On December 29, 2022, the SECURE 2.0 Act was signed into law to address issues related to retirement and savings. Basically, it changed who you can leave your assets to.
For parents, this change allows them to follow their heart without the risk of harming their child’s financial future.
For charities, this opens up new, potential donors who were previously unavailable.
Taxes are confusing, but retirement account taxes are really confusing. So here are some simple facts to help it make sense.
Prior to 2023 and Secure Act 2.0, IRS rules required parents who established a third party discretionary trust (TPDT) to only name “real” people as beneficiaries of the trust after the individual with special needs died to obtain the most efficient tax treatment for retirement plans left for the benefit of their child with special needs. This might not seem like a big deal and it wasn’t for many parents. For parents with multiple children, this rule did not have a big impact. Those parents with more than one child would often name their “typical children” as remainder beneficiaries of the TPDT after the child with special needs. Retirement assets not used for the benefit of the individual with special needs were distributed to the individual’s siblings and tax treatment was efficient.
But for my clients with single child families, this rule caused them to hold their noses when they named remainder beneficiaries. Many times, those parents wanted to leave assets to a charity rather than other relatives who maybe didn’t “need” the money or that weren’t close to the family. Unfortunately, I would have to advise them, (in a very complicated, tax talk) that this was not a good idea and would hurt their child during the child’s lifetime. Those clients usually ended up naming aunts and uncles or nieces and nephews as remainder beneficiaries of the trust after the individual with special needs. Many times, these relatives were not close emotionally and my clients were disappointed.
I don’t have to disappoint my clients anymore. Now under Secure Act 2.0, a charity can be named as the remainder beneficiary of a Third Party Discretionary Trust after the individual with special needs passes away.
For parents, this change allows them to follow their heart without harming the economics of their child.
For charities, this opens up new (and previously unavailable) potential donors.
See this Article for more in-depth tax talk. https://www.irahelp.com/slottreport/secure-20-modifies-rules-special-needs-trusts