If you support a relative with special needs, you may want to leave your retirement account funds to him. If this is not done correctly this can be a big problem. When you leave money or assets to a person with special needs, it could make him ineligible for government benefits. This includes assets like IRAs, 401(k)s, Keogh plans, pensions, and more.
Unfortunately, relatives tend to leave money to people with special needs without realizing the consequences in the future. Many people with special needs rely on government benefits for support. Government benefits programs often assess the income, the resources, or both that people with special needs have. If someone has too much money or resources in his or her name, he or she will not get benefits.
When you name a person with special needs as the beneficiary of your retirement account, you take a great risk that he or she will inherit that account at some point in the future and then lose benefits suddenly. The future is uncertain, and people often make beneficiary designations several decades before they pass away. If you plan to leave retirement funds to a relative with special needs, first set up a third-party special needs trust to inherit the retirement account. The SNT can hold other money that your family saves for the relative’s care too.
SNTs do not count toward money or assets for purposes of government benefits eligibility. This means your family can put away plenty of money to ensure your relative’s needs get met. The SNT’s trustee can pay for some of your relative’s expenses using money from the SNT.
If you plan to name an SNT as the beneficiary of your retirement account, here is what you need to know. First, make sure you talk to your account administrator and fill out the proper form to change the beneficiary. Often retirement account administrators have online forms available. List the full name of the trust as the beneficiary.
Second, you need to be careful if you have both an SNT with a charity as contingent beneficiary and an IRA with the SNT as beneficiary. The IRS requires that IRA holders begin taking minimum distributions from their IRAs when they reach a certain age. If an accountholder dies before reaching that age, and the IRA beneficiary is a trust with a charity as contingent beneficiary, then the beneficiary must empty the account within 5 years of the accountholder’s date of death. This often results in high tax bills for the beneficiary – here, the SNT. You may want to make some different decisions about beneficiaries if these tax bills will hurt the SNT or diminish its ability to pay for your relative with special needs’ expenses.
Rubin Law is the only law firm in Illinois exclusively limited to providing compassionate special needs legal and future planning to guide our fellow Illinois families of children and adults with intellectual disabilities, developmental disabilities, or mental illness down the road to peace of mind. For more information, email us at email@rubinlaw.com or call 866-TO-RUBIN.
