Current Trends in Special Needs and Elder Law

Bernard A. Krooks and Tara Anne Pleat spoke on planning for deferrable retirement benefits at the 57th Heckerling institute of Estate Planning. Their focus was on benefits for the disabled and chronically ill Individuals which are categories of a new class of beneficiaries under the SECURE Act known as eligible designated beneficiaries (EDBs).  EDBs are eligible for life expectancy payout rather than the new ten-year rule under the SECURE Act.

They covered in detail the definitions of the term “disability” and “chronically ill individuals.”

Under the SECURE Act, “disability” is determined by IRC Sec. 72(m)(7), which provides that an individual is disabled if he or she is unable to engage in any substantial gainful activity by reason of any medically determined physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.  The proposed regulations provide a safe harbor for adults to show disability. Specifically, if the beneficiary has been deemed disabled by the Social Security Administration, then the beneficiary will be disabled and an EDB under these rules. While the safe harbor is helpful, it is not enough and likely fails to capture many individuals otherwise entitled to disabled status.

For minor children, under 18, the proposed regulations clarify that someone who is under 18 on the date of the account owner’s death will be disabled if that individual “has medically determinable physical or mental impairment that results in marked and severe functional limitations and that can be expected to result in death or be of long-continued and indefinite duration.”

A chronically ill individual is defined under IRC Sec. 7702B(c)(2) as someone who, without substantial assistance, is unable to complete two or more of the activities of daily living (grooming, dressing, toileting, ambulating, eating, or transferring).  The SECURE Act modifies the definition under IRC Sec. 7702 by replacing 90-day duration with “reasonably expected to be lengthy in nature.” The chronically ill individual must provide documentation to the plan administrator by October 31 of the following year.

The definition for disability needs more clarification and Tara discussed the ABLE accounts may give some additional guidance on the definition. ABLE accounts, under IRC Sec. 529A, are accounts that contributions can be made to up to $17,000 annually to be used for qualified disability expenses of the designated beneficiary of the account.

Bernie and Tara went on further to discuss trusts for eligible designated beneficiaries, special needs trusts and the trust terms and beneficiaries that will allow for lifetime distributions for the disabled beneficiary.

New as of December 29, 2022, the SECURE 2.0 Act of 2022 as part of the Consolidated Appropriation Act of 2023 allows an organization qualifying under IRC Sec. 408(d)(8)(B)(i) to be treated as a designated beneficiary for a special needs trust and still allow the stretch payout.

The law for inherited retirement plans and trusts for disabled and chronically ill individuals to qualify for the stretch IRA are complicated and need proper planning.