Special Needs Planning and Inherited Retirement Accounts

Many parents save for retirement through 401(k)s and IRAs, which together held over $22 trillion in assets as of mid-2024. Because these accounts are often a significant part of an estate, proper planning is essential—especially when a beneficiary has special needs.

Inherited retirement accounts come with rules that can complicate special needs planning. Distributions from these accounts can impact eligibility for government benefits like Medicaid or SSI. While naming a trust as the beneficiary is a potential solution, it requires careful structuring to avoid adverse tax consequences.

The SECURE Act of 2019 changed how most inherited retirement accounts are handled, requiring beneficiaries to withdraw all funds within 10 years. However, individuals with disabilities are considered “Eligible Designated Beneficiaries” (EDBs), allowing them to stretch distributions over their lifetime instead. This offers continued tax-deferred growth and smaller annual payouts.

To preserve government benefits and still access retirement funds, a Special Needs Trust (SNT) can be named as the account beneficiary. For the IRS to recognize the trust as a designated beneficiary, it must be a “see-through” trust—valid under state law, irrevocable at the owner’s death, and clearly identify its beneficiaries.

There are two main trust options: conduit and accumulation trusts. Conduit trusts pass all distributions directly to the beneficiary — problematic for someone receiving public benefits. Accumulation trusts retain distributions, protecting benefit eligibility but requiring all possible beneficiaries to be considered in RMD calculations. The trust must be carefully drafted to avoid disqualifying the disabled individual from the lifetime stretch.

The best option is often an Applicable Multi-Beneficiary Trust (AMBT), which allows lifetime distributions to a disabled beneficiary while protecting benefit eligibility. SECURE 2.0, passed in 2022, now permits AMBTs to name charitable remainder beneficiaries without disqualifying the trust from the stretch option—if the disabled person is the only beneficiary during their lifetime.

Alternative strategies include allocating retirement accounts to an SNT for the disabled child and leaving non-retirement assets to other heirs. Or, you may accept the 10-year withdrawal rule and plan accordingly.

Each option has pros and cons. Working with a special needs planning attorney ensures your trust is properly drafted and tailored to your family’s needs. If you have questions, give us a call at 605-275-5665.

Read more: Passing Retirement Benefits to a Child With Special Needs