small businesses to consider in their retirement, estate and tax planning.


This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

Financial planning and investment advice offered through Affinia Financial Group, LLC, a registered investment advisor. Securities offered through LPL Financial, Member FINRA/SIPC. Affinia Financial Group and LPL Financial are separate entities.



Tags: Retirement Planning, Special Needs Trusts

3 Financial Aid Facts for Families of People with Disabilities

Posted by Haddad Nadworny on Wed, Jun 12, 2019 @ 06:00 AM

The Special Needs Financial Planning Team John Nadworny, CFP, CTFA | Cynthia Haddad, CFP | Alexandria Nadworny, CFP,  CTFA

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Filing FAFSA, filling in a College Scholarship profile or just finding out all you can about student debt forgiveness programs? Here is some information specific to ABLE Accounts, Special Needs Trusts, Social Security Benefits and the student loan process. 

Before we get started, a special shout-out to Mary Rubenis of the Massachusetts Educational Financing Authority (MEFA), sponsors of the Attainable Savings PlanSM  for contributing her insight and key  information. 

A Little Background Info about the ABLE Account & Special Needs Trusts:

The ABLE (or 529A) account is a tax advantaged account for individuals with a disability to pay for qualified disability expenses.  Unlike a typical 529 plan which requires funds be spent on qualified higher education expenses, the funds in an ABLE account may be used to pay for qualified expenses related to living with a disability. Qualified disability expenses may include education, transportation, housing, employment training and support, personal support services, health, basic living and assisted technologies and related support.

As of 2018, it is allowable to rollover up to $15,000/year from a beneficiary’s 529 account into their own or their family member’s ABLE account without penalty.  To read about the basics of the ABLE account, as well as suggested strategies and case studies that use the ABLE, click here

 A Special Needs Trust (SNT), also called a supplemental needs trust, is a vehicle to provide monetary support for a beneficiary without effecting their eligibility for needs-based government benefits, e.g. Social Security Income and Medicaid.  The beneficiary will not have access or control over the money in a SNT.

3 Financial Aid Facts

1. Reporting requirements for Free Application for Federal Student Aid (FAFSA)

FAFSAGuidance from the Federal Student Aid Office states that ABLE accounts, along with interest income and distributions, should be excluded as assets on the beneficiary’s FAFSA. ABLE accounts were created to supplement, and not to replace, eligibility for federal means-tested benefit programs. ABLE accounts would also not be reported on a sibling’s FAFSA, as the assets are considered those of the beneficiary, not the parents.

SNTs are treated as any other trust fund for the purposes of FAFSA and need to be reported. Restrictions on distributions from a SNT are imposed by the grantor of the trust and unless specifically excluded, these funds may be dispensed by the trustee to pay for educational expenses for the beneficiary.  The assets in the SNT are not included on the beneficiary’s siblings’ FAFSA.

Social Security benefits that are not subject to taxation do not have to be included on FAFSA. SSI recipient’s income levels are generally below the taxable threshold, so SSI generally does not need to be reported. If you receive SSDI and have substantial income, your benefits may be taxed at the federal level. For example, if you are single and your income is more than $25,000 per year but less than $34,000, you would have to pay taxes on about half the value of your benefits. If you earn more than $34,000 (or married and earn more than $44,000), 85% of your benefits could be taxed.

2. Reporting Requirements for College Scholarship Service (CSS ) Profile

The Federal Student Aid Office has not yet provided guidance on reporting assets in a SNT or ABLE. Currently, the CSS/Financial Aid Profile does require reporting the assets of siblings and may require the disclosure of assets in a SNT and ABLE.  In these circumstances, families should give details of how these funds are used in the special circumstances section of the application and ask each college for a professional judgment review.  While some financial aid departments will ignore the assets in the trust, most will not.  They may however, consider the high costs of dependent care when making their grant determinations.

3. Student Loan Repayment

student-loan-debt-1160848_960_720If their student loan covers a time period during which the individual had an ABLE account open, repayment may be considered a Qualified Disability Expense and be paid from the ABLE.

If you become totally and permanently disabled (TPD), you may qualify for a TPD discharge of your federal student loans.  Refer to DisabilityDischarge.com for more information. 

Also, If you are employed by a government or not-for-profit organization, you may be able to receive loan forgiveness under the Public Service Loan Forgiveness Program. Refer to StudentAid.ed.gov for more information.


MEFA, Massachusetts Educational Financing Authority

Fidelity Investments, Attainable Savings Account




Content in this material is for general information only and  not intended to provide specific advice or recommendations for any individual,  nor intended to be a substitute for specific individualized tax or legal advice.  We suggest that you discuss your specific situation with a qualified tax or legal advisor. 

Prior to investing in an ABLE or 529 account investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s ABLE program.  Withdrawals used for qualified disability expenses are federally tax free.  Tax treatment at the state level may vary.

Investing involves risk, including loss of principal.



Tags: transition planning, Special Needs Trusts, planning for college, ABLE Account, FAFSA, Planning for college with disabilities

Life Insurance and the Special Needs Trust

Posted by Patty Manko on Thu, Jul 24, 2014 @ 04:43 PM

Special Needs Trusts resized 600The establishment of a special needs trust can provide a false sense of security that you are all set. 

The money that funds the trust will secure the resources for your loved one to be cared for.


What is a special needs trust?

A Special Needs Trust (SNT) is a legal document and a very important part of your child's long-term financial plan.

The trust may be used to hold money:

  • that you save
  • that others give your child as gifts
  • that you receive from an insurance settlement

Funds in the SNT will not interfere with your child's eligibility for federal benefits like Medicaid and Supplemental Security Income (SSI).

Who are the parties involved?

The individual who funds the trust is the Donor. The individual who benefits from the trust is the Beneficiary. The individual who oversees the trust is the Trustee

Regardless of the timing decision for funding the trust, it is important to do whatever you can to makes sure there will be adequate money in the trust to provide for your child’s security.

There are two steps:

  •  identify what the anticipated needs will be
  •  assess what steps you can realistically take to provide what is  necessary in light of your other financial requirements and goals.

Special Considerations for Life Insurance in Special Needs Planning

The use of life insurance in special needs planning is somewhat different than in traditional planning . It is critical to plan for the financial problem of one of the most catastrophic events in life; a parent’s death.

In planning for a traditional family, often the largest amount of life insurance protection is purchased for the wage-earning parent.  Following this same strategy is one of the most common errors a family with special needs tends to make.  One cannot assume there is no financial value lost in the event of death of the primary caregiving parent.  Although it is difficult to place a financial value on the parent that does not work outside of the home, or provide the majority of the income to the family, it is critical to account for this value.  This often means that you have to look at each parent to determine the human life value.  This is ultimately converted to a dollar value to determine the life insurance protection needed.  

Income Replacement:

In the traditional planning model, the amount of life insurance needed is often simplified to be a function of the annual income. For example, to determine the life insurance need of a wage earner, a simple technique is to multiply your annual earnings by 5 or 10 times or the number of years you want to ensure that income for your family is continued.  This means tht if you earn $100,000 per year, you should have from $500,000 to $1,000,000 of life insurance protection.  A more detailed approach would be to complete a capital needs analysis. This is the analysis that most life insurance professionals and financial planners use.  This calculation involves determining the present value of money needed to pay for short-mid-and long-term goals a family identiifies. For families with special needs, insurance coverage requirements often extend well beyond the traditional family's timeline fo having enough money to support children through their school years.  Special needs planning requires planning for two generations, anticipating a possible need to support the child with disabilities beyond the school years and throughout his or her life.

In special needs planning, the first step in determining life insurance needs is to determine the loss of income to the household with the death of a parent. Next it is important to identify the expenses that will continue upon the death of that parent, particularly money needed to address future family goals. Looking at income alone can be misleading because variations in saving and spending affect planning.  In the event that a family spends a larger percentage of their monthly income, they have two options:1. to insure for this larger amount to maintain the family lifestyle, or 2.to anticipate lifestyle changes required by the family due to a decrease in income after the death of a parent.  For families who are diligent at saving for their future – for retirement, education, supplemental needs, etc. – a loss of income may prevent the ability to maintain this saving pattern.  Families must address issues of both current spending to maintain their lifestyle and their savings and investments for the future. 

The other common error in purchasing life insurance is buying only term life insurance.  Term insurance is life insurance that is designed to last for a predetermined number of years, such as 5,10, 20 or possibly 30 years if applied for at an early age. Term insurance works in the event that the need for protection is for only a temporary period of time. In special needs planning, the “need” is not temporary – it is permanent. As we have discussed, the need to address that second generation of financial issues comes into play once again.  There may be a need for permanent life insurance protection, rather than term life insurance that only lasts until the children have grown in 20 years.  A recommended strategy is to acquire a combination of both term and permanent insurance.

Contact us with questions or for help  determining your family's insurance needs.

Tags: Special Needs Trusts

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

FAQs : Funding a Special Needs Trust

Posted by Patty Manko on Thu, Feb 13, 2014 @ 11:41 AM

moneyThe establishment of a special needs trust can provide a false sense of security that you are all set. It is
the money that funds the trust that will secure the resources for your loved one to be cared for.

What is a special needs trust?

A Special Needs Trust (SNT) is a legal document and a very important part of your child's long-term financial plan.

The trust may be used to hold money:

  • that you save that others give your child as gifts
  • that you receive from an insurance settlement
  • Funds in the SNT will not interfere with your child's eligibility for federal benefits like Medicaid and Supplemental Security Income (SSI).

Who are the parties involved?
The individual who funds the trust is the Donor. The individual who benefits from the trust is the Beneficiary. The individual who oversees the trust is the Trustee. 

When should families fund the SNT ?
 In most circumstances the SNT is funded at the death of the parent(s) or primary care giver, rather than during their lifetime. The term used for a trust that is funded at the death of an individual is a Testamentary Trust.

Reasons for not funding the trust during a donor’s lifetime include:

  • Once a trust is funded, the money can only be used to meet the  beneficiary’s supplemental needs. 
  • A separate tax return must be filed.
  • Taxes on any earnings must be paid by the trust. Income earned in  the trust is usually taxed at a higher tax rate than an individual rate.
  • Once a trust is funded, it becomes irrevocable. This prevents you  from making any changes to the terms of the trust.
  • Overall, there is no flexibility in your plan. 

Although funding the trust may reduce flexibility, the following are some of the reasons why one may consider funding a SNT during the lifetime of the donor as a planning strategy: 

  • If an individual has more than enough money to meet his/her  personal needs and will not jeopardize their personal financial  security.
  • Provides the donor with the comfort of knowing that there will be a  certain amount of money available for the beneficiary.
  • Parents who have taxable estates and are implementing strategies to  reduce their estate tax liability.
  • Grandparents or others are trying to reduce their taxable estate by  gifting to your child – the SNT protects the child’s eligibility for  government benefits.

•  Money in the trust can provide some protection from creditors. 

  •  Money directly received by the child either through an inheritance  and/or a legal       settlement which would otherwise disqualify them for  benefits. This would be a “payback” SNT.

Regardless of the timing decision for funding the trust, it is important to do whatever you can to makes sure there will be adequate money in the trust to provide for your child’s security. There are two steps:

•  identify what the anticipated needs will be
•  assess what steps you can realistically take to provide what is  necessary in light of your other financial requirements and goals.


View the ways we help a Trustee  in their fiduciary role.

Tags: Special Needs Trusts, Trustee Services

Year End Planning Tips for Families with Special Needs

Posted by Patty Manko on Wed, Dec 18, 2013 @ 04:40 PM

2013 2014 year end resized 600This is a great time of year to reflect upon what has happened in 2013 and enable you to set goals for 2014. Here are also a few additional planning strategies to consider.

1. Update your Letter of Intent (LOI)

This is a great gift idea too, not only for your child, but for yourself. Many of our client's give an updated copy of their child's LOI at the holidays to each of his/her future caretakers, guardians, and trustees. Keep your LOI up to date and you will have the peace of mind knowing that if anything should happen to you, then you have left a legacy of information and the vision you have for your child's lifetime.  The LOI is the one central place to put all of your child's important information and important people and agencies in his/her life. You can also tell others about daily routines, habits, hygiene, hobbies, preferences of your child, and so much more.  Click here to download a sample LOI.

2. Gifts from Grandparents

Please remember to say thank you first! This is the time of year that gifts of money can be in excess of the $2,000 limits. The annual gift tax exclusion amount is $13,000 for 2012. Unfortunately if given to your child or to an account in his/her name, this gift can jeopardize your child's eligibility for government benefits. Gift giving, if done properly, can be beneficial for everyone. Please contact us if you would like to discuss options for your own financial and estate planning.

3. Gifts to Charities

Don't forget to support the agencies that support your family members. This time of year, most charitable non-profit organizations and agencies are asking for your financial support. They do so to be able to continue to provide the services and supports to your family member. Most donations to these agencies are tax deductible to you. Don't forget to consider any matching gifts from your employer(s). This is our chance to give back and say thank you. If you would like to discuss options of charitable giving techniques for your own personal financial and estate planning, please contact us.

Contact us

We wish all our readers a very happy holiday season.

Tags: Special Needs Financial Planning, Special Needs Trusts, special needs Letter of Intent

Special Needs Trust Distributions and Trustee Fees

Posted by Patty Manko on Fri, Nov 15, 2013 @ 12:22 PM

describe the imageTrust Distributions

Most special needs trusts give the trustee sole discretion to make distributions from the trust funds. There are specific guidelines to be followed in making distributions.  A general rule is that distributions should not be made directly to the beneficiary.  Instead checks should be made payable directly to the vendors when goods are purchased or to the providers when services are rendered.

Charging a trustee fee

Even if the trust does not contain any specific language about fees, the trustee has a right to be paid.  The trustee fee is a tax deduction for the trust and is taxable income to the trustee.  The following are some factors to consider in determining an appropriate fee:

  •   the amount of assets in the trust
  •   the complexity of the investments
  •   the beneficiary’s needs
  •   the services being performed 

There are two considerations used in determining a fee; the first is the number of hours worked, the second is the type of service provided. Activities such as paying bills and balancing the checkbook will be charged at one rate. More complicated tasks such as working on legal, investment, and tax matters would probably command a higher figure. This is especially important if the trustee has a financial or legal background. 

Time and billing records

The trustee should keep a written record of all the time spent on trust activities. Some trustees maintain a log book in which they write down the date, time spent, and nature of each service. If any personal funds are used for the trust, the trustee should keep receipts for reimbursement from the trust assets. Reimbursements should be made promptly. Plan to keep these records at least until the beneficiaries have approved your account. Click below to view an example of a  trustee log and to download a blank log. 

 Download a Trustee Time Log

Tags: Special Needs Trusts, Trustee Services

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