It’s not unusual for parents of children with special needs, or individuals who have become disabled as adults, to have retirement plans as a significant portion of their assets. In such cases, the question arises as to whether they can put a retirement plan into a special needs trust. The answer, as with many legal questions, is “it depends.” Also, the answer has changed significantly since passage of the SECURE Act at the end of 2019.
Let’s start by setting out three different questions:
- Can you transfer your own IRA or 401(k) into a special needs trust?
- Should you name a special needs trust as the beneficiary of a retirement plan?
- Can you transfer an inherited IRA into a special needs trust?
Can You Transfer Your Own IRA or 401(k) into a Special Needs Trust?
This question normally comes up for people who become disabled, whether due to injury or illness, after they have worked and accumulated retirement savings. The answer is a clear no. A disabled person cannot transfer a retirement plan into a special needs trust without first liquidating it and paying taxes on the realized income. If this is necessary in order to receive important public benefits, it may well be worth the cost. In fact, depending on the size of the retirement plan, the individual’s other income, and whether medical expense or other deductions are available, the tax cost may not be as high as it seems at first.
Should You Name a Special Needs Trust as Beneficiary of Your Retirement Plan?
Can You Transfer an Inherited IRA to a Special Needs Trust?
Here the answer is less definite. There’s no regulation on point, but there are revenue rulings that would permit such a transfer without having to liquidate the IRA first. Without a regulation on point, the challenge may be less the law and more the willingness of the bank or investment firm where the account is located to permit such a transfer to trust. They may well first require that the account owner obtain a revenue ruling from the IRS that is specific to the account in question. The cost of obtaining such a private revenue ruling in most cases would outweigh the potential benefit of making the transfer to trust.