This post was authored by Salvatore M. Capizzi, Dunham's Chief Sales & Marketing Officer. If you have questions concerning today's topic, please call us at (858) 964 - 0500. Hold us to higher standards.

Orange juice and toothpaste are two things that do not go well together.

An IRA with a special needs child named as the beneficiary is another.

This is especially true if the special needs beneficiary receives needs-based government benefits, like Supplemental Security Income, Medicaid, or housing assistance. Accepting their share of the IRA as a beneficiary compromises their access to benefits – even if it is an inheritance of only a few thousand dollars.

Certain assets, such as a disabled loved one's primary residence, the land that the primary residence is built on, furnishings, their car, and certain personal effects, would not affect Medicaid or SSI eligibility.

However, other assets, such as cash in any form, could affect eligibility for benefits. These cash assets include the cash value of life insurance, stocks, bonds, real estate other than the primary residence, and multiple cars. Receiving as little as $2,000 of your IRA as a beneficiary after you pass away could also be enough to disrupt their government benefits.

The DTC IRA Special Situations Trust® could provide a powerful solution.

Properly established, this trust can accomplish several objectives, including providing for a special needs child after their parents have passed away. It will preserve government benefits, and it will maintain the stretch that is allowed by the SECURE Act for disabled and chronically ill beneficiaries.

When you establish the trust, you, as the IRA owner, maintain complete control over your IRA. All you are doing is naming the trust as the beneficiary of your IRA. You still control how much of your IRA you spend, you control the IRA's investments, and you can change beneficiaries at any time, including removing the special needs trust.

This type of trust allows the special needs child to continue receiving government benefits because it is set up as a "third party" trust. It is funded by the special needs child's family and friends rather than the beneficiary themselves. You can encourage others like grandparents, uncles, aunts, and friends to name this trust as a beneficiary for a portion of their IRAs as well.

This third-party trust structure protects the funds from the Medicaid payback provision because the money is not left directly to the child. Additionally, because the trust is not in the child's name, if the child dies while money remains in the trust the parent can name a remainder beneficiary and the trustee can give what remains to that person.

Keep in mind that the SECURE Act named disabled and chronically ill beneficiaries as Eligible Designated Beneficiaries. As such, they can stretch their IRA for their lifetime as opposed to paying the tax no later than the end of the 10th year of the IRA owner's death.

The DTC IRA Special Situations Trust® can provide a benefit by stipulating that the trustee must stretch the IRA to benefit the special needs child. The stretch is significant because it allows the spread of distributions over the beneficiary’s lifetime and enables the earnings building inside the trust to grow tax-deferred.

Most IRA trusts for special needs children are drafted as "accumulation" trusts. This trust does not require distributions of RMDs, which is vital because doing so could undermine eligibility for public benefits the disabled beneficiary may be receiving.

This type of sub-trust within the DTC IRA Special Situations Trust® allows the trustee to retain RMDs to pay for the care and support of the person with special needs and distribute them as the trustee deems appropriate.

Requiring the trustee to stretch the IRA is also essential. I have seen situations where the trustee decided to pay the tax rather than stretch the IRA. In all cases I witnessed, the trustee found calculating RMDs too much work and did not want to be liable for the IRS penalty if they made a mistake in calculating the RMD. They decided it would be easier if they paid the tax and then used the income from what remained for the special needs child.

The table below assumes the special needs child receives a $1.3 million IRA at age 32 and assumes that one trustee pays the tax and provides the income off the remaining balance. The other uses the stretch, and at their discretion, uses the RMDs each year to care for the child. We are assuming a 6% return and that the IRA that was not stretched paid top 37% federal tax and a 10% state tax.

Establishing an IRA Trust for a Special Needs Child

Stretching the IRA for the special needs child can make a significant difference. You want to be sure your retirement assets are distributed in a way that best protects the money you have set aside for your loved ones and in the most tax-efficient manner possible.

Planning for Multiple Generations

If you would like to receive more information about how you and your clients may benefit from utilizing the DTC IRA Special Situations Trust®, contact us today. We look forward to talking with you soon.

Financial Advisors: To receive an E-Folder with the DTC IRA Trust Trilogy® White Papers and Case Study Videos, fill out this form.


This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Risk Associated with all three trusts in the DTC IRA Trust Trilogy®:

Current tax environments are subject to change at any time and no one can predict with certainty what Congress or the IRS may do.

Dunham Trust Company does not guarantee the investments in the DTC IRA Trust Trilogy® as investments are subject to risk and market fluctuation, including possible loss of principal. Dunham Trust Company does not guarantee that your investment objectives will be achieved.

Fees Associated with all three trusts in the DTC IRA Trust Trilogy®:

To maintain a DTC IRA Trust Trilogy® you may incur fees and expenses. Generally, there are no administrative fees associated with the DTC IRA Special Situations Trust® and DTC IRA  Charitable Trust® until the IRA owner passes, at which point the trust administration fee schedule published at the time will apply.

However, the fees related to the DTC IRA Replacement Trust® will be subject to the published fee schedule at the time the trust is established.

Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA / SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc. Trust services offered through Dunham Trust Company, an affiliated Nevada Trust Company.