The Listen to Lawrence Letter: Coordinating your IRA beneficiary with a Special Needs Trust
January 5, 2022
Dear Clients and Friends,
Today’s question seems like another irrevocable trust question but it really isn’t. This question is really about coordinating your IRA beneficiary designation with any trust, although here it specifically relates to a special needs trust. Read on.
CLIENT QUESTION:
I have an irrevocable trust set up with my home protected by your office. The trust is set up so my two children will receive the proceeds in a special needs trust when the time comes. My question is about the IRAs that we have. How should we set up the beneficiaries so that my children are protected as far as Medicaid is concerned? One of my IRA custodians called and asked how I want the contingent beneficiaries titled. Right now it is only my wife listed as beneficiary since these are my IRAs…Should I list the trust as the contingent beneficiary?
MY RESPONSE:
Naming the correct beneficiaries to your retirement plans (IRAs, 401Ks, 403Bs, etc.) is a critical part of your overall estate planning. It is great that you named your wife as beneficiary, but if she predeceases you or you die together, you will need a backup (or successor or contingent beneficiary). Failure to name a beneficiary means by default that your estate will be the beneficiary and all the money must be paid out and taxed, at most, over a five-year period. Usually, if you name a person or a trust for a person (or people) as beneficiary then, according to the SECURE ACT OF 2020, the money must be paid out and taxed over a 10 year period. 10 years is better than 5. Naming a special needs trust (SNT) as beneficiary is even more favorable because required minimum distributions can be spread out over the lifetime of the beneficiary with disabilities.
DEFERRING OR STRETCHING THE TAX OVER A LONGER PERIOD OF TIME IS ALWAYS DESIRABLE.
So, how do you name a trust as beneficiary or contingent beneficiary in this case?
In the question above, it would be as follows: 50% to the trustee of the trust for the benefit of my child x, under the Jones Family Trust (whatever we named your trust), dated 12/28/21 (or whatever the real date of the trust)…and then repeat for the other child.
If the SNT had been in a last will and testament, then as follows: 50% to the trustee of the trust for the benefit of my child x, under my last will and testament. OR SIMILAR WORDS TO THIS EFFECT.
I hope this helps! Please forward this information to your friends and relatives to share these informative answers to some very commonly asked questions.
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Until next time…
peace, health and happiness,
Lawrence Eric Davidow