Trusts for Disabled and Chronically Ill Beneficiaries under the SECURE Act | Special Needs Trust

Sep 1, 2020 | Diversity, Equity & Inclusivity, General Estate Planning, IRS / Tax Guidance, Podcasts, T&E Administration

“Trusts for Disabled and Chronically Ill Beneficiaries under the SECURE Act,” that is the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Susan Snyder, ACTEC Fellow from Chicago. ACTEC has produced several podcasts on changes resulting from the SECURE Act. Today’s podcast will focus on trusts for disabled and chronically ill beneficiaries in this area such as an AMBT (Applicable Multi-Beneficiary Trust). To tell us what an AMBT is, you will be hearing today from ACTEC Fellows Deb Tedford of Mystic, Connecticut and Steve Trytten of Pasadena, California. Welcome, Deb and Steve.

Thank you, Susan. We are delighted to be here. As background for trusts for disabled people, I would first like to observe that there has been a whole history of Congress in the past 20 or 30 years, treating disabled people with a great deal more respect and consideration than in the past, and that began really with the Americans with Disabilities Act in 1990, OBRA ’93 (Omnibus Budget Reconciliation Act) or Special Needs Trust in 1993, Qualified Disability Trust in 2003, ABLE (Achieving a Better Life Experience) Accounts, the Special Needs Fairness Act, and now in 2019, we have the SECURE Act and AMBTs. So, what is all of this and how is it relevant to retirement accounts?

Special Needs Trusts – SNT

I am first going to do a quick background in Special Needs Trust, so that we know what it is we are starting from. There are first-party trusts, which really are not terribly relevant but were created as a very helpful backup for the needs of disabled people by Congress in 1993. Most commonly, though, we use third-party supplemental needs trusts, which have been around for many, many years and which allow disabled people to get benefits from to supplement their governmental benefits but do not disqualify them for it. And that is the real focus of this area of planning — how to benefit those with disabilities or chronic illnesses and not lose the lifelines that they depend on.

Recently, in 2003, Congress also created a special income tax benefit for disabled people who get benefits in trusts, recognizing that the trust income tax rules can be quite painful for those receiving their income from them. And the qualified disability trust has a series of rules that allow that trust to get an extra 4,300-dollar exemption as compared with the typical 100-dollar or 300-dollar exemption.

Applicable Multi-Beneficiary Trusts – AMBT

Those qualified disability trusts are very similar but not identical to the new AMBT trust created under the SECURE Act. The qualified disability trusts are only for those who have been found disabled by Social Security. They must be found disabled before the age of 65 and the beneficiaries of the trust can only be disabled people. AMBTs are a bit similar but a little bit different. They can be for chronically ill people; they can be for people who are disabled within the meaning of the Internal Revenue Code but not found disabled by Social Security. And, it appears in all cases that the remainder beneficiaries can be non-disabled people after the death of the disabled people. There are a number of tax benefits available if one has a qualified AMBT, including the ability to use life expectancy or stretch status in distribution from retirement plans, unlike most people who are now on an accelerated 10-year payout. Steve, do you have any thoughts on AMBTs, like special rules for them that we should be aware of?

Thank you, Deb. And let me just briefly provide some background of how we got to the SECURE Act and AMBTs because prior to the SECURE Act, where post-death distributions from retirement plans and IRAs were concerned, we normally could get a life expectancy method for the intended beneficiary if we knew how to draft trusts under the see-thorough trust rules that applied.

The see-through trust rules are still with us, but the SECURE Act changed the default to a 10-year payout instead of a life expectancy. Then, it created exceptions for five categories of eligible designated beneficiaries, which we call EDBs. Those five categories are the participant’s spouse, the participant’s minor child, disabled, chronically ill, or anyone no more than 10 years younger than the participant. So, for this discussion, the disabled and chronically ill categories are the ones that we would first turn to, although we would probably have a comment on the minor-child category before we are through.

Disabled and Chronically Ill Beneficiaries Under the SECURE Act

Where the disabled and chronically ill are concerned – we do not know yet — we do need some more guidance but there is a question whether it is possible to get a life expectancy for them under the kinds of trusts we used to draft prior to SECURE Act. But Congress did, at the eleventh hour, add a new kind of trust under the see-through trust rules, under SECURE Act, called an Applicable Multi-Beneficiary Trust or A-M-B-T or AMBT. And with this type of trust, Congress was trying to provide special treatment for disabled and chronically ill for their protection. So, the definition of – I mean you can draft trust to have a number of different features, but it has to check a few boxes to qualify for AMBT status. The trust has to have more than one beneficiary. It has to be a see-through trust. So, that means all the beneficiaries have to be DBs, which is what we call a designated beneficiary under the regs, who is an individual; and at least one of those beneficiaries has to be either a disabled or chronically ill EDB.

By the way, the test for disabled, chronic, EDB is so similar to qualifying for social security disability for this discussion you can assume it is the same. If the trust checks all of those boxes, it is an AMBT, and it will be allowed to use the life expectancy method. The Congress left out one little detail, which is “whose life expectancy is it?” Is it the disabled EDB or is it some other trust beneficiary who might be older? We are awaiting guidance on that and we hope that the answer will be favorable that it is the EDB’s life expectancy. In the meantime, anyone drafting an AMBT should probably try to minimize any older DBs of that trust as much as possible, so that if the answer is less favorable, we still get the lowest possible age that we can under the circumstances.

One other rule under AMBT that is very intriguing is it looks like one AMBT could be designated, which then splits immediately on the decedent’s death into separate trusts for each of the current beneficiaries. So, for example, if I had three children, I could designate an AMBT that will then split into three trusts for the three children. Well, what is so special about that? The trustee of that AMBT that I have designated could decide how much of the plan goes to each of the different children. So, that flexibility could be very appealing. But we do need a little more guidance to be sure we know how the details of that works, but that is another possibility too.

So, what this really is saying is that while traditionally when doing estate planning for disabled individuals, we have tried to avoid giving them retirement benefits as part of their trust or other devices; we may end up turning estate planning on its head and finding that disabled beneficiaries are really the ones that we want to be receiving these employee plan benefits. We are not certain yet. We need more guidance from the Treasury, but this may be a new direction and a new way of thinking — of planning.

Thank you, Deb. I agree with you and I will add a couple of other comments. When we are drafting, statements of intent may be helpful during this time that we are waiting for guidance. And the other thing, as planners, we do not want to get so caught up in the tax and drafting details that we lose track of what the client really wants. We do not want these things to be the tail that wags the dog. I hope this discussion was helpful and, Deb and I both wish you the best of luck and thank you for being with us today.

Thank you, Steve and Deb, for educating us on AMBTs and the SECURE Act.


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