Special Needs Trust as IRA Beneficiary

[Christine Roberts]

Last year PLR 200620025 said that a disabled beneficiary of a parent's IRA could essentially re-designate the IRA, naming as beneficiary a newly-created special needs trust (SNT) of which he was the sole beneficiary. The IRS said that (a) the transfer of the IRA to the SNT was not taxable because the SNT was a self-settled "grantor" trust; and (b) the SNT beneficiary's life would be the measuring life for minimum required distributions from the IRA.

In the PLR situation the SNT was created after the death of the IRA holder, as a way for the disabled beneficiary to remain qualified for Medicare and other gov't. benefits. So it was not an estate planning technique, per se.

My question is the degree to which practitioners are using the PLR as a basis for estate planning, for instance by instructing clients to name SNTs as IRA beneficiaries during life, whether or not the SNT is a grantor trust or third party trust.

Would the transfer of the IRA to the SNT on the IRA holder's death under these circumstances still be a nontaxable event under these circumstances? Would the SNT beneficiary still be the measuring life in such circumstances?

Just trying to figure out if practitioners are interpreting the PLR aggressively or cautiously, given the eternal provision about applying PLRs to different factual circumstances.

[Bruce Steiner]

If the IRA owner had left the IRA to the beneficiary in trust rather than outright, it would have avoided these complexities. The only complexity would have been that the stretchout would have been limited to the life expectancy of the oldest beneficiary of the trust.