The world of estate planning is ever changing, and what may have been the proper way to set up a trust for a special needs individual may be different now than it was a few years ago.  It is important to ensure that any beneficiary designations for individuals with disabled or chronically ill beneficiaries are proper and up to date so as to not lose advantages available to those individuals.

The SECURE Act (2020) changed the rules of retirement benefits so that, after the participant’s death, only a narrow class of individuals (and trusts for those individuals) known as eligible designated beneficiaries (“EDB”) may have minimum distributions paid out over their lifetimes.  All other beneficiaries must have the entire retirement plan paid out either within five or ten years following the participant’s death, depending on the beneficiary type (or the participant’s remaining life expectancy if the participant was in pay status, depending on the beneficiary type).

Under SECURE, a trust created for the sole benefit of a disabled or chronically ill individual (as that term is defined in the Act and proposed regulations) will be considered an EDB.  While in the past it may have been common to make the disabled individual’s special needs trust a spray trust (such as being for the benefit of others such as siblings as well), the new laws make it clear that if the trust has multiple beneficiaries who may receive distributions during the lifetime of the disabled individual, the trust will not be an EDB and will lose the ability to stretch out the benefits.  Further, such trusts often provide that if the state attempts to claim the trust as an available resource, the trust shall terminate and the remaining assets will be distributed to the remainder beneficiaries.  Those trusts also will not be considered an EDB.

SECURE 2.0 (2022) revised the SECURE rules regarding trusts for disabled individuals in a beneficial way.  Before this new legislation, if a charity was named as the remainder beneficiary of the trust, then the trust would fail to qualify as an EDB (i.e., payments could not be stretched over the disabled individual’s lifetime).  However, under SECURE 2.0, the participant can now name a charity as the remainder beneficiary of the special needs trust and still get the stretch payout.

If you created a special needs trust in the past and have significant retirement assets that you wish to pass to that trust, the trust may need to be reviewed to ensure that it is set up in a way to provide the maximum benefits.  Please call us if you need assistance with completing or reviewing your beneficiary designation forms.   For more information, please contact Kimberly T. Smith or another BW attorney.