SECURE Act - Special Needs Trusts

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MtnBiker
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SECURE Act - Special Needs Trusts

Post by MtnBiker » Mon Dec 23, 2019 12:37 pm

There is another thread about how estate plans and trusts could be engineered for best results to the benefit of "designated" beneficiaries (those not eligible for stretched payout of inherited IRAs) under the new tax law. See: viewtopic.php?f=2&t=298113

I thought I would start a separate thread so that our resident estate planning experts could comment on the effect (if any) of the new tax law on qualified trusts for "eligible" beneficiaries (in particular, those who are disabled or chronically ill) of qualified retirement assets (i.e. tIRA, Roth, 401k, etc.). Evidently qualified trusts continue to provide a means for a person's eligible primary beneficiary to benefit from stretch payouts over the heir's lifetime by being structured so that the IRS can "look through" the trust and treat the trust beneficiary as an individual for purposes of the stretch.

One question I have is whether the term of the IRA stretch is changed for an eligible primary beneficiary under the new tax law. My understanding was that under the prior tax law, the post-death RMDs are calculated based on the life expectancy of the oldest of the trust’s underlying beneficiaries (including successor beneficiaries). Furthermore, if one or more of the successor beneficiaries of an accumulation-type Special Need Trust was a charitable organization, there was no possibility of stretching the IRA RMDs over the eligible beneficiary's lifetime. Under the new tax law, does the period of the stretch depend only on the eligible primary beneficiary's life expectancy? Can older persons and/or charities now be successor beneficiaries without reducing the period of the stretch?

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MtnBiker
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Re: SECURE Act - Special Needs Trusts

Post by MtnBiker » Tue Dec 24, 2019 11:57 am

After reading and trying to understand the text of the new tax law, I guess there are three possible answers for my question about what is the term of the stretch for an inherited IRA held in a SNT for benefit of an eligible (disabled) beneficiary. Suppose, for simplicity, the trust has one eligible designated beneficiary and one older designated successor beneficiary who is more than 10 years younger than the now deceased original owner of the IRA and is not otherwise "eligible" (not disabled, etc.).

Under the new law, if the IRA was inherited directly by the disabled individual (rather than the original IRA owner having naming the SNT as the primary beneficiary of the IRA), the disabled individual would receive a lifetime stretch. Upon death of the disabled individual, the successor beneficiary would be required to disperse the IRA within 10 years, regardless of whether he or she was a qualified beneficiary. (Only one lifetime stretch is permitted under the new law.)

Depending on how the rules for qualified "see through" trusts work, then under the new tax law it seems that the stretch received by the eligible (disabled) beneficiary of the SNT in the above example could be one of these three possibilities:
1) 10 years (because the successor beneficiary can hold assets in an inherited IRA for no more than 10 years under the new law).
2) The lifetime of the successor beneficiary (because he or she is older than the qualified primary beneficiary, same as under the old law)
or,
3) the lifetime of the qualified primary beneficiary (as seems to be the intent of the new tax law).

Perhaps Option (2) is most likely, assuming the new tax law does not modify any of the trust rules. Hopefully someone knowledgeable can render an opinion.

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FIREchief
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Re: SECURE Act - Special Needs Trusts

Post by FIREchief » Tue Dec 24, 2019 1:44 pm

MtnBiker wrote:
Mon Dec 23, 2019 12:37 pm
There is another thread about how estate plans and trusts could be engineered for best results to the benefit of "designated" beneficiaries (those not eligible for stretched payout of inherited IRAs) under the new tax law. See: viewtopic.php?f=2&t=298113
The Secure act uses three different references to beneficiary types:
a) beneficiary - basically everything not meeting the criteria of the following two types
b) designated beneficiary - all beneficiaries who are individuals (various IRS interpretations have allowed qualified see through trusts to qualify as individuals provided that certain criteria are met), with a further subtype of:
c) eligible designated beneficiary - a designated beneficiary who remains eligible for lifetime stretch due to them being a spouse, disabled, not more than 10 years younger, etc.

The secure act text included discrete definitions for "b" and "c"
I thought I would start a separate thread so that our resident estate planning experts could comment on the effect (if any) of the new tax law on qualified trusts for "eligible" beneficiaries (in particular, those who are disabled or chronically ill) of qualified retirement assets (i.e. tIRA, Roth, 401k, etc.). Evidently qualified trusts continue to provide a means for a person's eligible primary beneficiary to benefit from stretch payouts over the heir's lifetime by being structured so that the IRS can "look through" the trust and treat the trust beneficiary as an individual for purposes of the stretch.
I didn't find anything in the secure act that specifically mentioned trusts, so I believe that the treatment of trusts vs. direct inheritors of IRAs will remain unchanged (please see my signature). There will still be qualified conduit trusts (which rarely make sense) and qualified accumulation trusts. The thread that you referenced above introduces the idea of using a non-qualified accumulation trust in situations where some potential beneficiaries are not designated beneficiaries or the ten year stretch doesn't provide enough advantage relative to a (potentially) shorter stretch with added flexibility of a non-qualified trust (i.e. not having to comply with the strict, generally undocumented IRS requirements for a qualified accumulation trust).
One question I have is whether the term of the IRA stretch is changed for an eligible primary beneficiary under the new tax law. My understanding was that under the prior tax law, the post-death RMDs are calculated based on the life expectancy of the oldest of the trust’s underlying beneficiaries (including successor beneficiaries). Furthermore, if one or more of the successor beneficiaries of an accumulation-type Special Need Trust was a charitable organization, there was no possibility of stretching the IRA RMDs over the eligible beneficiary's lifetime. Under the new tax law, does the period of the stretch depend only on the eligible primary beneficiary's life expectancy? Can older persons and/or charities now be successor beneficiaries without reducing the period of the stretch?
I believe that this is unchanged from current law. If the trust is a conduit trust, than I believe that the answer to both your questions remains "yes." If an accumulation trust, then I believe that the answers to both questions remains "no." I don't know very much about special needs trusts, but I can't imagine they would ever be drafted as conduit trusts; since this would provide the beneficiary with a steady income stream which would likely interfere with any government benefits that they might otherwise qualify for. This is based only on my reading of both the Secure act text (which is mostly a collecton of deltas from the current IRS code) and a review of the affected sections of IRC 401(a)(9). Again, please see my signature. I am not an expert, but hopefully one of our forum experts will correct or clarify anything I may have stated in error.
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Re: SECURE Act - Special Needs Trusts

Post by JBTX » Tue Dec 24, 2019 3:43 pm

These are issues that I will need to be dealing with in redoing our estate plan sooner rather than later:

- revisit the best strategy for set up of special needs trust for special needs child
- revise or get rid of existing conduit trusts for inherited iras.

I'm still a bit confused about the 5 year vs 10 year stretch. I've heard one or two place the 10 year replaces the 5 year. The limited preliminary consensus here seems to be the 5 year stretch does not change and 10 year only applies cases where qualified trusts were previously used ( conduit / accumulation).

Ultimately it seems like long term carry forward of large traditional IRA balances into traditional trusts creates problems, between accelerated distributions, required liquidation of trusts, undesired taxation, high trust tax rates, etc. It just becomes a question of the optimal timing of moving to Roth/ conversions.

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Re: SECURE Act - Special Needs Trusts

Post by FIREchief » Tue Dec 24, 2019 4:49 pm

JBTX wrote:
Tue Dec 24, 2019 3:43 pm
I'm still a bit confused about the 5 year vs 10 year stretch. I've heard one or two place the 10 year replaces the 5 year. The limited preliminary consensus here seems to be the 5 year stretch does not change and 10 year only applies cases where qualified trusts were previously used ( conduit / accumulation).
I believe that you are correct. I think we've had enough of our "experts" eyes on this in the other thread, and nobody has suggested otherwise. It's only lifetime vs. 10 year for a designated beneficiary (i.e. an "individual" or see through trust treated as an individual). The five year remains for a decedent's IRA who has not reached the RBD and whose beneficiary is not an individual. I re-read the applicable sections of IRS Pub 590-B yesterday, and I think this is all pretty clear.
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Re: SECURE Act - Special Needs Trusts

Post by MtnBiker » Wed Dec 25, 2019 1:10 am

FIREchief wrote:
Tue Dec 24, 2019 1:44 pm

I didn't find anything in the secure act that specifically mentioned trusts, so I believe that the treatment of trusts vs. direct inheritors of IRAs will remain unchanged (please see my signature).
As a complete novice in this area, I went looking for the text of the regulations governing these trusts. Here are links to two examples:
https://www.law.cornell.edu/cfr/text/26/1.401(a)(9)-4
https://www.law.cornell.edu/cfr/text/26/1.401(a)(9)-5
These appear to be IRS regulations that are written in the form of Q&A's, interpreting line-by-line how to apply the old tax law in trust situations. These regulations are obviously going to change as they will have to be rewritten to conform to the new tax law. (For example, there are references to age 70.5, the "eligible" designated beneficiary subtype is missing from the definitions, and so on.) So I'm guessing that the questions posed in the OP are unanswerable until the trust regulations are rewritten.

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Re: SECURE Act - Special Needs Trusts

Post by Alan S. » Wed Dec 25, 2019 2:19 pm

The main purpose of the RMD Regs including the trust provisions is to avoid having the IRA or other inherited account being distributed slower than if the account were left to individuals. Using the oldest trust beneficiary prevents that, often at a cost of accelerating RMDs for younger beneficiaries.

The easiest way to continue this under the new10 year rule would be to simply treat 10 year designated trust beneficiaries as if their life expectancies were actually 10 years, and they would determine the RMDs to the trust even if an older "eligible beneficiary" had a longer LE per Table I. In other words, the IRS will likely not permit using an older eligible beneficiary to stretch the distribution beyond 10 years if there are 10 year beneficiaries in the trust.

Of course, such a determination would just result in separate trusts being created for certain beneficiaries so that eligible beneficiaries receive the same stretch they would have enjoyed before. We'll see.

As for SNTs, they would have the same issues as before, that being structured so that the RMD is determined by the eligible beneficiary and not by a remainder designated beneficiary. State laws may differ with respect to SNT provisions allowed.

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Re: SECURE Act - Special Needs Trusts

Post by MtnBiker » Wed Dec 25, 2019 11:14 pm

Alan S. wrote:
Wed Dec 25, 2019 2:19 pm
The main purpose of the RMD Regs including the trust provisions is to avoid having the IRA or other inherited account being distributed slower than if the account were left to individuals. Using the oldest trust beneficiary prevents that, often at a cost of accelerating RMDs for younger beneficiaries.

The easiest way to continue this under the new10 year rule would be to simply treat 10 year designated trust beneficiaries as if their life expectancies were actually 10 years, and they would determine the RMDs to the trust even if an older "eligible beneficiary" had a longer LE per Table I. In other words, the IRS will likely not permit using an older eligible beneficiary to stretch the distribution beyond 10 years if there are 10 year beneficiaries in the trust.

Of course, such a determination would just result in separate trusts being created for certain beneficiaries so that eligible beneficiaries receive the same stretch they would have enjoyed before. We'll see.

As for SNTs, they would have the same issues as before, that being structured so that the RMD is determined by the eligible beneficiary and not by a remainder designated beneficiary. State laws may differ with respect to SNT provisions allowed.
Based on the approach taken previously by the IRS, it does seem possible that the IRS might determine that the IRA distribution cannot be stretched beyond 10 years if there are any 10 year beneficiaries in the trust. Given the importance of retaining a lifetime stretch and the present uncertainty in what determination the IRS may make, perhaps it would be advisable for us to include no other beneficiary in our SNT than our disabled son (who meets the definition of an eligible designated beneficiary).

In the case of a trust with only one beneficiary, what happens to the trust assets upon the death of that beneficiary? Is there a way to direct where the assets are to be distributed upon termination of a qualified (see-through) third-party accumulation trust without naming a successor beneficiary? Or is this a potential Catch-22; to get a lifetime stretch there can only be one (eligible) beneficiary but there is no way to properly terminate the trust without naming a second beneficiary?

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Re: SECURE Act - Special Needs Trusts

Post by MtnBiker » Thu Dec 26, 2019 7:15 pm

This article, https://www.naela.org/NewsJournalOnline ... ement.aspx, provides a clear statement of what beneficiaries are needed to establish a qualified accumulation trust (under the old tax law). Quote:
As the name suggests, a qualified accumulation trust allows the trustee to accumulate annual minimum required distributions inside of the trust after they are received from the inherited retirement benefit (and, of course, this is the primary difference when compared to the conduit trust). Typically, the trustee is given discretion to make and not make distributions to or for the benefit of the current beneficiary or beneficiaries of the qualified accumulation trust. A qualified accumulation trust must have at least one current beneficiary, but it may have more than one. The current beneficiary or beneficiaries of a qualified accumulation trust must be an individual(s). For a qualified accumulation trust to be drafted so that it can be understood and administered with the greatest amount of ease possible, the remainder beneficiary (or beneficiaries) should be an individual(s). In addition, the remainder beneficiary or beneficiaries should be entitled to inherit all of the trust’s assets, including the right to receive assets within the inherited retirement benefit not yet distributed, both immediately and outright upon some future event that is expressly stated in the qualified accumulation trust document. The identity of the remainder beneficiary (or beneficiaries) is determined upon the death of the retirement benefits owner and must be set in place by September 30 of the year after the year that the retirement benefits owner died (in other words, not removed as a beneficiary via qualified disclaimer or some other method). The date of September 30 of the year after the year of the retirement benefit owner’s death is often referred to as the “Beneficiary Finalization Date.” All “counted” beneficiaries of a qualified accumulation trust must be individuals by the Beneficiary Finalization Date. The concept of “counted” beneficiaries of a qualified accumulation trust is discussed below.

The applicable distribution period of a qualified accumulation trust is based on the life expectancy of the oldest individual who is living at the time of the retirement benefit owner’s death, has not been removed as a beneficiary prior to the Beneficiary Finalization Date, and is either: 1) entitled to receive a distribution from the accumulation trust during the trust’s administration (i.e., a current beneficiary); or 2) entitled to receive a distribution from the qualified accumulation trust immediately and outright upon its termination (i.e., a remainder beneficiary). It does not matter whether the oldest individual is a current beneficiary or a remainder beneficiary.
Clearly, such a trust needs to have at least one current beneficiary and one remainder beneficiary. Under the new tax law, the remainder beneficiary would be by definition a 10-year beneficiary. Under the existing IRS determination describing trusts under the old tax law, the ages of both beneficiaries count when defining the stretch. If the IRS extended such a determination under the new law, treating 10 year beneficiaries as if their life expectancies were actually 10 years, it would indeed establish the Catch-22 mentioned in the post immediately above. That is, to assure that the eligible (disabled) current beneficiary has a lifetime stretch there can only be one beneficiary but there is no way to properly terminate the trust without naming a remainder beneficiary.

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Re: SECURE Act - Special Needs Trusts

Post by harmony » Fri Dec 27, 2019 12:48 am

Mtnbiker, you are certainly raising thought-provoking questions for which we will need to find the answers as well. Thank you.

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Re: SECURE Act - Special Needs Trusts

Post by FIREchief » Fri Dec 27, 2019 3:06 am

MtnBiker wrote:
Thu Dec 26, 2019 7:15 pm
This article, https://www.naela.org/NewsJournalOnline ... ement.aspx, provides a clear statement of what beneficiaries are needed to establish a qualified accumulation trust (under the old tax law). Quote:
As the name suggests, a qualified accumulation trust allows the trustee to accumulate annual minimum required distributions inside of the trust after they are received from the inherited retirement benefit (and, of course, this is the primary difference when compared to the conduit trust). Typically, the trustee is given discretion to make and not make distributions to or for the benefit of the current beneficiary or beneficiaries of the qualified accumulation trust. A qualified accumulation trust must have at least one current beneficiary, but it may have more than one. The current beneficiary or beneficiaries of a qualified accumulation trust must be an individual(s). For a qualified accumulation trust to be drafted so that it can be understood and administered with the greatest amount of ease possible, the remainder beneficiary (or beneficiaries) should be an individual(s). In addition, the remainder beneficiary or beneficiaries should be entitled to inherit all of the trust’s assets, including the right to receive assets within the inherited retirement benefit not yet distributed, both immediately and outright upon some future event that is expressly stated in the qualified accumulation trust document. The identity of the remainder beneficiary (or beneficiaries) is determined upon the death of the retirement benefits owner and must be set in place by September 30 of the year after the year that the retirement benefits owner died (in other words, not removed as a beneficiary via qualified disclaimer or some other method). The date of September 30 of the year after the year of the retirement benefit owner’s death is often referred to as the “Beneficiary Finalization Date.” All “counted” beneficiaries of a qualified accumulation trust must be individuals by the Beneficiary Finalization Date. The concept of “counted” beneficiaries of a qualified accumulation trust is discussed below.

The applicable distribution period of a qualified accumulation trust is based on the life expectancy of the oldest individual who is living at the time of the retirement benefit owner’s death, has not been removed as a beneficiary prior to the Beneficiary Finalization Date, and is either: 1) entitled to receive a distribution from the accumulation trust during the trust’s administration (i.e., a current beneficiary); or 2) entitled to receive a distribution from the qualified accumulation trust immediately and outright upon its termination (i.e., a remainder beneficiary). It does not matter whether the oldest individual is a current beneficiary or a remainder beneficiary.
Clearly, such a trust needs to have at least one current beneficiary and one remainder beneficiary. Under the new tax law, the remainder beneficiary would be by definition a 10-year beneficiary. Under the existing IRS determination describing trusts under the old tax law, the ages of both beneficiaries count when defining the stretch. If the IRS extended such a determination under the new law, treating 10 year beneficiaries as if their life expectancies were actually 10 years, it would indeed establish the Catch-22 mentioned in the post immediately above. That is, to assure that the eligible (disabled) current beneficiary has a lifetime stretch there can only be one beneficiary but there is no way to properly terminate the trust without naming a remainder beneficiary.
That's a good summary of an accumulation trust. I believe your final comments may be correct. It may be that the ONLY way for a special needs person to benefit from lifetime stretch will be for them to inherit the IRA directly (i.e. not in trust), which would seem to run counter to the very reasons that SNT's are established. I'm guessing that the advantages to holding inherited assets in trust for ten years will in many cases outweigh the advantages of a lifetime stretch outside of a trust. Practically speaking, there may not be many scenarios remaining where an accumulation trust can achieve a lifetime stretch. If I have no kids and an adult sibling I like and one that I don't (both not more than ten years younger than me), I can establish a trust with only the sibling I like as 100% primary beneficiary and then stipulate that upon the death of that sibling any remaining assets are paid outright to the sibling I don't like. That would work. I'm not envisioning many other examples....
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: SECURE Act - Special Needs Trusts

Post by MtnBiker » Fri Dec 27, 2019 12:51 pm

FIREchief wrote:
Fri Dec 27, 2019 3:06 am
Practically speaking, there may not be many scenarios remaining where an accumulation trust can achieve a lifetime stretch. If I have no kids and an adult sibling I like and one that I don't (both not more than ten years younger than me), I can establish a trust with only the sibling I like as 100% primary beneficiary and then stipulate that upon the death of that sibling any remaining assets are paid outright to the sibling I don't like. That would work. I'm not envisioning many other examples....
If the IRS kept the determination that the stretch is based on the lifetime of the oldest of ALL beneficiaries, I'm not seeing any scenario where an accumulation trust can achieve a lifetime stretch. Under the new tax law, every remainder beneficiary (including the "eligible" but unlikeable sibling above) is defined as a 10 year beneficiary (no more than one lifetime stretch is permitted), so I'm not sure even FIREchief's example would work.

As Alan S. stated earlier, the main purpose of the trust provisions in RMD Regs is to avoid having the inherited IRA being distributed slower than if the account were left to individuals. Perhaps the IRS will realize that using the lifetime of the oldest of all of the trust beneficiaries to prevent that is not a good approach under the new tax law. Hopefully the IRS will get creative and write a new determination that allows the intent of the new tax law to be realized in an accumulation trust situation.

Again, consider my over-simplified example of one eligible current designated beneficiary and a second named individual residual beneficiary. It seems that the IRS could achieve its objective by a determination stating that, if all the current beneficiaries are eligible, the stretch for initial current beneficiaries is based on the lifetime of the oldest initial current beneficiary and, furthermore, that all successive or remainder beneficiaries must distribute the proceeds within 10 years or less. Such a determination would seem to satisfy the intent of the new tax law while fitting within the framework of an accumulation trust, the type which makes the most sense for a Special Needs (eligible) individual.

If a lifetime stretch is not possible when a tIRA passes to an accumulation trust, then other vehicles will need to be given consideration. Not sure what can be done with life insurance products or a charitable remainder unitary trust (CRUT) in which the SNT gets the money for a period of time, and the remainder goes to a charity. In the latter case the SNT may need to be Medicaid-payback trust. See: viewtopic.php?t=249375

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Re: SECURE Act - Special Needs Trusts

Post by FIREchief » Fri Dec 27, 2019 2:52 pm

MtnBiker wrote:
Fri Dec 27, 2019 12:51 pm
FIREchief wrote:
Fri Dec 27, 2019 3:06 am
Practically speaking, there may not be many scenarios remaining where an accumulation trust can achieve a lifetime stretch. If I have no kids and an adult sibling I like and one that I don't (both not more than ten years younger than me), I can establish a trust with only the sibling I like as 100% primary beneficiary and then stipulate that upon the death of that sibling any remaining assets are paid outright to the sibling I don't like. That would work. I'm not envisioning many other examples....
Perhaps the IRS will realize that using the lifetime of the oldest of all of the trust beneficiaries to prevent that is not a good approach under the new tax law. Hopefully the IRS will get creative and write a new determination that allows the intent of the new tax law to be realized in an accumulation trust situation.
Unfortunately, the IRS has been very conservative in providing guidance for accumulation trusts. As I understand it, they've never really "blessed" them, but have accepted them in specific situations via Personal Letter Rulings. It may be years before anything robust emerges regarding treatment of accumulation trusts under the secure act, especially where there is a mix of designated beneficiaries and eligible designated beneficiaries. This is largely why I started that other thread focused on utilization of a non-qualified accumulation trust as beneficiary of qualified retirement assets. I just don't think the added IRS risk is worth the extra five year stretch. Lifetime stretch for a young beneficiary? Sure. A few extra years (or not) for somebody inheriting an IRA from a decedent who lived past the RBD? Likely not. :annoyed

I'm envisioning new boilerplate trust language the exact opposite of what has been used to date. Current trusts clearly state an intent to qualify for stretched RMDs for inherited qualified assets. We may soon see trust language specifically stating that the intent is NOT to be treated as qualified in order to avoid this mess of Secure act consequences and unknowns. Yes, it would be nice if the IRS would finally provide some formal guidance for accumulation trusts. I'm just not going to hold my breath. It may be that folks will just have to give up on lifetime stretches for accumulation trust beneficiaries, regardless of if any are eligible designated beneficiaries under the Secure act.
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Re: SECURE Act - Special Needs Trusts

Post by harmony » Fri Dec 27, 2019 6:20 pm

This is largely why I started that other thread focused on utilization of a non-qualified accumulation trust as beneficiary of qualified retirement assets.
Does the original poster or the moderator think this topic should be moved to the Personal Finance forum rather than stay in the Theory forum? If both topics would appear in the Personal Finance forum, they may be easier to track some months down the road.

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Re: SECURE Act - Special Needs Trusts

Post by MtnBiker » Fri Dec 27, 2019 8:50 pm

harmony wrote:
Fri Dec 27, 2019 6:20 pm
Does the original poster or the moderator think this topic should be moved to the Personal Finance forum rather than stay in the Theory forum? If both topics would appear in the Personal Finance forum, they may be easier to track some months down the road.
I agree this topic should be moved to Personal Finance (Not Investing) with the other thread referenced in the OP. That is where I originally intended it to be, but somehow misfired.

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Re: SECURE Act - Special Needs Trusts

Post by LadyGeek » Fri Dec 27, 2019 8:52 pm

This thread is now in the Personal Finance (Not Investing) (trust).

(Thanks to the member who reported the post - it gets our attention sooner.)
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Re: SECURE Act - Special Needs Trusts

Post by Enkidu » Sat Dec 28, 2019 12:06 pm

Title 4 Section 401 (a) (1) (H) (iv) of the SECURE Act provides a Special Rule in Case of Certain Trusts or Chronically Ill Beneficiaries
(iv) SPECIAL RULE IN CASE OF CERTAIN TRUSTS FOR DISABLED OR CHRONICALLY ILL BENEFICIARIES.— In the case of an applicable multi-beneficiary trust, if under the terms of the trust— ‘‘(I) it is to be divided immediately upon the death of the employee into separate trusts for each beneficiary, or ‘‘(II) no individual (other than a eligible designated beneficiary described in subclause (III) or (IV) of subparagraph (E)(ii)) has any right to the employee’s interest in the plan until the death of all such eligible designated beneficiaries with respect to the trust, for purposes of a trust described in subclause (I), clause (ii) shall be applied separately with respect to the portion of the employee’s interest that is payable to any eligible designated beneficiary described in subclause (III) or (IV) of subparagraph (E)(ii); and, for purposes of a trust described in subclause (II), subparagraph (B)(iii) shall apply to the distribution of the employee’s interest and any beneficiary who is not such an eligible designated beneficiary shall be treated as a beneficiary of the eligible designated beneficiary upon the death of such eligible designated beneficiary.

Related rules:
(ii) EXCEPTION FOR ELIGIBLE DESIGNATED BENEFICIARIES.—Subparagraph (B)(iii) shall apply only in the case of an eligible designated beneficiary. ‘‘(iii) RULES UPON DEATH OF ELIGIBLE DESIGNATED BENEFICIARY.—If an eligible designated beneficiary dies before the portion of the employee’s interest to which this subparagraph applies is entirely distributed, the exception under clause (ii) shall not apply to any beneficiary of such eligible designated beneficiary and the remainder of such portion shall be distributed within 10 years after the death of such eligible designated beneficiary.
(2) DEFINITION OF ELIGIBLE DESIGNATED BENEFICIARY.— Section 401(a)(9)(E) of such Code is amended to read as follows: ‘‘(E) DEFINITIONS AND RULES RELATING TO DESIGNATED BENEFICIARIES.—For purposes of this paragraph— ‘‘(i) DESIGNATED BENEFICIARY.—The term ‘designated beneficiary’ means any individual designated as a beneficiary by the employee. ‘‘(ii) ELIGIBLE DESIGNATED BENEFICIARY.—The term ‘eligible designated beneficiary’ means, with respect to any employee, any designated beneficiary who is—...
‘‘(III) disabled (within the meaning of section 72(m)(7)), ‘‘(IV) a chronically ill individual (within the meaning of section 7702B(c)(2),
except that the requirements of subparagraph (A)(i) thereof shall only be treated as met if there is a certification that, as of such date, the period of inability described in such subparagraph with respect
The way I read this is that the a trust set up for a beneficiary who is qualified due to disability of chronic illness would use the appropriate RMD table and the successor beneficiary would use the 10 year distribution period after the qualified beneficiaries death. It does not seem ambiguous, Is that correct?

Edit to add source: https://www.congress.gov/bill/116th-con ... xt?r=4&s=8
The SECURE Act is in Division O
Last edited by Enkidu on Tue Dec 31, 2019 12:00 pm, edited 1 time in total.

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Re: SECURE Act - Special Needs Trusts

Post by MtnBiker » Sat Dec 28, 2019 1:55 pm

Enkidu wrote:
Sat Dec 28, 2019 12:06 pm
The way I read this is that the a trust set up for a beneficiary who is qualified due to disability of chronic illness would use the appropriate RMD table and the successor beneficiary would use the 10 year distribution period after the qualified beneficiaries death. It does not seem ambiguous, Is that correct?
Thanks for posting this. I had been focused on the related rules regarding tax treatment of IRAs inherited directly, and missed that the new tax law contains a special rule for IRAs passing to a trust. Maybe someone who understands the legal verbiage can confirm that this special rule eliminates any ambiguity or possible Catch-22, thus confirming that an eligible designated beneficiary of a SNT can receive a lifetime stretch if certain conditions are met.

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Re: SECURE Act - Special Needs Trusts

Post by Alan S. » Sat Dec 28, 2019 2:24 pm

Well, thanks for posting these trust clauses. I had been reading a former Secure Act code revision that did not include any provisions relative to trusts. This might be the same for MtnBiker. These trust provisions must have been added late in the game but they do answer some questions.

I think (iv) indicates that these disabled and/or ill eligible beneficiaries get the stretch WITHOUT regard to other trust beneficiaries that do not qualify. That eliminates the chance that an older trust beneficiary would erase the benefits of eligible status for the special needs beneficiary. And yes, after the special needs beneficiary passes, the 10 year rule kicks in. Most likely, some questions will remain however.

But this relief for properly drafted SNTs does not apply to other trusts, so there remains issues for these other trusts.

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Re: SECURE Act - Special Needs Trusts

Post by harmony » Sat Dec 28, 2019 2:41 pm

Enkidu, thank you very much for your post quoting paragraph (iii). I had trouble verifying the text that you found for paragraph (iii) because earlier versions of the bill said something much different. I finally found the paragraph that you quoted at a site which I found which makes it very easy to track the changes to the original bill: https://www.govtrack.us/congress/bills/116/hr1994/text
I clicked on a link that said read the latest text before I could see the same text that you posted for paragraph (iii).

What source did you use to find the final wording? There were many more links to the earlier version, so it was easy to miss this.

No, this does not seem ambiguous. We’ll ask our drafting attorney to review our trust documents in light of the changes in the law.

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MtnBiker
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Re: SECURE Act - Special Needs Trusts

Post by MtnBiker » Sat Dec 28, 2019 3:46 pm

This link to the text for the signed bill is working for me: https://www.govtrack.us/congress/bills/116/hr1865/text

Just to be perfectly clear, this relief for properly drafted SNTs clearly applies only to disabled and chronically ill individuals, a subset of eligible designated beneficiaries. (The special rule for trusts does not apply to surviving spouses, children of the employee who have not reached the age of majority, or individuals who are not more than 10 years younger than the employee.)

Here is the definition given for an applicable multi-beneficiary trust:
(v)Applicable multi-beneficiary trust

For purposes of this subparagraph, the term applicable multi-beneficiary trust means a trust—
(I)which has more than one beneficiary,
(II)all of the beneficiaries of which are treated as designated beneficiaries for purposes of determining the distribution period pursuant to this paragraph, and
(III)at least one of the beneficiaries of which is an eligible designated beneficiary described in subclause (III) or (IV) of subparagraph (E)(ii).
It is interesting that line (I) of the definition seems to open up the trust to include all kinds of beneficiaries. As FIREchief mentioned previously, the Secure act uses three different references to beneficiary types:
a) beneficiary - basically everything not meeting the criteria of the following two types
b) designated beneficiary - all beneficiaries who are individuals (various IRS interpretations have allowed qualified see through trusts to qualify as individuals provided that certain criteria are met), with a further subtype of:
c) eligible designated beneficiary - a designated beneficiary who remains eligible for lifetime stretch due to them being a spouse, disabled, not more than 10 years younger, etc.
So this definition seems to imply that the lifetime stretch for the special needs individual is available regardless of whether or not the other beneficiaries are all designated beneficiaries (individuals). Non-individuals (such as a charity) seem to be permitted and treated as if they are individuals for purposes of determining the distribution period.

harmony
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Re: SECURE Act - Special Needs Trusts

Post by harmony » Sat Dec 28, 2019 9:17 pm

Does anyone know if/how the SECURE Act relates to the “see-through” trust requirements we were careful to follow in drafting our trust documents? Has anything changed in our understanding of this? https://www.investopedia.com/terms/s/se ... -trust.asp

One of the four requirements of a "see-through" trust is that individual beneficiaries must be identifiable from the trust document. Thus a charity would not have been considered an individual. https://www.forbes.com/sites/leonlabrec ... a44b7156a3

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Re: SECURE Act - Special Needs Trusts

Post by MtnBiker » Sat Dec 28, 2019 10:35 pm

harmony wrote:
Sat Dec 28, 2019 9:17 pm
Does anyone know if/how the SECURE Act relates to the “see-through” trust requirements we were careful to follow in drafting our trust documents? Has anything changed in our understanding of this? https://www.investopedia.com/terms/s/se ... -trust.asp

One of the four requirements of a "see-through" trust is that individual beneficiaries must be identifiable from the trust document. Thus a charity would not have been considered an individual. https://www.forbes.com/sites/leonlabrec ... a44b7156a3
The origin of the "see-through" requirement was an IRS regulation 1.401(a)(9)-4, Q&A-5 which was an IRS determination on how they wanted trusts to be configured in order to apply Federal Tax Law 26 U.S. Code § 401(a)(9) for inherited IRAs to a trust situation. The SECURE Act modifies the Federal Tax Law directly, thus should supersede any IRS interpretations of the Tax Law. In essence, Congress apparently didn't like the extra requirements that the IRS put on SNTs and replaced that with the new special rule for SNTs.

If it was Congress's intent that all beneficiaries of a applicable trust were individuals, they could have defined the applicable multi-beneficiary trust as:

a trust—
(I)which has more than one designated beneficiary, and
(II)at least one of the designated beneficiaries of which is an eligible designated beneficiary described in subclause (III) or (IV) of subparagraph (E)(ii).

That is not what they said. It looks like the special rule is a potential game changer. But I'm not a lawyer.

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Re: SECURE Act - Special Needs Trusts

Post by harmony » Sun Dec 29, 2019 1:24 pm

After the death of an employee and his/her spouse, could an eligible designated disabled beneficiary receive a Life Expectancy stretch; while his non-disabled sibling who is just a designated beneficiary receive a 10-year stretch? Would these distributions run concurrently for 10 years, after which the distributions would continue for the disabled sibling using the Life Expectancy method?

If the disabled eligible designated beneficiary passes before his non-disabled sibling who is just a designated beneficiary, then could the non-disabled sibling receive the remainder starting with a fresh 10-year distribution period for those remaining funds?

After the passing of the last living sibling, could the remainder be distributed to a charity named by the trust? The naming of a charity would no longer thwart the life expectancy distribution period for the individuals named in the trust document? Nor would the name of an older designated beneficiary any longer limit the distribution time frame for a younger disabled beneficiary? It seems like this would require careful drafting to distinguish separate sub-trusts, and separate successor beneficiaries for each sub-trust.

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Re: SECURE Act - Special Needs Trusts

Post by bsteiner » Sun Dec 29, 2019 1:48 pm

harmony wrote:
Sun Dec 29, 2019 1:24 pm
...
After the passing of the last living sibling, could the remainder be distributed to a charity named by the trust? The naming of a charity would no longer thwart the life expectancy distribution period for the individuals named in the trust document? Nor would the name of an older designated beneficiary any longer limit the distribution time frame for a younger disabled beneficiary? It seems like this would require careful drafting to distinguish separate sub-trusts, and separate successor beneficiaries for each sub-trust.
You can replicate the stretch for beneficiaries who aren't disabled or chronically ill with a charitable remainder trust (CRT). A CRT is tax-exempt so it can collect the IRA all at once. It then pays a percentage of the value of the trust (at least 5%) to one or more individuals for life (or for a fixed term of not more than 20 years). The value of the trust can (and usually would) be recalculated each year. Upon the death of the last individual beneficiary, the balance of the trust goes to charity.

The actuarial value of the charity's remainder interest has to be at least 10% of the initial value of the trust.

Depending on the beneficiary's age, the replication of the stretch may outweigh the loss of the remainder to charity. (Many people wouldn't view the remainder passing to charity as a loss, but rather an opportunity to give a large amount to charity at little or no cost or often at a negative cost to the family.)

SInce the actuarial value of the charity's remainder interest has to be at least 10% of the initial value of the trust, the beneficiary has to be at least age 27 (at current interest rates, which are updated monthly) for this to work.

This will work well for IRA owners whose children (or grandchildren) are in their late 20s, 30s or 40s.

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Re: SECURE Act - Special Needs Trusts

Post by harmony » Sun Dec 29, 2019 3:02 pm

Bsteiner, your voice is welcome at a time like this when many of us are faced with revising trust documents. I can see how putting the remainder in a charitable trust would pace distributions so that a beneficiary wouldn’t be as likely to spend it all at a young age and perhaps unwisely. We drafted the subtrust for our nondisabled son with him as trustee with full discretion over his subtrust.

My concerns with sandwiching distributions for my non-disabled son between my disabled son and a charitable remainder trust is that the non-disabled son would have taken on too much work as the trustee and caregiver and might feel skimped on his own portion. He has already made personal sacrifices and would likely put his own needs far behind his brother’s. After we are gone, we want him to be allowed the opportunity to take larger distributions as he determines. He should make his own decision as to how much he wants to allow to go to a charity or other beneficiaries he may chose. He may have large unexpected expenses along the way, i.e. starting a business to employ his sibling, or changing his residence without the proceeds of the timely sale of a current residence. He may need to reduce from full-time work to part-time work to care for his brother. If he needs to move to another part of the country, they may decide to both move so they can live in the same community. There is the potential for his own disability or the need of long-term care for himself or a family member. So the idea of limiting him to annual earnings from a remainder trust wouldn’t allow for this kind of flexibility, would it? I think this would limit our son too much. It may work for others though.

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Re: SECURE Act - Special Needs Trusts

Post by bsteiner » Sun Dec 29, 2019 4:29 pm

harmony wrote:
Sun Dec 29, 2019 3:02 pm
Bsteiner, your voice is welcome at a time like this when many of us are faced with revising trust documents. I can see how putting the remainder in a charitable trust would pace distributions so that a beneficiary wouldn’t be as likely to spend it all at a young age and perhaps unwisely. We drafted the subtrust for our nondisabled son with him as trustee with full discretion over his subtrust.
...
He can't be trustee with full discretion (or else it will be treated as if the trust didn't exist).

You are correct that one of the tradeoffs of the charitable remainder trust is that the distributions are inflexible. It will work better where there's other money available for the beneficiary's nonrecurring needs.

Another tradeoff is that the distributions from the charitable remainder trust are payable outright and will be thrown into the beneficiary's estate and subject to the beneficiary's creditors and spouses. (There's a narrow exception for a special needs beneficiary in Revenue Ruling 2002-20 which allows distribution to a trust that will be included in the beneficiary's estate.) By comparison, distributions from an IRA could otherwise be accumulated in the trust, kept out of the beneficiary's estate and protected against the beneficiary's creditors and spouses. So the charitable remainder trust will work better for a beneficiary who will need substantial distributions, isn't expected to have a taxable estate, and isn't expected to have a problem with creditors or spouses.

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Re: SECURE Act - Special Needs Trusts

Post by MtnBiker » Sun Dec 29, 2019 6:34 pm

harmony wrote:
Sun Dec 29, 2019 1:24 pm
After the death of an employee and his/her spouse, could an eligible designated disabled beneficiary receive a Life Expectancy stretch; while his non-disabled sibling who is just a designated beneficiary receive a 10-year stretch? Would these distributions run concurrently for 10 years, after which the distributions would continue for the disabled sibling using the Life Expectancy method?
It seems the answers would be yes and yes, but only under (I) of the Special rule in case of certain trusts for disabled or chronically ill beneficiaries:
"In the case of an applicable multi-beneficiary trust, if under the terms of the trust—
(I)it is to be divided immediately upon the death of the employee into separate trusts for each beneficiary"

But wouldn't it be simpler if the non-disabled sibling just inherited his portion of the IRA directly, rather than through a trust? (For example, if the IRA had two beneficiaries, with X% going to a SNT and (100-X)% to the non-disabled sibling. Or the IRA could be divided into two separate IRAs with different beneficiaries.) Either way the non-disabled sibling has to live with distribution of his portion over a 10 year period.
harmony wrote:
Sun Dec 29, 2019 1:24 pm
If the disabled eligible designated beneficiary passes before his non-disabled sibling who is just a designated beneficiary, then could the non-disabled sibling receive the remainder starting with a fresh 10-year distribution period for those remaining funds?
Yes, if the non-disabled sibling is the remainder beneficiary of the applicable multi-beneficiary trust:
"...any beneficiary who is not such an eligible designated beneficiary shall be treated as a beneficiary of the eligible designated beneficiary upon the death of such eligible designated beneficiary."

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Re: SECURE Act - Special Needs Trusts

Post by johnra » Sun Dec 29, 2019 8:22 pm

My wife and I are planning on funding our disabled daughter's SNT with monies from life insurance and taxable assets up to a defined limit, but not from our IRAs. The remaining assets and our IRAs will be divided amongst our non-disabled children. One principle I am learning now that I am managing my own parents affairs (one deceased and the other in a nursing home) is that managing a trust is complex, takes time and a lot of knowldege. I want as much simplicity for our other non-disabled children since they are not particularly interested in or knowledgeable about finance.

Another thing that I am learning (not related to the SECURE Act) is that my disabled daughter has more financial resources than I thought she would--she now has both Medicare and Medi-Cal, she receives SSA and SSI, she has housing support through Regional Center (which uses her SSA and SSI), she has a small ABLE account (which will grow through more contributions and investments), and she will receive part of my Social Security as a disabled adult child and my pension as a contingent annuitant after I am gone. I think we have overfunded the SNT and will need to adjust.

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Re: SECURE Act - Special Needs Trusts

Post by harmony » Sun Dec 29, 2019 9:31 pm

I wrote in error that our non-disabled son is trustee of his own trust. That’s what I asked the lawyer to do, but it didn’t end up that way because it’s impossible, as bsteiner stated. Instead, he’s supposed to get his own “bucket” as the lawyer called his principal which would deliver an annual RMD; or could be taken earlier, in larger amounts and in other forms such as real estate and taxable.

Must a multi-trust designated beneficiary wait until the eligible designated beneficiary has passed away before accessing any of his inheritance? We definitely want to avoid that because they are close in age, and the funds would be way too late for one of them.

Is it not true that even without a multi-beneficiary trust that the two RMDs would run concurrently for the first 10 years, one feeding into the disabled sibling's trust, the other emptying directly to an account of the non-disabled sibling? Then after 10 years, only the Life Expectancy RMD would continue for the disabled sibling, while the other manages what he had already received?

I appreciate Johnra's point about simplicity. Are you still using a trust structure for her, but just not feeding any IRA monies into it?

One underestimated element of a disabled person's future need may be the free care which elderly parents now provide, but which will come at a much higher cost when others provide it. This depends on what type of disability the person has: Our son can't live in a group setting (too loud) so the efficient support system provided in a group home setting would not be available to him.

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Re: SECURE Act - Special Needs Trusts

Post by MtnBiker » Sun Dec 29, 2019 11:31 pm

harmony wrote:
Sun Dec 29, 2019 9:31 pm
Must a multi-trust designated beneficiary wait until the eligible designated beneficiary has passed away before accessing any of his inheritance? We definitely want to avoid that because they are close in age, and the funds would be way too late for one of them.
The only way I can see for both beneficiaries to concurrently receive distributions from inherited IRA assets held in trust, and for the eligible designated beneficiary to get the lifetime stretch, is to have two separate trusts for the two beneficiaries. The law is pretty clear - the special rule says the lifetime stretch for the disabled individual is possible only if:

"In the case of an applicable multi-beneficiary trust, if under the terms of the trust— ‘‘(I) it is to be divided immediately upon the death of the employee into separate trusts for each beneficiary, or ‘‘(II) no individual (other than a eligible designated beneficiary described in subclause (III) or (IV) of subparagraph (E)(ii)) has any right to the employee’s interest in the plan until the death of all such eligible designated beneficiaries with respect to the trust."
harmony wrote:
Sun Dec 29, 2019 9:31 pm
Is it not true that even without a multi-beneficiary trust that the two RMDs would run concurrently for the first 10 years, one feeding into the disabled sibling's trust, the other emptying directly to an account of the non-disabled sibling? Then after 10 years, only the Life Expectancy RMD would continue for the disabled sibling, while the other manages what he had already received?
Without an applicable multi-beneficiary trust, the two individuals would inherit the IRA assets directly (divided as indicated by the beneficiary designations of the IRA). The disabled individual would own a portion of the IRA, likely exceeding asset limits for the disabled individual to qualify for government benefits. The 10-year distribution and the lifetime RMDs would feed concurrently for the first 10 years directly into each of the sibling's respective personal accounts (not to the trust of the disabled sibling).

An applicable multi-beneficiary trust is beneficial for the disabled sibling, but a second trust is not necessarily essential for the non-disabled sibling.

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Re: SECURE Act - Special Needs Trusts

Post by johnra » Mon Dec 30, 2019 10:22 am

harmony wrote:
Sun Dec 29, 2019 9:31 pm
...I appreciate Johnra's point about simplicity. Are you still using a trust structure for her, but just not feeding any IRA monies into it?...
Yes, my wife's and my current revocable trust will become an irrovocable trust when one of us dies, and then the last one dies, the assets will fund our daughter's SNT trust up to a predefined amount that will come from non-IRA and whatever remains plus the IRAs will be divided equally among the other the other children.

In your case, why not decide how much the disabled child will need and separate that from the rest (assuming there is more). Fund the SNT different from your other son? If most of your assets are in IRA space, make two IRAs, one for each son?

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Re: SECURE Act - Special Needs Trusts

Post by MtnBiker » Mon Dec 30, 2019 10:40 am

bsteiner wrote:
Sun Dec 29, 2019 4:29 pm
harmony wrote:
Sun Dec 29, 2019 3:02 pm
Bsteiner, your voice is welcome at a time like this when many of us are faced with revising trust documents.
+1
Bsteiner, I would like to thank you for joining in the discussion on this thread. As a complete novice in tax law, I cannot be confident in my understanding of the full implications of the SECURE Act provisions for disabled and chronically ill individuals without some confirmation from an expert. Since you have not corrected any of the statements made by myself and Enkidu, can I assume that our understanding of the Special Rule is generally correct? That is, are we correct that under the new tax law:

1) An IRA inherited by a trust set up for an eligible designated beneficiary who is qualified due to disability or chronic illness would receive a lifetime stretch and the remainder beneficiary, after death of the eligible designated beneficiary and termination of the trust, would own the residual value of the trust including the inherited IRA, and would start a new 10 year distribution period.

And,
2) The third of the four IRS "see-through" requirements (specifically that all the beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the employee's benefit, must be Individuals) has been struck down by the new tax law in this special case. For purposes of the new Special Rule, the eligible designated beneficiary of the trust will receive a lifetime stretch even if a remainder beneficiary is not an individual but rather is a charity or other entity without an identifiable lifetime.

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Re: SECURE Act - Special Needs Trusts

Post by bsteiner » Mon Dec 30, 2019 2:16 pm

MtnBiker wrote:
Mon Dec 30, 2019 10:40 am
bsteiner wrote:
Sun Dec 29, 2019 4:29 pm
harmony wrote:
Sun Dec 29, 2019 3:02 pm
Bsteiner, your voice is welcome at a time like this when many of us are faced with revising trust documents.
+1
Bsteiner, I would like to thank you for joining in the discussion on this thread. As a complete novice in tax law, I cannot be confident in my understanding of the full implications of the SECURE Act provisions for disabled and chronically ill individuals without some confirmation from an expert. Since you have not corrected any of the statements made by myself and Enkidu, can I assume that our understanding of the Special Rule is generally correct? That is, are we correct that under the new tax law:

1) An IRA inherited by a trust set up for an eligible designated beneficiary who is qualified due to disability or chronic illness would receive a lifetime stretch and the remainder beneficiary, after death of the eligible designated beneficiary and termination of the trust, would own the residual value of the trust including the inherited IRA, and would start a new 10 year distribution period.

And,
2) The third of the four IRS "see-through" requirements (specifically that all the beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the employee's benefit, must be Individuals) has been struck down by the new tax law in this special case. For purposes of the new Special Rule, the eligible designated beneficiary of the trust will receive a lifetime stretch even if a remainder beneficiary is not an individual but rather is a charity or other entity without an identifiable lifetime.
I think you are correct.

New Section 401(a)(9(H)(iii) says that upon the death of the eligible designated beneficiary (EDB) (a disabled or chronically ill person), the exception [the stretch for the EDB] shall not apply to any beneficiary of such EDB and the remainder shall be distributed within 10 years after the death of the EDB.

New Section 401(a)(9)(H)(iv) allows the exception (the stretch) for a trust if all of the current beneficiaries are EDBs. It says that any beneficiary who's not an EDB is treated as a beneficiary of the EDB upon the EDB's death.

So I think you get the life of the EDB plus 10 years.

It's only been 10 days since the new law was signed, so I'm sure there will be lots of articles and seminars on this next year, so by this time next year we'll know a good deal more than we now know.

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Re: SECURE Act - Special Needs Trusts

Post by MtnBiker » Mon Dec 30, 2019 2:58 pm

bsteiner wrote:
Mon Dec 30, 2019 2:16 pm
It's only been 10 days since the new law was signed, so I'm sure there will be lots of articles and seminars on this next year, so by this time next year we'll know a good deal more than we now know.
Thanks for the reply! Our estate plan is long overdue for a complete overhaul. My "new years resolution" is to get that fixed ASAP, or at least early within the upcoming decade. I had been procrastinating pending some clarity on the impact of the SECURE Act.

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Re: SECURE Act - Special Needs Trusts

Post by Ron » Mon Dec 30, 2019 3:03 pm

bsteiner wrote:
Mon Dec 30, 2019 2:16 pm
It's only been 10 days since the new law was signed, so I'm sure there will be lots of articles and seminars on this next year, so by this time next year we'll know a good deal more than we now know.
Exactly.

While we don't have an SNT for our adult disabled son (he's on Social Security Disability) and not receiving additional government benefits other than receiving a SNAP benefit along with his Medicare Part B being paid for by the state, we're still concerned if our/his will documents that he is disabled and if the new rules will be applied to him properly in the future after we're gone.

My wife/me will have to sit down with our elder law attorney to go over and possibly revise our documents (along with the arrangements made for our son's trustee - a commercial trust arrangement) to ensure that the assets are maintained for his possible end of life needs rather than prepaying excessive taxes over a possibly much shortened period.

- Ron

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Re: SECURE Act - Special Needs Trusts

Post by bsteiner » Mon Dec 30, 2019 3:47 pm

Ron wrote:
Mon Dec 30, 2019 3:03 pm
bsteiner wrote:
Mon Dec 30, 2019 2:16 pm
It's only been 10 days since the new law was signed, so I'm sure there will be lots of articles and seminars on this next year, so by this time next year we'll know a good deal more than we now know.
Exactly.

While we don't have an SNT for our adult disabled son (he's on Social Security Disability) and not receiving additional government benefits other than receiving a SNAP benefit along with his Medicare Part B being paid for by the state, we're still concerned if our/his will documents that he is disabled and if the new rules will be applied to him properly in the future after we're gone.

My wife/me will have to sit down with our elder law attorney to go over and possibly revise our documents (along with the arrangements made for our son's trustee - a commercial trust arrangement) to ensure that the assets are maintained for his possible end of life needs rather than prepaying excessive taxes over a possibly much shortened period.
You may want to work with a trusts and estates lawyer on your estate planning rather than an elder law (mainly Medicaid and guardianships) attorney. A substantial percentage of their clients have beneficiaries with special needs.

The trust in your Will for your special needs son won't be much different from the trusts for your other children. The difference, if any, will be that, depending on the nature of his disability, he may have a lesser degree of control over his trust, or perhaps no control over his trust.

The definition of disabled for purposes of the stretch under the SECURE Act is similar to the definition of disability for Social Security. New Section 401(a)(9)(E)(ii)(III) says that for purposes of the stretch it means disabled within the meaning of Section 72(m)(7), which says:

"For purposes of this section, an individual shall be considered to be disabled if he 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. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the Secretary may require."

So if he gets Social Security disability, the trust for his benefit should be able to stretch the retirement benefits over his life expectancy, except that if he dies before reaching his life expectancy, the trustees will have to take the remaining retirement benefits within 10 years after his death.

Ron
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Re: SECURE Act - Special Needs Trusts

Post by Ron » Mon Dec 30, 2019 3:54 pm

bsteiner wrote:
Mon Dec 30, 2019 3:47 pm
Ron wrote:
Mon Dec 30, 2019 3:03 pm
bsteiner wrote:
Mon Dec 30, 2019 2:16 pm
It's only been 10 days since the new law was signed, so I'm sure there will be lots of articles and seminars on this next year, so by this time next year we'll know a good deal more than we now know.
Exactly.

While we don't have an SNT for our adult disabled son (he's on Social Security Disability) and not receiving additional government benefits other than receiving a SNAP benefit along with his Medicare Part B being paid for by the state, we're still concerned if our/his will documents that he is disabled and if the new rules will be applied to him properly in the future after we're gone.

My wife/me will have to sit down with our elder law attorney to go over and possibly revise our documents (along with the arrangements made for our son's trustee - a commercial trust arrangement) to ensure that the assets are maintained for his possible end of life needs rather than prepaying excessive taxes over a possibly much shortened period.
You may want to work with a trusts and estates lawyer on your estate planning rather than an elder law (mainly Medicaid and guardianships) attorney. A substantial percentage of their clients have beneficiaries with special needs.

The trust in your Will for your special needs son won't be much different from the trusts for your other children. The difference, if any, will be that, depending on the nature of his disability, he may have a lesser degree of control over his trust, or perhaps no control over his trust.

The definition of disabled for purposes of the stretch under the SECURE Act is similar to the definition of disability for Social Security. New Section 401(a)(9)(E)(ii)(III) says that for purposes of the stretch it means disabled within the meaning of Section 72(m)(7), which says:

"For purposes of this section, an individual shall be considered to be disabled if he 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. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the Secretary may require."

So if he gets Social Security disability, the trust for his benefit should be able to stretch the retirement benefits over his life expectancy, except that if he dies before reaching his life expectancy, the trustees will have to take the remaining retirement benefits within 10 years after his death.
There are no others that will be getting the proceeds of his trust after he's gone (no siblings nor remainder family). The remainder will be going to charity - hopefully tax free - unless the rules of the game are again changed in the future...

- Ron

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Re: SECURE Act - Special Needs Trusts

Post by MtnBiker » Mon Dec 30, 2019 8:46 pm

Today in the comments section of the article covering the SECURE Act on the Kitces website:
There were some special rules put in for Special Needs Trusts at the last second, and we'll be covering those further in an upcoming post. In the meantime, if you need info sooner, consider looking into (new thing) " Applicable Multi-Beneficiary Trusts ".
https://www.kitces.com/blog/secure-act- ... nrollment/
Last edited by MtnBiker on Tue Dec 31, 2019 9:38 am, edited 1 time in total.

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Re: SECURE Act - Special Needs Trusts

Post by johnra » Tue Dec 31, 2019 12:35 am

I may be missing the point of this excellent discussion: In light of the SECURE Act, does it make more financial sense to fund a SNT with after-tax (non-IRA) or pre-tax (IRA) assets? In our case, the SNT is created just in case monies are needed, but it is not clear that they are? If the IRA is transferred to the trust, can the RMD be taken out of the IRA and then sit in the trust without being distributed? Isn't the taxation much steeper this way? Thanks!

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Re: SECURE Act - Special Needs Trusts

Post by MtnBiker » Tue Dec 31, 2019 10:39 am

johnra wrote:
Tue Dec 31, 2019 12:35 am
I may be missing the point of this excellent discussion: In light of the SECURE Act, does it make more financial sense to fund a SNT with after-tax (non-IRA) or pre-tax (IRA) assets? In our case, the SNT is created just in case monies are needed, but it is not clear that they are? If the IRA is transferred to the trust, can the RMD be taken out of the IRA and then sit in the trust without being distributed? Isn't the taxation much steeper this way? Thanks!
As in all things financial, what is the best approach will likely depend on the details of the individual situation. For me the main point of this discussion is that "The Death of the Stretch IRA" does not apply in the special needs arena, thus retaining additional options for funding the long term care of remaining loved ones.

The general idea is that the RMDs from the lifetime stretch, if taxable, should not be retained in the trust but rather distributed in ways that improve the standard of living of the trust beneficiary. The trustee is supposed to manage the distributions in a tax efficient manner, so that any taxes due on the RMDs, and dividends from funds in the trust, are payable at the low marginal rate of the trust beneficiary, to the extent possible. (If RMDs and dividends are retained inside the trust without being distributed, the trust pays the taxes at higher marginal rates that kick in at much lower income levels than for individuals.)

Consider the case of a disabled individual who has a known, high, on-going cost of care and a life expectancy of 40 years or more. Suppose also that the parents have a pre-tax tIRA in an amount equal to 30x annual expenses for on-going care, which is the result of a lifetime of saving and sacrifice with the intent of leaving a legacy to care for their child when they no longer can. Funding a SNT with such a large inherited tIRA will be far more tax efficient with the stretch than without. The trustee of the SNT would have the ability to manage the distributions from the SNT, with a withdrawal rate of around 3% per year, that provides an endowment in perpetuity for the disabled adult child.

johnra
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Re: SECURE Act - Special Needs Trusts

Post by johnra » Tue Dec 31, 2019 2:02 pm

Yes, I am starting to see and am reading more about these and I really appreciate your insights

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MtnBiker
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Re: SECURE Act - Special Needs Trusts

Post by MtnBiker » Wed Jan 08, 2020 7:30 pm

Here is a source which discusses the special rule for a retirement account left in trust for a disabled or chronically ill individual. (There may be other sources, but this is the most comprehensive that I have found so far.) https://ncbarblog.com/the-secure-act-ha ... r-clients/
Disabled Individuals: Under paragraph IRC §401(a)(9)(E)(ii)(III), to be “disabled” a beneficiary must meet the requirement of IRC §72(m)(7) (“[A]n individual shall be considered to be disabled if he 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.”). See below for a summary of trusts for disabled or chronically-ill individuals that receive favorable treatment under the Act.

...

The determination of the eligible designated beneficiary status is made as of the date of the employee’s death, not September 30 of the following year. IRC §401(a)(9)(E)(ii).

No Tacking: The Act also prohibits tacking eligible designated beneficiaries to extend the distribution period – an IRA must be distributed within ten years after the death of the first eligible designated beneficiary. IRC §401(a)(9)(H)(iii). For example, if a surviving spouse holds an IRA as an inherited IRA instead of making a spousal rollover and then dies after designating a disabled beneficiary, the disabled beneficiary would have only ten years to distribute the funds.

Multi-beneficiary Trusts Including Disabled or Chronically-Ill Beneficiaries:
The Act creates specific safe harbor rules for an “applicable multi-beneficiary trust” if one of the beneficiaries is disabled or chronically-ill. IRC §401(a)(9)(H)(iv). (Note: Be careful about the word “trust” in this part of the Code; the term generally refers to the qualified plan itself and not to the employee’s personal trust agreement – this section is an exception.) A disabled or chronically-ill individual receives “eligible designated beneficiary” treatment (and the ability to stretch IRA distributions) under two circumstances: First, if the trust terms require immediate division upon the death of the employee into separate trusts for each beneficiary, the disabled or chronically-ill beneficiary is treated as an eligible designated beneficiary (and is allowed to use his or her life expectancy for distributions); and the ten-year rule applies to all the other beneficiaries of the trust. IRC §401(a)(9)(H)(iv)(I). (Note that you can avoid the need for this safe harbor by using the beneficiary designation forms to designate each separate trust as a beneficiary in appropriate percentages rather than designating the master trust as beneficiary of the entire account.)

Second, if the disabled or chronically-ill individual is the only beneficiary who may receive distributions during his or her lifetime, then he or she will be treated as an eligible designated beneficiary. (If there are multiple disabled or chronically-ill beneficiaries, no other beneficiary can receive distributions until they have all died.)

The safe harbors will also likely require clarification from the agency. The first safe harbor may be problematic for beneficiaries with needs-based public assistance and beneficiaries who are not capable of managing assets responsibly. It seems likely that to receive eligible designated beneficiary status under this first safe harbor, the trust upon division would either have to distribute the IRA to the disabled individual intact as an inherited IRA or would have to also meet the second safe harbor; otherwise, the settlor could circumvent the requirements of the second safe harbor by naming as beneficiary a master trust with multiple beneficiaries and calling for immediate division into separate trusts.

Like under the previous rules, the life expectancy of the oldest designated beneficiary will determine the required minimum distributions for the disabled or chronically-ill beneficiary since those provisions of the Code have not been amended. From the language of the second safe harbor, it appears that if there are multiple disabled or chronically-ill beneficiaries, no amount may be distributed to a non-disabled and non-chronically-ill beneficiary until all of the disabled or chronically-ill beneficiaries have died; even when one of the disabled/chronically-ill beneficiaries dies, the trust may not be allowed to distribute any assets to a healthy beneficiary. This would technically be true even if the intent of the trust was to provide protection for one beneficiary receiving Medicaid and the settlor was not concerned about another beneficiary who started receiving SSDI following the creation of the trust and before the employee’s death. After the death of any disabled or chronically-ill beneficiaries of the trust, the remainder of the qualified money must be distributed within ten years to the non-disabled or chronically-ill beneficiaries. IRC §401(a)(9)(H)(iv).
Some sources I have seen indicate that an individual receiving SSDI should qualify as disabled under the IRS definition above. Other sources state that the IRS definition may be somewhat more stringent than the Social Security definition.

Parents of a special-needs child need to be cognizant of the "no tacking" provision mentioned above. If the estate plan is for the child to receive a lifetime stretch after the second parent passes, it is imperative that, after the first spouse dies, the surviving spouse make any inherited retirement account(s) his or her own by means of a spousal rollover.

I suspect that the statement "Like under the previous rules, the life expectancy of the oldest designated beneficiary will determine the required minimum distributions for the disabled or chronically-ill beneficiary since those provisions of the Code have not been amended." is incorrect. As far as I know the previous rule referencing the life expectancy of the oldest designated beneficiary is not part of the Code, but rather is an IRS clarification of the Code.

The discussion quoted above considers only the case where trust beneficiaries are individuals. It does not mention or acknowledge the possibility of an eligible designated beneficiary receiving a lifetime stretch when the remainder beneficiary is not an individual.

bsteiner
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Re: SECURE Act - Special Needs Trusts

Post by bsteiner » Wed Jan 08, 2020 8:02 pm

MtnBiker wrote:
Wed Jan 08, 2020 7:30 pm
...
I suspect that the statement "Like under the previous rules, the life expectancy of the oldest designated beneficiary will determine the required minimum distributions for the disabled or chronically-ill beneficiary since those provisions of the Code have not been amended." is incorrect. As far as I know the previous rule referencing the life expectancy of the oldest designated beneficiary is not part of the Code, but rather is an IRS clarification of the Code.
...
The discussion quoted above considers only the case where trust beneficiaries are individuals. It does not mention or acknowledge the possibility of an eligible designated beneficiary receiving a lifetime stretch when the remainder beneficiary is not an individual.
A trust for a disabled or chronically ill person qualifies for the stretch if all of the current beneficiaries are disabled or chronically ill. It's possible but unlikely that an IRA owner could have two children who are both disabled or chronically ill and create a single trust for them.

With the exception of trusts for disabled or chronically ill persons, the subsequent beneficiaries still have to be individuals (or other trusts for individuals) in order to get the 10-year stretch rather than 5 years. However, there's no restriction on who may be a remainder beneficiary of a trust for a disabled or chronically ill person.

The April 2020 issue of Trusts & Estates magazine will be devoted primarily or entirely to the SECURE Act. Some of the contents will be available on www.trustsandestates.com. The lawyer who handles your estate planning can tell you if there are any articles that might be relevant to your situation that aren't on their website.

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Michael Patrick
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Re: SECURE Act - Special Needs Trusts

Post by Michael Patrick » Wed Jan 08, 2020 9:04 pm

I'm a little confused, not that that is an abnormal state for me...

When the surviving spouse dies, would there be an inherited IRA created for the disabled child, and the SNT would receive the stretch RMDs based on the age of the child? Is that how it is supposed to work? Or does the trust get the inherited IRA?

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MtnBiker
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Re: SECURE Act - Special Needs Trusts

Post by MtnBiker » Wed Jan 08, 2020 9:45 pm

Michael Patrick wrote:
Wed Jan 08, 2020 9:04 pm
When the surviving spouse dies, would there be an inherited IRA created for the disabled child, and the SNT would receive the stretch RMDs based on the age of the child? Is that how it is supposed to work? Or does the trust get the inherited IRA?
When the IRA is inherited directly by the disabled child, it would usually defeat the purposes of a SNT, that is, to retain eligibility for government benefits which generally have limitations on income and/or assets. Thus, in a special needs case, it is desirable for the trust to hold the inherited IRA.

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MtnBiker
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Re: SECURE Act - Special Needs Trusts

Post by MtnBiker » Mon Jan 13, 2020 12:20 pm

bsteiner wrote:
Wed Jan 08, 2020 8:02 pm
With the exception of trusts for disabled or chronically ill persons, the subsequent beneficiaries still have to be individuals (or other trusts for individuals) in order to get the 10-year stretch rather than 5 years. However, there's no restriction on who may be a remainder beneficiary of a trust for a disabled or chronically ill person.
It seems that others disagree with the above interpretation that there is no restriction on who may be a remainder beneficiary of a trust for a disabled or chronically ill person.

From: https://www.bowlesrice.com/assets/htmld ... dified.pdf (emphasis added):
The Act adds the new concept of an “applicable multi-beneficiary trust.” This is a trust which has more than one beneficiary all of which are “designated beneficiaries,” and at least one of which is an eligible designated beneficiary that is a “chronically ill individual” or a “disabled person.”
From: https://www.ataxplan.com/wp-content/upl ... 9-2020.pdf (emphasis added):
“Applicable multi-beneficiary trust. For purposes of this subparagraph, the term “applicable multi-beneficiary trust” means a trust—
(I) which has more than one beneficiary,
(II) all of the beneficiaries of which are treated as designated beneficiaries for purposes of determining the distribution period pursuant to this paragraph, and
(III) at least one of the beneficiaries of which is an eligible designated beneficiary described in subclause (III) [disabled] or (IV) [chronically ill] of subparagraph (E)(ii).”

Note the requirement that “all of the beneficiaries of which are treated as designated beneficiaries...” This appears to incorporate by reference the IRS’s minimum distribution trust rules as contained in Reg. § 1.401(a)(9)-4, A-5(a).
Reg. § 1.401(a)(9)-4, A-5(a) lists the IRS qualifications for a "see-through" trust, which includes the requirement that all beneficiaries of the trust be individuals (designated beneficiaries). Quote (emphasis added):
Q-5. If a trust is named as a beneficiary of an employee, will the beneficiaries of the trust with respect to the trust's interest in the employee's benefit be treated as having been designated as beneficiaries of the employee under the plan for purposes of determining the distribution period under section 401(a)(9)?

A-5. (a) If the requirements of paragraph (b) of this A-5 are met with respect to a trust that is named as the beneficiary of an employee under the plan, the beneficiaries of the trust (and not the trust itself) will be treated as having been designated as beneficiaries of the employee under the plan for purposes of determining the distribution period under section 401(a)(9).
The requirements of this paragraph (b) are met if, during any period during which required minimum distributions are being determined by treating the beneficiaries of the trust as designated beneficiaries of the employee, the following requirements are met -
(1) The trust is a valid trust under state law, or would be but for the fact that there is no corpus.
(2) The trust is irrevocable or will, by its terms, become irrevocable upon the death of the employee.
(3) The beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the employee's benefit are identifiable within the meaning of A-1 of this section from the trust instrument.
(4) The documentation described in A-6 of this section has been provided to the plan administrator.
So it seems that the definition of an applicable multi-beneficiary trust could be interpreted as still including the IRS "see-through" regulatory requirement (3) that all beneficiaries must be specifically identified individuals. If that was Congress intent, it would have been nice if they had just said that clearly - something like "(II) all of the beneficiaries of which are designated beneficiaries, and", rather than the potentially ambiguous verbiage "(II) all of the beneficiaries of which are treated as designated beneficiaries..."

I'm thinking I'll have to dial back my expectations that the reminder beneficiaries of our SNT could include charities.

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