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When to use a Special Needs Trust?

Is it wise to leave a retirement account to a beneficiary who receives disability assistance? Simply put, the answer is no. Leaving tax-deferred retirement accounts (IRAs, 401K, 403B, etc.) to someone who is receiving disability assistance is not the best route to take.

What happens when an IRA is inherited?

Normally, when an IRA owner passes away, the beneficiary can inherit the IRA and possibly stretch it over their life expectancy in accordance to IRS published life tables. When the lifetime distributions take place, the taxes are paid (albeit over a length of time), which in turn helps reduce the overall tax burden.

The problem with leaving an IRA or 401K account to a beneficiary with disability assistance such as Medi-Cal/Medicaid or SSI is that the beneficiary cannot have more than $2,000.00 in their name and must meet very low-income thresholds.

What are some options for leaving an inheritance to a disability-assisted beneficiary?

One option to consider is to convert a Roth IRA before death of the original retirement account owner.

Another option would be to place the retirement accounts into a Special Needs Trust, which can hold the IRA assets for the beneficiary’s future needs – but even this has its own problems. Any trust that retains the income and does not distribute it to a beneficiary in the given tax year will be taxed at 37% Federal Income rates on income above $12,750. For comparison, a single individual taxpayer would need to earn above $510,300 in order to fall into the same tax bracket. Unfortunately, even individuals who are under the age of 70.5 will have to take required minimum distributions, including trusts.

If there are no other resources to leave a beneficiary with disability, then a Special Needs Trust will most likely be the best option.

Need to set up a Special Needs Trust? Chatterton can help.

Working with a Chartered Special Needs Counselor®/Certified Financial Planner™ is highly recommended to help you explore the different paths that can be taken.   Contact us today to get started.


Eric Y. Oh, CFP®, ChFC®, ChSNC®

Check the background of this firm/advisor on FINRA’s BrokerCheck.