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Feb 18 2013 12:00AM

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I have five children. One child, 54, has a disability. I want this child’s special needs trust to be the beneficiary of my IRA. How will this be paid out?


I currently administer several trusts that hold IRA’s so I am probably a good person to answer your question since this situation is not common. It is not common because people try to avoid depositing IRA’s in a trust due to the administrative burden and complications that arise. 

The treatment of the IRA owned by a trust is significantly impacted by the language in the trust. You must have specific designated beneficiary language in the trust so that the IRS will recognize the life expectancies of the beneficiaries rather than treat the beneficiary as an entity. If the language is not there, the executor/trustee may be forced to distribute the funds either all at once or over a five year period of time rather than over a life expectancy. You should be working with not only a board certified estate planning attorney, but one that has expertise in special needs planning. 

Assuming the correct language is present, the choices in timing the distributions are the same as an IRA inherited outright. If the IRA owner is already taking required minimum distributions (if they are over age 70 ½), the trustee will need to make distributions using the decedents life expectancy reduced by one each year.  If the decedent was not taking RMD’s at death, the executor/trustee will be able to use each beneficiary’s life expectancy if everything has been handled properly. If it has not been handled properly, the life expectancy of the eldest beneficiary might have to be used. If the first RMD is not taken by December 31st of the year after death, the distributions must be made within five years.  

Now-- that is just the RMD part of the discussion. When the funds are withdrawn from the IRA, they are taxable, but they do not necessarily have to be distributed from the trust. The discretionary distribution standard should be followed for any distributions made from the trust. We keep the trust IRA in a sub account to help keep things organized.

It gets complicated very quickly and most financial institutions either don’t know how or chose not to administer an IRA owned by a trust. If the IRA is a large dollar amount and a considerable portion of the inheritance, this perhaps is the route for you.  But if the dollars aren’t substantial and/or it is possible for you to leave the IRA to the other four children and leave offsetting financial assets to the beneficiary of the special needs trust, you should avoid naming the trust as beneficiary of the IRA.


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