07/19/2010 08:36:00 AM EST
Fundamentals of Special Needs Trusts - Inheritance & Lifetime Gifting; Redirecting IRAs
Fundamentals of Special Needs Trusts § 3.03
Inheritance & Lifetime Gifting
In the same way that parents
or grandparents sometimes fail to recognize the importance of directing a
child/grandchild's inheritance to a SNT when the child/grandchild suffers from
a disability, they also forget to take into account the beneficiary
designations on IRAs or other retirement type assets.
The issue of properly
directing IRA proceeds to a SNT is dealt with in § 3.03[d]. When
the IRA owner fails to properly name a SNT as the beneficiary, it may still be
possible to divert or redirect the proceeds from the IRA to a first-party SNT
for the benefit of the child with a disability.
In such cases a petition for
substituted judgment could be filed to create the SNT (see § 4.06) and the petition could also seek an order
transferring the child's interest in the IRA into the SNT. Alternatively, any
other method by which a first-party SNT can be created (i.e., by a parent,
grandparent, guardian or court order)1
(see § 1.05) should suffice and thereafter, if the child with
the disability has the capacity to do so, she may transfer her interest in the
IRA into the SNT.
Such an approach has been
approved by the IRS in at least one case. In Letter Ruling 200620025 the IRS
concluded that the portion of the IRA transferred into the SNT was not a
recognized transfer for either estate or gift tax purposes and also that the
child's life expectancy could be used in determining the require minimum
The IRS reached these
conclusions by determining that the SNT was a grantor trust and therefore the
grantor and the trust are treated as one taxpayer. Therefore, the transfer of
the IRA into the SNT was not a sale or other disposition under I.R.C. § 691(a)(2) and thus there was no immediate
recognition of federal income tax. The IRS also determined that the terms of
the SNT met the test for a designated beneficiary trust (see § 3.03[b]) and therefore the five-year distribution rule
did not apply, but rather the beneficiary's life expectancy could be used.
SNT drafting attorneys must
keep in mind that letter rulings cannot be cited as precedent, but rather they
are an indication of the IRS's position on the specific question presented and
may be useful as an indication of how the IRS will evaluate the drafter's
This free download is part of Fundamentals of Special
Needs Trusts, which places special needs trusts in the arsenal of tools
available to an attorney to help his senior clients and those who have
disabilities. It helps the practitioner to understand how she can draft a
trust, using the person's own funds or the funds of another, to provide goods
and services for those clients that will enhance their everyday existence.
Fundamentals of Special Needs Trusts provides practitioners with analysis of the law,
authoritative advice, practice notes, checklists, and forms. It begins with a
discussion of the history of special needs trusts, discusses ethical issues,
explains the various types of special needs trusts and how to draft, fund, and
administer those trusts, how and when to terminate them, and the relevant tax
subscribers can conduct a search in Fundamentals of Special Needs Trusts.
of Special Needs Trusts is a reasonably priced desk manual that is available at the LexisNexis Store and is the product
of highly experienced practitioners.
See 42 U.S.C. § 1396p(d)(4)(A) .