The main way most American families save for the future is through private retirement savings plans such as 401(k)s and IRAs. These plans offer the opportunity to designate a beneficiary upon the death of the account holder. These designations allow the account assets to bypass probate and pass directly to the named beneficiaries. Often, individuals make these decisions when initially setting up the account and never reconsider them.
Typically, the account holder names a primary beneficiary and a contingent (or back-up) beneficiary. The contingent beneficiary only receives the account assets if the primary beneficiary predeceases the account holder. The account holder can generally name more than one person. Some financial institutions will allow the account holder to name a class of beneficiaries, such as “my children.”
However, for individuals who have children or loved-ones with special needs[i], being the beneficiary of a retirement account could wreak havoc on their needs-based government benefits, such as Supplemental Security Income (SSI), Social Security Disability (SSD), Medicaid, or housing assistance. This is not simply a problem for large retirement accounts, many of the needs-based programs have very strict income and asset limits. A Special Needs Person could lose access to these programs which provide medical coverage, housing, and other necessities if they inherit assets or income in their individual name.
Proper planning can prevent a Special Needs Person from losing their government benefits. Creating a Special Needs Trust to receive the funds on behalf of the Special Needs Person will accomplish this goal. The account holder merely designates the trust as the beneficiary. If properly drafted, the trust can receive funds from a retirement account without negative income tax implications and the funds can be used to assist the beneficiary without compromising government benefits. The purpose is to supplement the benefits.
A Special Needs Person may be provided for through designating their Special Needs Trust as the beneficiary of a 401(k) or an IRA account. There are also other ways to fund Special Needs Trusts, including designating the trust as a beneficiary of a life insurance policy and giving assets to the Special Needs Trust in a Last Will and Testament.
Routinely review your retirement account beneficiary designations and Estate Planning Documents, especially for the Special Needs Person in your life.
[i] “Supplemental Needs Person” means a person who: is disabled or is receiving, or is eligible to receive, assistance or other benefits under a means-based government program (such as Medicaid or Supplemental Security Income). "Disabled" is defined under USC Title 42, Section 1382c(a)(3), KAR Title 907 Chapter 20:005, or under any Kentucky law related to means-based government programs. “Assistance” is defined in United States Code Title 42, Section 1396d(a), or under Kentucky law related to means-based government programs, and in particular KRS 205.510.