Assignment Of Income Streams To Special Needs Trusts (Part 4)

(This is part 4 of a 4-part blog post on the subject of the assignment of various types of income to a special needs trust. This post discusses the assignment of annuities, IRAs and other retirement benefits to a special needs trust. Prior blog posts on this subject can be found here, here and here.)


B.      Annuities


The Social Security POMS specifically provide for the assignment of an annuity payment to a special needs trust: an example provided in the POMS of a situation in which trust principal is not a resource is where “the claimant is a minor and the beneficiary of an irrevocable trust established with the child’s annuity payment by his father, who is his representative and the trustee of the trust,” and the claimant’s siblings are residuary beneficiaries. The POMS section addressing third-party special needs trust analyzes the situation as follows:

The trust principal is not a resource to the claimant. Under the general rule in SI 01120.200.D.2, the trust document provides that the trust is irrevocable. Although the claimant can be considered the grantor of the trust (because the actions of the father as payee are as an agent of the claimant), the trust is not revocable under the rule for grantor trusts in SI 01120.200.D.3 because the claimant is not the sole beneficiary. POMS §SI 01120.200.L.2.b.


C.      IRAs


A special needs trust may be funded with an IRA or other qualified retirement plan. According to the trust rules regarding payments of IRAs and other retirement benefits, all benefits must be distributed out of the IRA within five years of the owner’s death, if he or she died before the required beginning date (“RBD”); or over what would have been the remaining life expectancy of the deceased owner, if the deceased owner died after the RBD. However, when a qualifying trust (including a special needs trust) is the beneficiary, benefits can be distributed in annual installments over the life expectancy of the oldest beneficiary of the trust.

Pursuant to Private Letter Rulings 2006-200-25 and 2011-160-05, the transfer of a decedent’s IRA to a self-settled SNT is disregarded, for federal income tax purposes. The trustee of a special needs trust can use the disabled beneficiary’s life expectancy to calculate the annual RMD. The IRS also determined that a special needs trust is a grantor trust, for federal income tax purposes, so all income is taxed at the disabled beneficiary’s applicable tax rate.

A conduit trust is a trust that requires immediate distribution to the disabled beneficiary of all amounts received from the IRA; there is no possibility of accumulation. An accumulation trust is a trust that can accumulate distributions from an IRA. For purposes of public benefits eligibility, naming a conduit trust as an IRA beneficiary may not be appropriate:

A special needs trust may qualify as a designated beneficiary. If the trust meets the designated beneficiary requirements, the beneficiaries of the trust, and not the trust itself, are treated as the designated beneficiary. This type of trust is commonly referred to as a “conduit trust” … in which the trustee has no power to accumulate retirement plan distributions in the trust. The trustee is required, by terms of the governing instrument, to pass all plan distributions out to the individual trust beneficiary or beneficiaries. Under the conduit trust approach, the beneficiary is in the same position as if he/she had been named directly–individually as beneficiary of the benefits–except that distributions must be made to satisfy required minimum distributions (RMD). A conduit trust may not be a workable option because it requires that all RMD are passed through to the beneficiary, and these distributions may disqualify the beneficiary from receiving means-tested public benefits.