Can the Owner of an IRA Put It in a Self Settled Special Needs Trust?
Someone with a disability who is eligible for federal disability programs might become disqualified if countable assets are too high. An Individual Retirement Account is one such countable asset. Rather than spend or gift all assets away, a disabled person or guardian can establish a self-settled special needs trust to hold assets. The goal is to have enough to provide care above and beyond federal assistance.
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Purpose of Special Needs Trust
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Special needs trusts exist to protect eligibility for federal aid while protecting assets owned by the disabled person. Many special needs trusts are established via court order. However, self-settled special needs trusts are often established by the disabled person or a guardian after an accident or injury settlement. The trust is funded with personal, inherited and gifted assets. When established properly, the disabled person still receives his maximum federal aid but has resources to provide care over and above federal programs when necessary.
Establishing the Trust
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The trust document must specifically state that trust exists to provide "supplemental and extra care" above what the government agencies give. One requirement of self-settled trusts as opposed to court ordered trusts is a pay-back provision. Self-settled trusts must comply with the Omnibus Budget and Reconciliation Act of 1993, holding a pay back provision for Medicaid costs upon the beneficiary's death. Trusts established by third-parties do not have this requirement.
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IRA Asset
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An IRA can either be a pre-existing asset owned by the disabled person or an asset inherited upon the death of a family member. The IRA is included in the trust in both cases. The disabled person is still subject to the terms of owning the IRA, therefore a traditional pre-owned IRA is subject to the annual Required Minimum Distribution once the disable person reaches age 70 1/2. There is no penalty for distributions prior to age 59 1/2 since the owner is disabled. An inherited IRA rolled into a beneficiary IRA held by the trust must take annual RMDs regardless of the disabled person's age.
Legal Considerations
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Dealing with federal disability programs and maintaining assets at the same time requires an astute understanding of the law. It is best to seek not only proper legal representation in the creation and funding of the trust, but to also speak with a tax adviser to mitigate any tax ramifications from trust held assets.
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References
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