SECURE 2.0 and Special Needs Trusts: What Trustees Need to Know
- Attorney Staff Writer
- Jul 17
- 4 min read
Updated: Aug 23
Economic volatility isn’t the only challenge trustees must manage. Legislative changes—particularly those affecting retirement accounts and disability planning—can dramatically alter long‐term strategies. The SECURE Act of 2019 and its successor, SECURE 2.0 (enacted in late 2022), overhaul the rules for inherited retirement accounts. These laws include special provisions for people with disabilities and create opportunities for parents and trustees managing special needs trusts (SNTs). This post explains why these changes matter, how trustees can respond, and what steps to take to protect beneficiaries.
Background: Retirement Accounts, RMDs, and the SECURE Acts
Required Minimum Distributions (RMDs)
A required minimum distribution (RMD) is the minimum amount a retirement account owner must withdraw each year once they reach a certain age. Under current IRS rules, owners of traditional IRAs, SEP and SIMPLE IRAs, and employer retirement plans generally must start taking RMDs at age 73. If they reach age 73 in 2024, their first RMD is due by April 1, 2025, and the second by December 31, 2025.
Owners can withdraw more than the minimum, but any part of the withdrawal that hasn’t already been taxed counts as income. RMD rules do not apply to Roth IRAs while the owner is alive; however, beneficiaries of Roth IRAs must follow the same rules.
Impact of the SECURE Act (2019)
The SECURE Act introduced a 10‑year payout rule for most non‑spouse beneficiaries. Beneficiaries now must withdraw the entire inherited balance within a decade, often resulting in a significant tax burden. However, certain Eligible Designated Beneficiaries (EDBs)—including surviving spouses, minor children, people with disabilities or chronic illnesses, and beneficiaries not more than 10 years younger than the account owner—may still use the “stretch” method to base distributions on their own life expectancy.
SECURE 2.0 (2022)
The sequel, SECURE 2.0, clarified and expanded these rules. It allows trustees to name a charity as a remainder beneficiary of a special needs trust and confirms that distributions to an SNT can stretch over the disabled beneficiary’s lifetime. It also increases eligibility for ABLE accounts by raising the onset age of blindness or disability from 26 to 46.
Why Special Needs Trusts Are Different
Parents often leave retirement accounts to their other children because inherited IRAs can jeopardize a beneficiary’s eligibility for public benefits. Yet the SECURE Act changed the rules: disabled beneficiaries can stretch distributions over their life expectancy, meaning they receive smaller annual withdrawals, potentially remain in lower tax brackets, and preserve benefits. Trustees can also name a special needs trust as the retirement account beneficiary, allowing the trustee to use RMDs to support the beneficiary.
Advantages for Trustees
Reduced Tax Impact: Distributions over the beneficiary’s life expectancy prevent large lump‑sum taxes.
Maintaining Benefits: By keeping distributions small, beneficiaries remain eligible for Supplemental Security Income (SSI) and Medicaid.
Controlled Spending: Trustees can direct funds toward care, therapy, housing, and other essentials without giving the beneficiary direct control.
SECURE 2.0: Charitable Remainder Beneficiaries
Under SECURE 2.0, a qualified charity can be named as a remainder beneficiary of an SNT. In practice, this means parents can ensure any remaining retirement funds support a cause aligned with their child’s disability once the child passes away.
Example: Suppose a parent names an SNT for their autistic child as the beneficiary of a $500,000 IRA. Under SECURE 2.0, the trustee distributes RMDs over the child’s life expectancy. When the child dies, any leftover funds flow automatically to the Autism Society.
ABLE Account Expansion
ABLE accounts are tax‑advantaged savings vehicles for people with disabilities. SECURE 2.0 increases the eligibility onset age from 26 to 46. This change, effective for taxable years beginning after December 31, 2025, allows individuals who become disabled later in life to open ABLE accounts and retain benefits. Trustees should consider funding ABLE accounts for beneficiaries who become disabled between ages 26 and 46.
Action Plan for Trustees
Review Existing Special Needs Trusts: If the trust was drafted before the SECURE Act, update language to allow the trustee to accept retirement benefits and stretch distributions over the beneficiary’s life expectancy.
Coordinate with Retirement Account Custodians: Ensure beneficiary designations correctly name the SNT rather than the individual. Verify that custodians recognize the trust as an Eligible Designated Beneficiary.
Explore Charitable Remainder Options: Discuss with the grantor whether a charitable remainder aligns with their values and whether the trust instrument should specify charitable beneficiaries.
Educate Beneficiaries: Explain the tax and benefits implications of stretching distributions to family members who might otherwise expect a lump sum.
Monitor ABLE Accounts: For beneficiaries between ages 26 and 46, evaluate whether an ABLE account would complement or replace trust distributions after 2025.
Practical Considerations and Challenges
Guardianship and Consent
If the beneficiary lacks capacity, the trustee must work with a guardian or attorney‑in‑fact to coordinate withdrawals and ensure compliance. Detailed record‑keeping is essential.
Coordination with Other Trust Assets
RMDs may not cover all expenses. Trustees should integrate distributions with other trust assets, such as Social Security benefits, personal injury settlements, or assets placed in the trust by parents or guardians. When distributions cover qualified disability expenses, the trust reduces spending from principal.
Tax Planning
Even though life‑expectancy payouts minimize taxes, they still generate taxable income. Trustees should coordinate with accountants to optimize timing and manage bracket creep.
State Law Considerations
State trust and tax laws may affect how distributions are treated. Some states exempt certain retirement income from taxation; others do not. Trustees should consult qualified counsel to ensure compliance.
Conclusion
The SECURE Act and SECURE 2.0 represent the most significant changes to retirement account inheritance in decades. For trustees administering special needs trusts, these laws create opportunities to preserve tax benefits, maintain public assistance eligibility, and incorporate charitable legacies. They also require action: updating trust documents, coordinating beneficiary designations, and educating families. Staying informed allows trustees to navigate these rules confidently and secure the long‑term well‑being of beneficiaries.