structuring special needs trusts as ira...

Structuring Special Needs Trusts as IRA

Beneficiaries: Avoiding Tax Traps in Funding

SNTs With Retirement Accounts

Today’s faculty features:

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TUESDAY, OCTOBER 15, 2019

Presenting a live 90-minute webinar with interactive Q&A

Evan H. Farr, CELA, Partner, Farr Law Firm, Fairfax, Va.

Structuring Special Needs Trusts as IRA

Beneficiaries: Avoiding Tax Traps

By Evan H. Farr, CELA, CAP

NELF Certified Elder Law Attorney

NAELA Council of Advanced Practitioners

Farr Law Firm, A Professional Corporation

www.LivingTrustPlus.com | www.FarrLawFirm.com | www.EverythingElderLaw.com

Main Office: 10640 Main Street, Suite 200, Fairfax, Virginia 22030

501 Westwood Office Park, Fredericksburg, VA 22401

1425 K Street, NW, Suite 350, Washington, DC 20005

1 Research Court NW, Suite 450, Rockville, MD 20850

Phone: 1-800-399-FARR

About the Author

Evan Farr, CELA, CAP, is the creator of the Living Trust Plus® Asset Protection System used by dozens of

Estate Planing and Elder Law Attorneys around the country, and is widely recognized as one of the

foremost experts in the Country in the field of Medicaid Asset Protection and related Trusts. Evan is

both a Certified Elder Law Attorney through the National Elder Law Foundation and a Member of

NAELA’s Council of Advanced Practitioners. Evan has been quoted or cited as an expert by numerous

sources, including the Washington Post, Newsweek Magazine, Northern Virginia Magazine, Trusts &

Estates Magazine, The American Institute of Certified Public Accountants, and the American Bar

Association, and has been featured as a guest speaker on numerous radio shows, including WTOP and

Washington Post Radio.

Evan has been named by SuperLawyers.com as one of the top 5% of Elder Law and Estate Planning

attorneys in Virginia every year since 2007, and in the Washington, DC Metro Area every year since

2008. In 2011, Evan was named by Washingtonian Magazine as one of the top attorneys in the DC

Metropolitan area and by Newsweek Magazine as one of the top attorneys in the country.

AV-Rated by Martindale-Hubbell, Evan is a nationally renowned Best-Selling author and frequent

educator of attorneys across the U.S. As an expert to the experts, Evan has educated tens of thousands

of attorneys across the country through speaking and writing for organizations such as his own Elder

Law Institute for Training and Education, the National Academy of Elder Law Attorneys, the American

Law Institute and American Bar Association, the National Constitution Center, the National Business

http://www.livingtrustplus.com/

http://www.farrlawfirm.com/

http://www.everythingelderlaw.com/

Structuring SNTs as IRA Beneficiaries: Avoiding Tax Traps – Evan H. Farr, CELA, CAP

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Institute, myLaw CLE, the Virginia Academy of Elder Law Attorneys, the Virginia Bar Association, Virginia

Continuing Legal Education, and the District of Columbia Bar Association. His publications include 4

Best-Selling books in the field of Elder Law: the Nursing Home Survival Guide, which provides valuable

information and guidance to families dealing with the possibility of nursing home care and struggling to

make the best decisions for themselves or their loves ones; Protect & Defend, which Evan authored

along with a host of other top attorneys across the country; How to Protect Your Assets From Probate

PLUS Lawsuits PLUS Nursing Home Expenses with the Living Trust Plus®, and Protecting Your Assets from

Probate and Long-Term Care. In addition, Evan has authored scores of articles that have appeared in

the popular press, and dozens of scholarly publications for the legal profession, including two legal

treatises published by American Law Institute in connection with the American Bar Associations:

Planning and Defending Asset Protection Trusts and Trusts for Senior Citizens.

Note: This outline is intended to educate and assist readers, but does not constitute legal advice. Readers should consider

carefully the applicability and consequences of using any planning technique. The writer and publisher expressly disclaim (I) all

warranties, express and implied, including, without limitation, of merchantability and fitness for any particular purpose, and (ii)

all other responsibility for all consequences of use of this material.


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I. Types of Special Needs Trusts and Criteria for Selection

1. Introduction

a. Special Needs Trusts: The Clients

Special Needs Trusts come into play in a multitude of situations. Common client-types include:

• Parents planning for a disabled child;

• Disabled individuals coming into an inheritance or winning or settling a personal injury

claim; or

• Healthy spouse planning for a disabled spouse.

b. Special Needs Trusts: The Purpose

The purpose of a Special Needs Trust (SNT) is to supplement, but not supplant, whatever benefits and

services the disabled beneficiary may be eligible to receive from time to time by reason of age, disability,

incapacity, or other factors, from federal, state, and local governmental and charitable sources.

It is understood and acknowledged that governmental and charitable programs, in themselves, contain

many gaps that, if unaddressed, will greatly reduce the possibility of the Primary Beneficiary’s

maintaining herself as independently as possible and having the capacity to meet her future needs.

Most SNT Settlors intend that the SNT be used in ways that will best enable the beneficiary to lead as

normal, comfortable, and fulfilling a life as possible.

c. Special Needs Trusts Solutions Overview

Special Needs Trusts can offer the solutions to the following common client concerns:

How to leave funds for the benefit of a child without causing the child to forfeit important public

benefits?

• How to leave funds for the benefit of a spouse without causing the spouse to forfeit

Medicaid benefits?

• How do you make sure that the funds are well managed?

• How do you make sure that other children are not over-burdened with caring for the

disabled sibling?

• What is fair in terms of dividing the estate among a disabled child and other children?

How do you make sure there’s enough money to meet the disabled child’s needs?


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d. The Wrong Approach

Often, parents of children with special needs try to resolve these issues by leaving their estates to their

healthy children -- disinheriting the disabled children. These parents offer a variety of justifications for

this approach:

“The disabled child shouldn’t receive anything because she can’t manage money and would lose her

benefits.”

“She doesn’t need any inheritance because she will be taken care of by the public benefits she receives.”

“The other children will take care of their sister.”

This approach is to be discouraged for a number of reasons (see next section).

e. Why a Special Needs Trust?

First, public benefits programs are often inadequate. They need to be supplemented with other

resources.

Second, both public benefits programs and individual circumstances change over time. What’s working

today may not work tomorrow. Other resources need to be available, just in case.

Third, in the situation where a parent thinks it is appropriate to rely on other children to take care of the

disabled sibling, an undue burden arises and can strain relations between them.

For example, who will determine whether inherited money belongs to the healthy child to spend as he

pleases, or whether he must set it aside for his disabled sister? If one child sets money aside, and the

other doesn’t, resentments can build that may split the family forever.

A special needs trust should be considered an essential tool to protect a disabled individual's financial

future. Also known as "a supplemental needs trust," eligibility is preserved for federal and state benefits

by keeping assets out of the disabled person's name.

f. Two Primary Functions

Special Needs Trusts fulfill two primary functions:

The first is to manage funds for someone who may not be able to do so himself or herself due to

disability.

The second is to preserve the beneficiary’s eligibility for public benefits, whether that is Medicaid,

Supplemental Security Income (SSI), public housing, or any other program.


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g. Two Main Categories

Special Needs Trusts fall generally into two main categories:

Third-Party SNTs: one person creates and funds for the benefit of someone else; and

First-Party SNTs: (also called d4a or d4c trusts) created for the person with special needs using that

person’s own money.

2. The General Rule and Two Exceptions

a. The General Rule

As a general rule, funds held by a self-settled trust are considered available to a disabled beneficiary and

render him ineligible for important benefits.

b. The Two Exceptions

Fortunately, both Medicaid and SSI allow two types of "self-settled" trusts that permit a beneficiary to:

• Shelter his/her own funds;

• Qualify for public benefits; and

• Remain a continuing beneficiary of the trusts.

These trusts fall in two categories:

• Single-beneficiary First Party Trusts (d4A); and

• Multiple-beneficiary First Party Pooled Trusts (d4C)

3. First Party Special Needs Trusts

a. In General

The single-beneficiary self-settled trust is generally referred to as a "(d)(4)(A)" trust, referring to the

enabling statute, or a "pay-back" trust, referring to their primary feature that any funds remaining in the

trusts upon the beneficiary’s death be used to reimburse the Commonwealth/State for any Medicaid

expenditures it has made on the beneficiary’s behalf.

Warning: Be very careful when drafting first-party Special Needs Trusts for individuals who are also on

or may be on SSI, as under a recent POMS, your fee for drafting this type of trust may need to be

approved by the Social Security Administration. This recent POMS was subject to much criticism and

was temporarily withdrawn by the SSA on 9-25-2019 for re-evaluation. Be sure to keep alert for new

developments on this issue.


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4. SSI and Medicaid Exceptions To Counting Self-Funded Trusts As Resources

b. POMS SI 01120.203

The POMS (Program Operations Manual System) are the rules used by the Social Security Administration

that govern SSI. The POMS refer to the exceptions discussed in this section as “Medicaid trust

exceptions” because section 1917(d)(4)(A) and (C) of the Social Security Act (Act) (42 U.S.C. §

1396p(d)(4)(A) and (C)) sets forth exceptions to the general rule of counting trusts as income and

resources for the purposes of Medicaid eligibility and can be found in the Medicaid title of the Act.

While these exceptions are also Supplemental Security Income (SSI) exceptions, the POMS refers to

them as Medicaid trust exceptions to distinguish them from other exceptions to counting trusts

provided in the SSI program (such as undue hardship) and because the term has become a term of

common usage.

According to this section, there are two types of Medicaid trusts to consider:

1. Special Needs Trusts; and

2. Pooled Trusts.

c. Policy For Special Needs Trusts Established Before December 13, 2016

The resource counting provisions for SSI and Medicaid do not apply to a trust that:

• contains the assets of an individual who is under age 65 and is disabled;

• is established for the benefit of such individual through the actions of a parent, grandparent, legal guardian, or court; and

• provides that the State(s) will receive all amounts remaining in the trust upon the death of the individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State(s) Medicaid plan(s).

NOTE:

Although this exception is commonly referred to as the special needs trust exception, the exception applies to any trust that meets the above requirements, even if it is not titled a special needs trust.

CAUTION:

A trust that meets the exception to counting for SSI purposes under the statutory trust provisions of section 1613(e) must still be evaluated under the instructions in SI 01120.200 to determine if it is a countable resource. If the trust meets the definition of a resource (see SI 01110.100B.1.), it will be subject to regular resource-counting rules.

http://policynet.ba.ssa.gov/poms.nsf/lnx/0501120203

https://secure.ssa.gov/poms.nsf/lnx/0501120200

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d. Under age 65

To qualify for the special needs trust exception, the trust must be established for the benefit of a

disabled individual under age 65. For special needs trusts, an individual attains age 65 on the

anniversary date of his or her birth. The special needs trust exception does not apply to a trust

established for the benefit of an individual age 65 or older. If the trust was established for the benefit of

a disabled individual prior to the date the individual attained age 65, the exception continues to apply

after the individual reaches age 65.

e. Additions to trust after age 65

Additions to or augmentations of a trust after age 65 (except as outlined below) are not subject to this

exception. Such additions may be income in the month added to the trust, depending on the source of

the funds (see SI 01120.201J) and may count as resources in the following months under regular SSI

trust rules.

Additions or augmentations do not include interest, dividends, or other earnings of the trust or any

portion of the trust meeting the special needs trust exception. If the beneficiary’s right to receive

payments from an annuity, support payments, or Survivor Benefit Plan (SBP) payments (see SI

01120.201J.1.e.), is irrevocably assigned to the trust, and such assignment is made when the trust

beneficiary was less than 65 years of age, treat the payments paid to a special needs trust the same as

payments made before the individual attained age 65. Do not disqualify the trust from the special needs

trust exception.

f. Disabled

To qualify for the special needs trust exception, the individual whose assets were used to establish the

trust must be disabled for SSI purposes under section 1614(a)(3) of the Act as of the date on which the

trust’s resource status could affect the individual’s SSI eligibility.

In cases where SSA needs to evaluate for disability, SSA must a disability determination from the

disability determination services (DDS) following procedure in SI 01150.121D.2 and develop disability as

of the date on which the trust’s resource status could affect SSI eligibility.

If DDS determines that the trust beneficiary was:

• disabled as of the date the trust's resource status could have affected SSI eligibility, the special needs

trust meets the disability requirements for exception; or

• not disabled as of the date the trust's resource status could have affected SSI eligibility, SSA must

evaluate the trust under instructions in SI 01120.201. Since the trust provisions take precedence over

the transfer provisions (see SI 01120.201D.5.), depending on the terms of the trust, the trust may count

as a resource or the transfer penalty may apply (see SI 01150.121.).

https://secure.ssa.gov/poms.nsf/lnx/0501120201#j

https://secure.ssa.gov/poms.nsf/lnx/0501120201#j1e

https://secure.ssa.gov/poms.nsf/lnx/0501120201#j1e

https://secure.ssa.gov/poms.nsf/lnx/0501150121#d


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Example Scenario 1: Mark, a special needs trust beneficiary whose trust was established in 2015, applies

for SSI Aged benefits in 2019. Even though disability is not a requirement for SSI Aged benefits, SSA must

develop disability as of Mark's SSI application date in 2019 for purposes of the Medicaid trust exception.

Example Scenario 2: Sally has a special needs trust that was established in 2010 when she was 10 years

old. At the time, she was not eligible for SSI Child benefits because of her deeming parents' income and

resources. However, she applies for SSI Adult benefits in 2018. SSA must develop disability as of Sally's

SSI application date in 2018. 2010 is not relevant because the trust did not present as a resource issue

until the SSI application date in 2018.

g. Definition of established

Under section 1613(e) of the Act, a trust is considered to have been “established by” an individual if any

of the individual's (or the individual's spouse’s) assets are transferred into the trust other than by will.

Alternatively, under the Medicaid trust exceptions in section 1917(d)(4)(A) and (C) of the Act, a trust can

be “established by” an individual who does not provide the corpus of the trust, or transfer any of his or

her assets into the trust, but who takes action to establish the trust. To avoid confusion, SSA uses the

phrase “established through the actions of” rather than “established by” when referring to the

individual who physically takes action to establish a special needs or pooled trust.

h. Established for the benefit of the individual

Under the special needs trust exception, the trust must be established and used for the benefit of the

disabled individual. SSA has interpreted this provision to require that the trust be for the sole benefit of

the individual, as described in SI 01120.201F.2. Other than trust provisions for payments described in SI

01120.201F.3. and SI 01120.201F.4., any provisions will result in disqualification from the special needs

trust exception if they:

• provide benefits to other individuals or entities during the disabled individual's lifetime, or

• allow for termination of the trust prior to the individual's death and payment of the corpus to another

individual or entity (other than the State(s) or another creditor for payment for goods or services

provided to the individual).

Payments to third parties for goods and services provided to the trust beneficiary are allowed under the

policy described in SI 01120.201F.3.a.; however, such payments should be evaluated under SI

01120.200E., SI 01120.200F., and SI 01120.201I. to determine whether the payments may be income to

the individual.

NOTE:

A third party can be a family member, non-family member, or an entity. Do not differentiate between

third parties; anyone other than the trust beneficiary (or spouse, guardian, or representative payee) is

a third party.

https://secure.ssa.gov/poms.nsf/lnx/0501120201#f




https://secure.ssa.gov/poms.nsf/lnx/0501120201#f3a

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i. Who established the trust

The special needs trust exception does not apply to a trust established through the actions of the

disabled individual himself or herself. (Remember that this instruction applies specifically to special

needs trusts established under section 1917(d)(4)(A) before December 13, 2016.) To qualify for the

special needs trust exception, the assets of the disabled individual must be put into a trust established

through the actions of:

• the disabled individual’s parent(s);

• the disabled individual’s grandparent(s);

• the disabled individual’s legal guardian(s); or

• a court.

In the case of a legally competent, disabled adult, a parent or grandparent may establish a “seed” trust

using a nominal amount of his or her own money or, if State law allows, an empty or dry trust. After the

seed trust is established, the legally competent, disabled adult may transfer his or her own assets into

the trust, or a second individual with legal authority (for example, a power of attorney) may transfer the

disabled individual's assets into the trust. To determine if the second individual had legal authority,

see SI 01120.203B.9. in this section.

j. Court-established trusts

In the case of a trust established through the actions of a court, the creation of the trust must be

required by a court order for the exception in section 1917(d)(4)(A) of the Act to apply. The special

needs trust exception can be met when a court approves a petition and establishes a trust by court

order, as long as the creation of the trust has not been completed before the order is issued by the

court. Court approval of an already created special needs trust is not sufficient for the trust to qualify for

the exception. The court must specifically either establish the trust or order the establishment of the

trust. An individual is permitted to petition a court for the present establishment of a trust or may use

an agent to do so. The court order establishes the trust, not the individual’s petition. Petitioning a court

to establish a trust is not establishment by an individual.

NOTE:

An individual may petition the court with a draft document of a trust as long as it is unsigned and not

legally binding.

a. Example of a court ordering the establishment of a trust

John is a legally competent adult who inherited $250,000 in January 2015, and is an SSI recipient. His

sister, Justine, petitioned the court to create and order the funding of the John Special Needs Trust.

Justine also provided the court with an unsigned draft of the trust document. A month later, the court

approved the petition and issued an order requiring the creation and funding of the trust. This trust



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meets the requirement in SI 01120.203B.8. in this section. The fact that the trust beneficiary is a

competent adult and could have established the trust himself, is not a factor in the resource

determination.

b. Example of a court-established trust

Henry wins a lawsuit in the amount of $50,000. As part of the settlement, the judge orders the creation

of a trust in order for Henry to receive the $50,000. As a direct result of this court order, a trust was

created with Henry’s settlement money. The trust document lists the $50,000 as the initial principal

amount in Schedule A of the trust. This trust meets the requirement for exclusion in SI 01120.203B.8. in

this section.

c. Example of a court-approved trust

Jane is ineligible for SSI benefits because she has a self-established special needs trust that does not

meet the requirements for exception in SI 01120.203 in this section. Jane petitioned the court to

establish an amended trust and to make the order retroactive, so that her original trust would become

exempt from resource counting from the time of its creation. The court approved the petition and

issued a nunc pro tunc order stating that the court established the trust as of the date on which Jane

had previously established the trust herself. The court did not establish a new trust; it merely approved

a modification of a previously existing trust. The amended trust does not meet the requirement for

exclusion in SI 01120.203B.8. in this section.

d. Example of a court-approved trust

Dan is the beneficiary of a special needs trust. His sister petitioned the court to establish the Dan’s

Special Needs Trust and submitted to the court along with the petition Dan’s special needs trust that

had already been signed and funded. Although the court order states that it approves and establishes

the trust, the court simply approved the existence of the already established special needs trust. This

trust does not meet the requirement in SI 01120.203B.8. in this section. For an example of an unsigned

and unfunded trust, see SI 01120.201B.8.a.

k. Legal authority and trusts

The person or entity establishing the trust with the assets of the legally competent disabled individual or

transferring the assets of the individual to the trust must have legal authority to act with respect to the

assets of the individual. Attempting to establish a trust with the assets of another individual without

proper legal authority to act with respect to the assets of that individual will generally result in an invalid

trust under state law.

For example, John is establishing a seed trust for his adult child with his own assets, and John has legal

authority over his own assets to establish the trust. John would need legal authority over his child's

assets only if he actually takes action with the child's assets, for example, by transferring them into a

previously established trust.






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An agent under power of attorney (POA) can establish legal authority to act with respect to the assets of

an individual. However, a trust established under a POA for the trust beneficiary will result in a trust that

we consider to be established through the actions of the disabled individual himself or herself because

the POA merely establishes an agency relationship. A POA for the trust beneficiary may be used as the

legal authority to transfer assets of the beneficiary into the trust, including, for example, a previously

established seed trust.

l. State Medicaid reimbursement requirement

To qualify for the special needs trust exception, the trust must contain specific language that provides

that, upon the death of the individual, the State(s) will receive all amounts remaining in the trust, up to

an amount equal to the total amount of medical assistance paid on behalf of the individual under the

State Medicaid plan(s). The State(s) must be listed as the first payee(s) and have priority over payment

of other debts and administrative expenses, except as listed in SI 01120.203E in this section.

The trust must provide payback for any State(s) that may have provided medical assistance under the

State Medicaid plan(s) and not be limited to any particular State(s). Medicaid payback also cannot be

limited to any particular period of time; for example, payback cannot be limited to the period after

establishment of the trust. If the trust does not have sufficient funds upon the beneficiary’s death to

reimburse in full each State that provided medical assistance, the trust may reimburse the States on a

pro-rata or proportional basis.

NOTE:

Merely labeling the trust as a Medicaid payback trust, an OBRA 1993 payback trust, a trust established

in accordance with 42 U.S.C. § 1396p, or a (MQT) is not sufficient to meet the requirements for this

exception. The trust must contain specific payback language whose effect is consistent with the

requirements described above. An oral trust cannot meet this requirement.

5. Policy For Special Needs Trusts Established Under Section 1917(D)(4)(A)

Of The Act On Or After December 13, 2016

a. General rules

On December 13, 2016, the President signed into law the 21st Century Cures Act (Public Law 114-255).

Section 5007 of this Act allows individuals to establish their own special needs trusts and qualify for the

exception to resource counting under Section 1917(d)(4)(A) of the Social Security Act.

The resource counting provisions of section 1613(e) do not apply to a trust that:

• contains the assets of an individual who is under age 65 and is disabled;

• is established for the benefit of such individual through the actions of the individual, a parent, a

grandparent, a legal guardian, or a court; and



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• provides that the State(s) will receive all amounts remaining in the trust upon the death of the

individual up to an amount equal to the total medical assistance paid on behalf of the individual under a

State Medicaid plan.

NOTE:

Although this exception is commonly referred to as the special needs trust exception, the exception

applies to any trust meeting the above requirements, even if it is not titled as a special needs trust.

CAUTION:

A trust that meets the exception to counting for SSI purposes under the statutory trust provisions of

section 1613(e) must still be evaluated under the instructions in SI 01120.200, to determine if it is a

countable resource. If the trust meets the definition of a resource (see SI 01110.100B.1.), it will be

subject to regular resource-counting rules.

b. Who established the trust

The special needs trust exception applies to a trust established through the actions of:

• the individual;

• a parent(s);

• a grandparent(s);

• a legal guardian(s); or

• a court.

c. Power of attorney

SSA consider a trust established under power of attorney (POA) for the disabled

individual to be established through the actions of the disabled individual because the

POA establishes an agency relationship. For additional information on a POA, see SI 01120.203C.3.

d. Use of a seed trust

If the legally competent, disabled adult does not establish the trust, a parent or grandparent may

establish a “seed” trust using a nominal amount of his or her own money or, if State law allows, an

empty or dry trust. After the seed trust is established, the legally competent, disabled adult may transfer

his or her own assets into the trust, or another individual with legal authority (such as a power of




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attorney) may transfer the individual's assets into the trust. To determine if the individual had legal

authority, see SI 01120.203C.9. in this section.

NOTE:

Under 1613(e) of the Act, a trust is considered to have been “established by” an individual if any of

the individual's (or the individual's spouse’s) assets are transferred into the trust other by will.

Alternatively, under the Medicaid trust exceptions in 1917(d)(4)(A) and (C) of the Act, a trust can be

“established by” an individual who does not provide the corpus of the trust, or transfer any of his or

her assets into the trust, but who takes action to establish the trust. To avoid confusion, SSA uses the

phrase “established through the actions of” rather than “established by” when referring to the

individual who physically takes action to establish a special needs or pooled trust.

e. Legal authority and trusts

The person or entity establishing the trust with the assets of the legally competent, disabled individual

or transferring the assets of the individual into the trust must have legal authority to act with respect to

the assets of the individual. Attempting to establish a trust with the assets of another individual without

proper legal authority to act with respect to the assets of the individual will generally result in an invalid

trust under state law.

For example, John, who is establishing with his own assets a seed trust for his adult child, has legal

authority over his own assets to establish the trust. He needs legal authority over his child's assets only

if he actually takes action with the child's assets, for instance by transferring them into a previously

established trust.

A power of attorney (POA) can establish legal authority to act with respect to the assets of an individual.

A trust established under a POA for the disabled individual will result in a trust that SSA considers to be

established through the actions of the disabled individual himself or herself because the POA establishes

an agency relationship. A third party can use the POA for the trust beneficiary as the legal authority to

establish a trust or to transfer assets of the beneficiary into the trust, as long as the POA provides the

proper authority to do so.

f. Additional requirements for a trust established on or after December

13, 2016

Except as noted in SI 01120.203C.1. through SI 01120.203C.3. of the POMS, the requirements for an

exempt special needs trust remain the same as those for a trust established prior to December 13, 2016.

For additional requirements and guidance, see SI 01120.203B.2. through SI 01120.203B.6., SI

01120.203B.8., and SI 01120.203B.10.

https://secure.ssa.gov/poms.nsf/lnx/0501120203#c

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6. Third Party Special Needs Trusts

a. In General

Parents who want to leave assets to a special needs child create “third-party” special needs trust. This

type of special needs trust can also serve to hold any inheritance that may come from a grandparent or

other family member. However, a third-party special needs trust cannot hold funds belonging to the

disabled individual himself. This type of trust can be created during the client’s life by using a revocable

or irrevocable living trust, or can be created upon death through a living trust or through a Last Will and

Testament.

b. Creation/Funding During the Client’s Lifetime

If created during life, one can place assets into the SNT while alive and/or upon death.

This type of third-party SNT can also be used to receive any inheritance that may come from a

grandparent or other family member; provided the other family member properly names the SNT that

was created. Because the SNT will own the assets, the beneficiary will not become ineligible for

government benefits.

On the contrary, the SNT allows the beneficiary to receive vital public benefits, while the funds in the

SNT can be used for the special needs beneficiary to improve care and quality of life until his or her own

death, at which time any assets left in trust can pass to whoever you name in the trust document.

7. Pooled Special Needs Trusts

a. In General

A pooled SNT is a special type of SNT that is created by a nonprofit organization. The nonprofit

organization may act as the trustee of the pooled SNT, or it may select the trustee. Individuals have

separate accounts in the pooled SNT, but all the money is pooled together and invested by the trustee.

Individual beneficiaries get the services of a professional trustee and more investment options because

there is more money overall. A third-party pooled trust provides a way to benefit from a special needs

trust without having to actually create one.

b. First Party Pooled Special Needs Trusts vs. Third-Party Pooled Special

Needs Trusts

Just as with single-beneficiary trusts discussed above, there are both “third-party” pooled SNTs (which

you can use to give money during life, or leave money upon death, for a special needs beneficiary) and

“first-party” pooled SNTs – also called “(d)(4)(C)” trusts – used to protect money that belongs to the

special needs beneficiary. Unlike the individual payback trust – i.e., the (d)(4)(A) discussed above, which

may be created only for those under age 65 – pooled SNT accounts may be for beneficiaries of any age


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and may be created by the beneficiary himself. However, although someone over age 65 can establish a

(d)(4)(A) account with a pooled trust, most states penalize transfers into the pooled trust if the disabled

individual was over age 65 at the time of transfer.

c. Requirements to Obtain Medicaid and SSI

Pooled disability trusts must be managed by a non-profit association. Unlike individual disability trusts,

which may be created only for those under age 65, pooled trusts may be for beneficiaries of any age and

may be created by the beneficiary herself.

In addition, at the beneficiary's death the state does not have to be repaid for its Medicaid expenses on

her behalf as long as the funds are retained in the trust for the benefit of other disabled beneficiaries.

Although a pooled trust is an option for a disabled individual over age 65 who is receiving Medicaid or

SSI, those over age 65 who make transfers to the trust will incur a transfer penalty.

8. Public Benefits Based on Financial Need

a. In General

In general, if one person creates a trust for the benefit of someone else, and the trust is drafted to give

the trustee complete discretion whether and when to make distributions to the beneficiary, the trust

funds will not be considered as available when considering the trust beneficiary’s eligibility for public

benefits.

Unfortunately, matters get more complicated when the trust assets are actually used for the

beneficiary.

For instance, trust funds distributed to a beneficiary will reduce that beneficiary’s SSI dollar for dollar. In

many circumstances, trust funds used on the beneficiary’s behalf will also cause a reduction in SSI

benefits.

In other words, while the existence of a properly-drafted trust will not affect eligibility for benefits, the

use of the trust funds could if extreme care is not taken.

1. Writing a Memorandum of Intent: an Additional Safeguard

c. In General

How can you ensure that the special needs child will remain well cared for and secure once others

assume the role of guardian or caregiver? While creating a financial plan and establishing a specialized

trust are central to preparing for the child's future, special needs planners also advise families to write

down their intentions and expectations in a document referred to as a Memorandum of Intent or Letter

of Intent.


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The Memorandum is not legally binding and, when directions conflict, those in wills, trusts and other

legal documents take precedence. But for "non-legal" matters, it will serve as the primary source of

information about the child, providing a roadmap for the courts, guardians, caregivers and others

involved in your child's life. This can be critical in easing a child's transition, ensuring continuity of care

and treatment, as well as appropriate decision making regarding living arrangements and other lifestyle

choices.

Topics that can be included in a Memorandum include the following:

Individuals and organizations that should be contacted upon death or incapacity;

The child's health care and therapeutic needs;

The parent’s preferences for education, religion, and child-rearing practices;

Contact information for doctors, therapists and teachers;

The child's personal history, degree of independence or mobility, behavioral issues, and need for

assistive technologies;

The child's interests and personality traits;

The location of medical records and other important documents.

While writing a Memorandum of Intent can be time-consuming and emotionally taxing, it's very

important not to postpone this task. Once the Memorandum is complete, place the original in a secure

location and distribute copies to others involved in the child's life. Take the time to revise the

Memorandum at least once a year so it will continue to reflect the child's current life stage and

situation.

1. Planning for Disabled Adult-Children

a. Alternative to Guardianship

Parents of children with special needs must be concerned with ensuring that medical and financial

decisions will continue to be made in the child’s best interest once the child reaches age 18 – the age of

legal capacity. In most states, once a child reaches age 18, he is presumed to have decision-making

capacity and the parents’ legal authority ends. Parents of children with special needs have various


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options, each with advantages and disadvantages depending on the situation, to establish a new legal

authority to continue making important decisions for the child.

There are ways to avoid the time and expense of a guardianship or conservatorship process while

accomplishing the same basic goals. If the person with special needs has sufficient capacity to

understand, he can appoint an agent using a durable power of attorney over medical or financial

matters, or both. Depending on the type of power of attorney, the agent will have the authority to make

financial and property decisions or medical and personal decisions on behalf of the adult child, all

without court intervention or direct oversight.

If the adult child receives either Supplemental Security Income (SSI) or Social Security Disability

Insurance (SSDI) and cannot manage the income, the Social Security Administration allows another

person to receive the funds to use on the child’s behalf. However this option also requires the filing of

an annual report showing how the money was used.

The special needs trust usually avoids the need for a financial guardian or conservator.

II. Selected Trust Administration Issues

1. Funding a Third-Party SNT

a. How much to Fund?

A number of issues arise with respect to the question of how much to put into a third-party SNT:

First, how much will a child with special needs require over her life?

Second, should the same portion of the estate be left to all of the children, no matter their need?

Third, how to assure that there’s enough money?

The first question is a difficult one. It depends on assumptions about the child’s needs and the

availability of other resources to fulfill those needs. A financial planner or life care planner with

experience in this area can help make projections to assist with this determination. It’s generally better

to err on the side of more money rather than less. You can’t be certain current programs will continue.

And you have to factor in paying for services, such as case management, that you provide free-of-charge

today. If these assumptions mean that the child with special needs will require a large percentage of the

estate, how will the other children feel if they receive less than their pro rata share? After all, the estate

may already be smaller than it would be otherwise due to the time and money spent providing for the

child with special needs.

One solution to the question of fairness and to the challenge of assuring that there are enough funds is

life insurance. You could divide the estate equally among the children, but supplement the amount

going to the special needs trust with life insurance. The younger the client starts the process, the more

affordable the premiums will be. If married, the premiums can often be lower for a policy that pays out

only when the second parent dies.


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b. Finding the Funds

Once a reasonable estimate is ascertained, the client will may need to consider how to fund this trust

without sacrificing such financial goals as college and retirement. You may also need to balance the

needs of the child with special needs with the wish to benefit other children as well as covering other

current needs.

Many families find that a second-to-die life insurance policy is the most realistic option to fund an SNT

because the premiums are often lower and the trust is funded when it is most needed, after both

parents have passed away. In short, how much is funded and how large an insurance policy is purchased

will be a question of balance among current needs, retirement funding, the needs of the other children,

if any, and the anticipated needs of the child with special needs.

Finally, be sure to create or update an estate plan and determine which assets you’ll leave to the SNT,

and make sure the client understands that any gifts from relatives of the need to be directed to the SNT,

rather than the child, to avoid the risk of disqualifying the child from eligibility for public benefits.

c. Tools for Calculating the “Special Needs Goal”

An excellent tool available to the general public are special needs calculators – such as MetLife’s version

(located at http://www.metlifeiseasier.com/metdesk/), which takes information you provide about

anticipated income and expenses, and then offers a realistic estimate of how much the child will need in

lifetime financial support. This calculation should be re-run periodically, particularly as the child nears

adulthood, to ensure the estimate reflects the most accurate, up-to-date information about needs and

circumstances.

The first step in determining the amount to set aside in an SNT is considering your goals and

expectations for the child’s future. If the client has not created a Memorandum of Intent, also called a

Letter of Intent or a Life Plan, this is the time to draft such a document. It should address factors such as

the child’s medical condition, guardianship needs, and ability to work and desired living arrangements,

all of which will drive your special needs calculation.

Next, you or your client will need to tackle the most arduous part of the process, placing a dollar value

on each category. You can start by listing any current income or expenses likely to continue into the

child’s adult years. Consider income from sources such as life insurance proceeds, gifts, inheritances,

and legal settlements, as well as from employment and public benefits such as Supplemental Security

Income and Social Security Disability Income.

On the expenses side of the column, broad categories include, but are not necessarily limited to:

• Housing: rent, a mortgage, utilities, insurance, taxes, maintenance;


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• Transportation: car payments, auto insurance, fuel, repairs, public transportation

costs;

• Medical care: doctor visits, therapy, prescription drugs;

• Care assistance: respite, custodial, nursing home care;

• Special equipment: wheelchairs, assistive technologies, durable medical

equipment, computers, service animals;

• Personal needs: grooming, hobbies, entertainment, vacations;

• Education and employment costs: tuition, books, supplies, tutoring; and

• Future asset replacement costs: for a car, major appliances, electronics, an

furnishings.

Prior to running the calculation, you may need to indicate the child’s life expectancy and the number of

years remaining until his or her parent’s retirement. Once you’ve input all required data, the calculator

automatically will run an analysis of the funding needs based on preset assumptions about the rate of

inflation and after-tax investment returns.

2. Trustee Selection

a. Choosing the Best Trustee: Difficult, but Essential

Choosing a trustee is one of the most difficult parts of planning for a person with special needs. The

trustee of a special needs trust must be able to fulfill all of the normal functions of a trustee –

accounting, investments, tax returns and distributions – and also be able to meet the needs of the

special beneficiary. The latter often means having an understanding of the various public benefits

programs, having sensitivity to the needs of the beneficiary, and having knowledge of special services

that may be available.

b. Trustee Possibilities

i. Professional Trustees

Because of the complexities of properly maintaining a Special Needs Trust, and making proper, non-

disqualifying disbursements to the disabled beneficiaries, a professional trustee familiar with public

benefits laws is always the best option to serve as trustee. Unfortunately, many professional trustees


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require a minimum amount of funds in the trust, often at least $500,000. Otherwise their fees become

unreasonable in relation to the size of the trust.

There are a number of possible solutions available. Often parents choose to appoint co-trustees – a trust

company or law firm as a professional trustee along with a healthy child as a family trustee. Working

together, they can provide the necessary experience to meet the needs of the child with special needs.

Unfortunately, in many cases such a combination is not available, often because of the minimum

amount requirements of the professional trustee. In other situations, there is no appropriate family

member to appoint as co-trustee.

Where the size of the trust is insufficient to justify hiring a professional trustee, two solutions are

possible:

j. Family Member Trustee

With amounts under $500,000, one of the only options is to have a family member or family friend act

as trustee. While not ideal, a family member or family friend can serve adequately as trustee so long as

that trustee understands that there are complex legal requirements and knows to hire special needs

attorneys, accountants, and investment advisors to help with administering the trust. Where no

appropriate family member is available to serve as co-trustee, the parent may direct the professional

trustee to consult with specific individuals who know and can care for the child with special needs.

These could be family members who are not appropriate trustees, but who can serve in an advisory role.

Or they may be social workers or care managers or others who have both personal and professional

knowledge of the beneficiary. This role may be formalized in the trust document as a “Care Committee”

or “Advisory Committee.” The second option is to use a pooled trust.

ii. Pooled Trust Option

The second option is to use a pooled trust. There are third-party pooled trusts in almost all states, and

some that are national in scope. A third-party pooled trust can provide a way to benefit from a special

needs trust without creating one yourself. A nonprofit organization creates a pooled trust and selects a

trustee. Individual beneficiaries have separate accounts inside the pooled trust, but all the money is

pooled together and invested by the trustee. Individual beneficiaries get the services of a professional

trustee and more investment options because there is more money overall.

3. Trust Investments

Financial planners advise that running alternative calculations can help you plan adequately for worst-

and best--case scenarios. One variable to consider is the child’s ability to earn income. For example, if he

or she is able to work more than expected, earned income may cover more expenses, but SSI payments

will likely be reduced. As the child’s disability advances, he or she may need to leave the workforce,

potentially increasing SSI payments but also adding new expenses.


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Another critical factor is the impact of higher or lower investment returns on the amount to set aside. If

the child is very young, you may plan to invest aggressively, pursuing a higher rate of return than if he

were nearing adulthood. The reason "an investment rule of thumb" is that you generally can take

somewhat greater risks with a longer-term investment because you have more time to recover from

dips in the market. If you anticipate a lower rate of return for any reason, you will need to compensate

by setting aside more in savings.

4. Trust Distributions

One of the most complex tasks faced by the trustee of an SNT is what type of distributions to make, and

what type of distributions are allowed. As a general rule, assets of an SNT can be used to purchase

anything for the beneficiary other than food and shelter1. Cash distributions (including distributions of

debit cards and gift cards that could be used for food or shelter) should never be made to the

beneficiary of an SNT, because cash distributions will be counted as income to the beneficiary, and could

disqualify the beneficiary from receiving SSI, which in many states would also disqualify the beneficiary

from receiving Medicaid.

Distributions that can generally be made from an SNT include, but are not limited to:

• Education and Training. Training, education, treatment, and rehabilitation

programs and services.

• Entertainment and Recreation. Costs of recreation, including, but not limited to:

vacations and attending family gatherings; theatrical performances; films;

festivals; athletic contests and similar events; sporting goods, equipment,

uniforms, team photos, travel to games and tournaments; electronic equipment

including but not limited to telephones, audio or video equipment of all kinds,

video game consoles and software, televisions, computer equipment, and

appropriate broadcast, cable, satellite, subscription, or wireless services to use

the equipment.

• Household Goods and Appliances. Costs for household items such as furniture,

decorations, window treatments, linens, towels, bedding, kitchen appliances,

and maintenance/repairs of same.

• Medical and Dental Care. Medical, dental or diagnostic work or other treatment

which is not covered by Medicaid and for which funds are not otherwise

available, including, but not limited to: cosmetic or plastic surgery or other non-

necessary medical procedures; orthodontics; dentures; optical care; eyeglasses;

1 In some states, an SNT can be drafted to allow distributions for food and shelter in the discretion of the trustee.

But if making distributions for food and shelter, it must be understood that such distributions will reduce the

beneficiary’s SSI.


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non-traditional medical care such as acupuncture, acupressure, or massage;

experimental medical treatments or procedures; private rehabilitative care;

private counseling; physical therapy, occupational therapy, and speech therapy;

psychological or psychiatric therapy; over the counter medications; vitamins and

herbs.

• Non-food Grocery Items. Costs for non-food grocery items such as: laundry soap,

bleach, fabric softener, deodorant, dish soap, hand and body soap, personal

hygiene products, paper towels, napkins, tissue paper, toilet paper, and

household cleaning products.

• Personal Items and Services. Costs for personal items such as clothing, haircuts,

spa and salon services, massages, facials, manicures, musical instruments

(including lessons and music); costs for personal services such as dry cleaning,

laundry, household cleaning, and personal assistance services not covered by

Medicaid.

• Pets and Pet Supplies. Costs of pets, pet food, pet supplies, kennel services,

veterinary services, and pet caretakers.

• Professional Services. Costs for the services of care managers, geriatric care

manager, registered or practical nurses, aides or caregivers, attorneys, and

accountants, and other appropriate professional service providers.

• Transportation and Mobility. Costs of transportation, such as cab fare, bus fare,

purchase of a new or specially equipped vehicle or other transportation device,

modification of an existing vehicle, wheelchairs and other ambulatory aids,

ramps, lifts, insurance, gasoline, and maintenance.

• Other. Costs of any other non-essential items that may serve to enhance the

Primary Beneficiary’s comfort or well-being.

III. Inheriting Retirement Accounts into SNTs

2. Retirement Accounts Contain Great Wealth

Retirement accounts (IRAs, 401(k)s, etc.) are often among a family’s largest assets, so many clients will

want to leave some or all of their retirement accounts to their child with disabilities. But if the child will

ever need means-tested benefits, a parent’s good intentions could disqualify the child for Medicaid and

SSI. Therefore, parents wishing to leave retirement accounts to benefit a disabled child must consider

establishing a special needs trust (SNT) for the child, and naming trust as beneficiary of the retirement

account. In that way, hopefully the parent can protect both the funds and the child’s eligibility for

benefits.


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3. Taxes and Required Distributions

Unless dealing with a Roth IRA, retirement funds contain pre-tax dollars, and there are convoluted rules

regarding required minimum distributions (RMDs) ─ how much money must be distributed at what

times. Whenever money leaves the retirement account, it incurs tax liability, so clients probably won’t

want it to remain in the trust, which is subject to a high tax rate.

The payout period for retirement accounts is generally determined by the life expectancy of the oldest

trust beneficiary. That means that, if possible, remainder beneficiaries─ those who are to receive funds

left upon the primary beneficiary’s death─ should be younger than the individual with disabilities.

Naming a favorite charity complicates things. Since a charity has no life expectancy, the payout period is

determined by the client’s age and working situation at time of death:

• If you were still working or under 70 ½, the fund must pay out all assets in five

years.

• If you had already retired, the payout will be based on what your life expectancy

would have been (“ghost life expectancy”).

The way to avoid this is to list at least one other remainder beneficiary ahead of the charity.

But what if it’s important to include someone older than the primary beneficiary on your list? In that

case, it may be advisable to set up two SNTs, one to hold the retirement fund and a second to include

other assets meant for your child with disabilities. The second one should include the older remainder

beneficiary. Have both SNTs administered by the same trustee, who should first spend down the trust

that’s holding the retirement account.

g. Should and SNT be a Conduit Trust or an Accumulation Trust?

A great debate centers around whether any individual beneficiaries’ subshare trusts designed to receive

IRA assets should, as a “default” position, be structured as a Conduit Trust or as an Accumulation Trust.

Another debate also centers around whether an IRA Trust should to be a subtrust or a standalone trust

(separate from the Living Trust). Regardless of whether an IRA Trust is contained in a Living Trust or is a

standalone trust, the decision to use either a conduit or accumulation trust for each individual

beneficiary still arises.

It’s important to understand the objectives of an IRA Trust and how conduit and accumulation subshare

trusts work to meet them, or not.

The two key intended benefits of an IRA Trust are: (1) to maximize the “stretchout” of taxable required

minimum distributions or “RMDs” (thereby compounding money tax-free inside the IRA longer so that,

theoretically, more will be available later in life); and (2) to maximize the asset protection of inherited

IRAs (which under federal and many state laws, alone, have very little protection).


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A conduit trust requires that all IRA distributions (including RMDs) which are paid into the trust must

pass out to the primary beneficiary. This entitles the primary beneficiary to utilize his or her life

expectancy for stretchout purposes. However, the distributions to the beneficiary (and in some states a

portion or all of principal as well) become subject to third party claims and, in the case of a Special

Needs Trust or Special Needs Trust Subtrust, could greatly affect or destroy the beneficiary’s public

benefits (SSI and Medicaid). A conduit trust is easy to draft and administer, but does not provide asset

protection and could destroy eligibility for vital public benefits.

An accumulation trust permits distributions from the IRA to be retained in the trust. This clearly offers

greater potential asset protection, and protects the IRA distributions from destroying elibibility for

public benefits for beneficiaries of special needs trusts. However, an accumulation trust vastly

complicates both drafting and administration, if maximum stretchout is to be achieved. That’s because,

in order to determine the measuring life for stretchout purposes, one must look beyond the primary

beneficiary to other potential beneficiaries who may someday receive the accumulations (how far down

the line of potential beneficiaries we must look is still somewhat an unanswered question). There is one

example in the regulations that describes an Accumulation Trust.2 In this example, the IRS determined

that the only beneficiaries who counted were the spouse (the current beneficiary) and the spouse’s

children who were the “sole remainder beneficiaries of the trust.” Unfortunately, this example provides

very little help because trusts do not typically work that way in real life. There are rarely ever “sole

remainder beneficiaries of a trust. There are almost always remote contingent beneficiaries that take in

the event one or more of the first line remainder beneficiaries are not then living (or not then in

existence). Even if not explicitly named in the trust agreement, state law will fill in the gaps.

Fortunately, the IRS issued a series of private letter rulings issued after the final regulations became

applicable that shed light on the situation. Below is a summary of the most important points from these

PLRs.

In all of the PLRs on this topic, the trust qualified as a see-through Accumulation Trust – the RMDs were

based on the life expectancy of the oldest trust beneficiary. Most importantly, in each ruling the IRS only

considered the current beneficiaries and the first line then living remainder beneficiaries, assuming

those remainder beneficiaries would still be living when the current beneficiaries died. The IRS looked at

who will receive the remainder of the trust when the current beneficiary dies – based on individuals

who were alive at the account owner’s death. The IRS ignored the fact that those contingent remainder

beneficiaries could predecease the current beneficiary of the trust.

The IRS never cited to any law on which beneficiaries must be considered and never stated the rule

described above. The rulings just summarily state which beneficiaries are to be “considered.”

Interestingly, the letter rulings examine who is alive upon the account owner’s death, as opposed to

who is alive on September 30 of the calendar year after the calendar year of death. One ruling

determined that the spouse would continue to be the designated beneficiary (with respect to a marital

2 Treas. Reg. § 1.401(a)(9)-5, Q&A (7)(c)(3), ex. 1.


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trust and credit shelter trust) even if she died prior to September 30 of the calendar year after the

calendar year of death.3 According to the regulations, “the employee’s designated beneficiary will be

determined based on the beneficiaries designated as of the date of death who remain beneficiaries as of

September 30 of the calendar year following the calendar year of the employee’s death.” If a trust

beneficiary dies prior to September 30, and the deceased beneficiary’s estate is not entitled to anything

from the trust after death (as is the case with almost every trust), then the deceased beneficiary should

be ignored for purposes of the RMD rules.

Should another potential beneficiary be older than the primary one, that other beneficiary’s shorter life

expectancy may force larger RMDs and loss of maximum tax-free compounding. (Potential beneficiaries

could be limited by the trust document via a savings clause, but this may be difficult to do and still carry

out the trustor’s intended distribution.) Moreover, if the RMDs paid to the accumulation trust are not

distributed to the primary beneficiary within the calendar year of receipt by the trust plus 65 days after

the end of the year (which often fails to get done timely or may not be the best option for asset

protection reasons), these trust retained moneys will be taxable at a rate likely to be significantly higher

than the beneficiary’s rate.

The following “savings clause” for a lifetime trust for a child takes into account non-individual

beneficiaries, older beneficiaries, and applies to both the power of appointment and default remainder

beneficiaries:

“Notwithstanding anything herein to the contrary, upon the Primary Beneficiary’s death, the

Separate Trust’s interest in all Retirement Benefits and all assets derived therefrom, may not be

payable, whether outright, in trust, or pursuant to the exercise of a power of appointment, to

(1) any individual older than the oldest of my descendants living on the date of my death, (2)

any person or entity other than a trust or an individual, or (3) any trust that may have as a

beneficiary a person or entity other than an individual or an individual who is older than the

oldest of my descendants living on the date of my death.”

Bottom line: there’s a tradeoff between using a conduit vs. an accumulation trust. While a conduit trust

definitely achieves maximum income tax stretchout, it is usually not consistent with a Special Needs

Trust, unless the Special Needs beneficiary is only on SSDI and Medicare, or the IRA is very small.

h. Which Should Be Your “Default”?

The answer largely depends upon your degree of concern about stretchout vs. protection.

Ideally you want to give each beneficiary a chance to achieve the blend of objectives most fitted to them

by building maximum flexibility into the IRA Trust provisions.

If a beneficiary, at the time the trust is drafted, is already known to have a serious protection concern –

– such as a disability, a pending divorce, a pending lawsuit, a pending bankruptcy, a pending creditor

3 PLR 200438044 (June 22, 2004)


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claim, or a drug or spendthrift habit –– then an accumulation trust should obviously be used (which can

be structured as a spendthrift trust or a special needs trust).

On the other hand, if a beneficiary, at the time of drafting, is not known to have a disability or other

asset protection problem, it could be better to utilize a conduit trust, and some practitioners do use this

as a default. However, since you never know when or if a beneficiary is going to face an asset protection

problem or become disabled, most practitioners set the accumulation trust as the default, which is

consistent with the whole intent of naming a trust as a beneficiary in the first place.

What if the you want to start with a conduit trust but you recognize that the primary beneficiary’s

situation could change over time because of divorce or other asset protection issues? Or you have a

beneficiary with asset protection issues who could become fine later and you don’t want him or her

stuck with a trust that may lose the maximum stretchout advantage? This is why many practitioners

use a “toggle switch” (a technique approved in PLR200537044).

With a “toggle switch,” a third party, not the beneficiary, such as a Trust Protector, can change the

beneficiary’s trust –– for a limited period after the IRA owner’s death –– from a conduit to

accumulation, or vice versa, depending on the situation, needs, and circumstances of the primary

beneficiary. This gives the trustee and beneficiary involved the benefit of “20/20 hindsight,” as opposed

to the attorney always having to guess at the drafting stage which type of trust is best for each

beneficiary, at the risk of choosing the wrong stretchout vs. asset protection result.

i. SNT as Remainder Beneficiary

What if a husband leaves his retirement fund to his wife and names their child’s SNT as the contingent

beneficiary, meaning that it will receive any assets that remain upon the wife’s death? If the wife has her

own retirement account, she should roll over the one she inherits from her husband into hers and then

name the SNT as primary beneficiary of her own account. Otherwise, the payout period upon her death

will be determined by her age, work status, or life expectancy. It may be wise to write instructions to

this effect into a spouse’s power of attorney so that a designated agent can handle the rollover, if

necessary.

Details matter, and it’s important that the trust be named beneficiary in the retirement fund contract,

not the will. If both the client and the client’s spouse are grantorsof the SNT, the trust must become

irrevocable upon the death of the person who is bequeathing the retirement fund.

structuring special needs trusts as ira...

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