A special needs trust (also referred to as a supplemental needs trust) enables assets to be left to a disabled or chronically ill individual without disqualifying them from certain public benefits such as Medicaid.
For the special needs planning community, the passage of the SECURE Act 2.0 offers the advantage of enabling certain types of charitable organizations to now be named as remainder beneficiaries of SNTs funded with retirement accounts, but without compromising the favorable “stretch” payout timeframe available to individuals with disabilities who are the primary beneficiaries.
This is a huge win for families who had previously sought to name a beloved non-profit as a remainder beneficiary in a special needs trust only to be told that it wasn’t possible to do so.
SECURE Act 1.0 of 2020
In 2020, the Setting Up Every Community Up for Retirement Enhancement Act, known as the SECURE Act, went into effect. Under this new law, beneficiaries were required to liquidate certain IRAs according to minimum distribution (RMD) rules. In its original version, the SECURE Act set the distribution date for most IRAs inherited after 2019 to 10 years from the owner’s date of death.
But, some beneficiaries, including the disabled and chronically ill, are excluded from this rule. Instead, these beneficiaries may have the retirement asset paid out to them over their lifetime. This means that the inherited retirement funds can be left to an SNT and distributed over the course of the beneficiary’s lifetime.
The potential benefit of this it that it can help reduce taxes and enable the beneficiary to supplement their finances for a longer period of time. The downside, however, was that charities were not included in any beneficiary category that could qualify for this more prolonged timeframe.
Further, due to the different rules for charities and designated beneficiaries, the SECURE Act effectively did not allow for creators of SNTs to name a charity as a remainder beneficiary. (A remainder beneficiary is a beneficiary of a trust whose interest would vest later, after an event such as the passing of a disabled loved one. Upon this event, the remainder beneficiary receives any remaining trust assets.)
SECURE Act 2.0 and the Impact on SNTs (as of late 2022)
Significant changes to the SECURE Act were approved in late 2022, including:
- Updating RMD rules during life and in the event the owner of a retirement account passes away;
- Reducing penalties for failing to take an RMD from 50% to 25%; and the
- Special Needs Trust Improvement Act of 2022.
The Special Needs Trust Improvement Act of 2022, now law, allows charitable organizations to be named as remainder beneficiaries of special needs trusts holding IRAs.
If your special needs trust was created prior to the passage of the SECURE Act 2.0 and you want to considering adding a charitable organization as a remainder beneficiary, we can help you.