Title

When to stretch and when not to stretch an inherited IRA: The special case of the special needs trust

Document Type

Article

Publication Date

2015

Department

Marketing

Abstract

Use of the stretch strategy for an inherited IRA offers many attractive features for estate planning. In the area of special needs trusts (SNTs), many advisors also favor the stretch strategy to fund or help fund the SNT. Nevertheless, this article suggests there are at least three scenarios facing SNT planning where the stretch strategy may not be prudent: (1)where the IRA is the sole source of funding for the SNT and required minimum distributions are insufficient to meet the present needs of the beneficiary; (2) where the life expectancy of the beneficiary is projected to be short and other end-of-life issues and expense favor greater funding of present needs over future needs; and (3) where a contingent beneficiary becomes disabled after the creation of the SNT, the trustee is empowered to create a new third-party trust to support the newly disabled beneficiary, and the IRA is the sole source of funding for the new trust. This article reviews these issues in the context of a growing market for special needs planning, a review of the conventional planning wisdom on the stretch strategy, why special needs planning requires special care, and why scenarios where the stretch is not prudent create special implications for financial planners.

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