Special Needs Trusts Rule Changes from SECURE 2.0

Key Points – Special Needs Trusts Rule Changes from SECURE 2.0

Reviewing Eligible Designated Beneficiaries from the SECURE Act
What Are Applicable Multi-Beneficiary Trusts?
How SECURE 2.0 Helped Save the Day for Those with Applicable Multi-Beneficiary Trusts
Other Special Needs Financial Planning Tips
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Special Needs Trust Rules from the SECURE Act and SECURE 2.0

While it wasn’t as earth shattering as the SECURE Act, Congress did implement some important new retirement rules in the SECURE Act 2.0. We’ve reviewed several of those rules since SECURE 2.0 went into effect on January 1, 2023, but there are a few rules that haven’t received much publicity that we still need to go over. Today, we’re going to review special needs trusts and other important financial planning strategies for those who are caring for children with special needs.

Applicable Multi-Beneficiary Trusts

Before we outline what all changed with special needs trusts thanks to SECURE 2.0, we need to take a few steps back and look at some of the major things that happened with the SECURE Act. The SECURE Act largely did away with the Stretch IRA. Instead, most beneficiaries must follow the 10-year payout rule. But notice that we said most, not all.

One of the exceptions that the SECURE Act made was for special needs trusts for beneficiaries who chronically ill or disabled. The Stretch IRA still applies in those situations. This is what is called an applicable multi-beneficiary trust (AMBT). The SECURE Act made it so that there could be another beneficiary under the AMBT along with the disabled or chronically ill beneficiary as long as they were designated beneficiaries.

Charities as Designated Beneficiaries

One rule from the SECURE Act was that a charity couldn’t count as a designated beneficiary. The SECURE Act stated that only surviving spouses, disabled beneficiaries, chronically ill beneficiaries, beneficiaries 10 years or younger than the IRA owner, and minor children of the IRA owner are the only groups that still qualify for Stretch IRAs, as they are considered to be eligible designated beneficiaries. Under the SECURE Act, a trust from an inherited IRA with a charity as a beneficiary needs to utilize one of two things. It’s contingent on when the account owner passes away, but it must use the five-year rule or the account owner’s remaining single life expectancy.

What Changed with Special Needs Trusts from SECURE 2.0?

The beneficiary rules from the SECURE Act changed the game of retirement planning, and not in a good way. It’s unfortunate that IRAs are simply not a good wealth transfer option anymore. In the case of special needs trusts, SECURE 2.0 did make some welcomed changes.

SECURE 2.0 allows for a qualified charity to be a designated beneficiary of an AMBT. The Stretch IRA now applies here—going from the inherited IRA to the special needs trust—based on the life expectancy of the special needs beneficiary requiring special care.

A Special Needs Trust Example

According to the 2019 American Community Survey, there were more than three million children in the U.S. with a disability. There was a 0.4% rise in children (18 or younger) with special needs from 2008 to 2019, so special needs trust—and special needs financial planning in general—have become even more important. As we consider that data, we also remind ourselves how emotional special needs trusts can be for our clients as they go through the necessary steps to take care of their family. The rule changes with special needs trusts are one of many reasons why we’ve spent a lot of time studying SECURE 2.0.

Let’s go over an example of a special needs trust and how these rules from SECURE 2.0 apply. In this example, there is a parent with an IRA and a child with special needs. The parent named a special needs applicable multi-beneficiary trust for their child as the IRA beneficiary. So, the leftover IRA funds will go to charity once their child passes on. When the parent passes away, distribution is paid to the AMBT via the inherited IRA over the course of the child’s life expectancy.

There’s a good chance that the parent of that child would be passionate about supporting charities of their child’s disability. Thankfully, SECURE 2.0 makes it easy to set up a special needs trust with charitable benefits. And there won’t be any unforeseen consequences from the special needs trust that the child would inherit.

Other Things to Consider with Special Needs Trusts

Special needs children can bless our lives in so many ways with how they see the world. That’s something everyone needs to remember if they’re creating a special needs trust or utilizing other financial planning strategies to accommodate for a special needs child. The child could require care for the entirety of their life depending on their disabilities. That level of care requires a major financial investment and estate planning needs to ensure that your child is in good hands when you pass on. Here are a few more special needs financial planning tips in addition to what we’ve shared about special needs trusts.

Name a Guardian and a Trustee

A trustee or guardian can give your child the care they need if you suddenly can’t provide it. Naming a guardian or trustee is critical if your child might require care after they turn 18.

Write a Letter of Intent

With a letter of intent, you can document the certain details that are pertinent to your child. Those details can include routines, preferences, background/contact info for specific medical professionals, etc. A letter of intent outlines clear-cut instructions about your child’s needs and your desires to caregivers and the legal system. A letter of intent isn’t legally binding, but it can offer the guidance and perspectives that a guardian or the courts must have to care for your child.

Educate Your Family Members

If you have a special needs child and have other family members that wish to include them in their will, make sure they understand how to do so. They will need to know how and why to name the special needs trust as a beneficiary. Now that you know the rule changes about special needs trusts within SECURE 2.0, share the good news with your loved ones.

Build Your Savings

As we mentioned earlier, caring for a child with special needs unfortunately isn’t cheap in many cases. But they need the best possible care as possible. That level of care might not be covered by your insurance or by the services available at the child’s school. So, you need to have a plan in place to increase your savings. That could include utilizing specialized health care accounts. Maybe your employer offers a Flexible Spending Account (FSA) or a Health Reimbursement Account (HRA). Both options can assist with covering for out-of-pocket health care expenses, all while including tax benefits.

Write a Will

According to Caring.com’s 2023 Wills Survey, two-thirds of U.S. citizens don’t have any kind of estate planning document. If you have a special needs child, a will can help you in a couple of ways. One, it allows you to name a guardian who can legally care for your child. Two, it allows for your assets go to the special needs trust. So, what happens if you don’t have a will? In that situation, a probate judge could make your child ineligible for federal benefits by naming them as a beneficiary of your assets. There are services out there that can assist you with making a will on your own. However, this is something that is best to seek out professional assistance from a skilled attorney with experience with special needs planning.

Do You Have Questions About Special Needs Trust or Other Aspects of Special Needs Planning?

The most important takeaway from this article should be that last sentence. Working with a team of professionals is critical to every aspect of the comprehensive financial planning process. Our firm is fortunate to have experienced estate planning professionals on staff and good relationships with attorneys who have experience with special needs planning.

If you haven’t done so already, the first step is to build a financial plan. It’s critical to build a plan that’s unique to you, especially if you’re caring for a child with special needs. Our industry-leading financial planning tool allows you to do exactly that from the comfort of your own home. And you can do it at no cost or obligation. You can begin building your plan by clicking the “Start Planning” button below.

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Working with a Team of Professionals

Along with answering your questions about special needs trusts and other aspects of special needs planning, we can help you with building that plan that is unique to you. Our CFP® Professionals are required to put your needs ahead of their own and always strive to help people with their specific financial planning needs. To schedule a meeting with one of our CFP® Professionals, click here. You have the option to schedule a 20-minute “ask anything” session or a complimentary consultation. We can meet with you in person, virtually, or by phone. Whatever setting works best for you will work for us.

Resources Mentioned in This Article

Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management, LLC, an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management, LLC does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.