Questions from a reader:
"I have established a special needs trust for my 50-year-old
daughter. I want to leave my IRA to the trust. Is that
possible?
Also, my
daughter lives in one state and the trust was established in
another. Are there any restrictions or differences I need to
know about between states? Where will the trust principal be
held, and can trust money be spent on anything beyond the
benefits she receives?
Our
response: First,
let's talk about the differences between states. Your
special needs trust can use money it holds (including
anything it receives from your IRA) to supplement your
daughter's care. In other words, the trust money is used to
pay for items that government benefits do not pay for.
As you might
guess, there are restrictions. Each government benefit
program and each state has separate rules, though there are
common elements across programs and states. You should talk
to an attorney where your daughter resides to make sure that
there are not issues peculiar to that state. You can find an
attorney experienced in dealing with special needs trusts in
just about every state by looking at the
Special Needs Alliance website.
Although
there are differences by state, the rules tend to be quite
similar. In addition, if your daughter qualifies for federal
benefits (such as Supplemental Security Income, or SSI,
payments), that might mean she automatically qualifies for
state-run benefits (like Medicaid) regardless of the state's
individual restrictions.
Now
for the tax question:
Yes, you can leave your IRA to the special needs trust for
your daughter. You should know, however, that naming the
trust as beneficiary may impact how fast the IRA must be
paid out after your death. The complicated rules are usually
described as the "minimum distribution" rules.
As you
probably know, you are required to take minimum
distributions from your IRA each year after you reach age 70
1/2. The minimum distribution rules also apply to the IRA
you leave to your daughter's special needs trust.
Your special
needs trust can be constructed to allow the minimum
distribution rules to be recalculated using your daughter's
life expectancy after your death. If you are not cautious,
however, the trust language might force the IRA
distributions to be completed in a much shorter time
period--perhaps even within five years of your death.
The minimum
distribution rules, as the name implies, only describe the
minimum speed with which the IRA holdings must be
distributed. More can be taken out than is required, but
every distribution is subject to income tax. In other words,
more withdrawals from the IRA mean more taxable income.
As is so
often the case when dealing with special needs trusts, the
rules are complicated--and many competent tax practitioners
are unfamiliar with the wrinkles introduced by special needs
issues. You should consider contacting a Special Needs
Alliance member in either your state (for convenience and to
explore the tax issues) or your daughter's state (to discuss
the treatment of special needs trusts where she lives--that
attorney can also talk to you about the tax issues).
Where
the trust will be located.
You also asked where trust principal will be held. Many
trust beneficiaries--and not a few lawyers and other
professionals--are surprised to learn that the trust
actually is controlled by the legal system in the state
where the trustee lives. If you live, for example, in
Illinois, and your daughter in Texas, but your son (who
lives in Colorado) is named as trustee after your death, the
trust will become a Colorado trust when your son takes over.
The trust itself may include language that, for example,
Illinois law will apply--but the "situs" of the trust will
still be where the trustee lives and the majority of trust
administration takes place.
After your
death, your successor trustee should have no difficulty
managing the IRA and any other trust assets from his or her
home. It is unlikely that any legal proceedings will be
required to interpret, protect or enforce your trust, but if
there are they should take place in the trustee's home
state.
About
the Author:
Bradley J. Frigon is a Colorado lawyer and a member of
the Special Needs Alliance. His practice is in Englewood, a
suburb of Denver. Brad has published and spoken extensively
about taxation issues and about the interplay of worker's
compensation claims and Medicare benefits, and the use of
"Medicare Set-Aside Arrangements" in such cases. He is
admitted to practice in Colorado and Kansas, and he is
currently a member of the Board of Directors of the
National Academy of Elder Law Attorneys.
About this Newsletter: We hope you find this
newsletter useful and informative, but it is not the same as
legal counsel. A free newsletter is ultimately worth
everything it costs you; you rely on it at your own risk.
Good legal advice includes a review of all of the facts of
your situation, including many that may at first blush seem
to you not to matter. The plan it generates is sensitive to
your goals and wishes while taking into account a whole
panoply of laws, rules and practices, many not published.
That is what The Special Needs Alliance is all about.
Contact information for a member in your state may be
obtained by calling toll-free (877) 572-8472, or by visiting
www.specialneedsalliance.com