Just before the end of 2019, Congress passed and the President signed a spending bill that includes significant changes to retirement savings accounts. Known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act, this legislation changes rules around retirement plans in several key ways. Families with special needs members should pay close attention, as these changes will have an impact on their estate planning.

Stretch IRAS
The biggest change eliminates “stretch” IRAs in most cases. To understand the change’s importance, a little background is needed.  IRAs are personal savings plans that allow you to set aside money for retirement and get a tax deduction for doing so. Earnings in a traditional IRA generally are not taxed until distributed to you. Any amount remaining in an IRA upon death can be paid to a beneficiary or beneficiaries, but the beneficiary is required to take a certain amount of money out of the account each year and pay taxes on it, called “required minimum distributions.”

Under the previous law, if you named anyone other than a spouse as the beneficiary of your IRA, the beneficiary could choose to take distributions over his or her lifetime and pass any remaining funds onto future generations (this was called the “stretch” option). The required minimum distributions were calculated based on the beneficiary’s life expectancy, so the younger the beneficiary, the smaller the annual distributions and the longer the inherited account money could be stretched. This allowed the money remaining in the account to grow tax-deferred over the course of the beneficiary’s life and to be passed on to his own heirs.

The SECURE Act requires most beneficiaries of an IRA to withdraw all the money—and pay the applicable income taxes—from the IRA within 10 years of the IRA holder’s death. In many cases, these withdrawals will take place during the beneficiary’s highest tax years, meaning that the elimination of the stretch IRA is effectively a tax increase on many Americans. This provision applies to those who inherit IRAs starting on January 1, 2020. 

An Exception for Beneficiaries with Special Needs
The SECURE Act makes exceptions for IRA beneficiaries who are considered disabled according to the IRS. These individuals can receive the funds in the form of required minimum distributions based on their life expectancy rather than within 10 years.  Also excluded from the 10-year rule are beneficiaries who are considered chronically ill or who are less than 10 years younger than the account owner.  

But what happens if an IRA owner wants to designate as the beneficiary a person with a disability who is also the beneficiary of a special needs trust (SNT)?  The new law states that the IRA owner can designate an SNT as the beneficiary, and the trustee can use the required minimum distributions to pay for the care and support of the person with special needs. The way to set this up is through what’s known as a “see-through” trust.

See-Through Trusts
On the IRA owner’s death, all the remaining money in the IRA goes into this trust and is distributed by the trustee according to certain structures and rules. The deferred taxes are due when the money is withdrawn from the trust in the form of required minimum distributions. If the beneficiary is a person with special needs (and certified as such by the IRS at the time of the IRA account owner’s death), distributions would be paid out over the beneficiary’s life (rather than within 10 years per the new rules in the SECURE Act). 

Note that there are two types of see-through trusts: a conduit trust, in which the money is distributed to the primary beneficiary immediately, and an accumulation trust, in which the money is distributed over time. Both are irrevocable trusts, and both must be permissible under applicable state laws. Accumulation trusts work well for special needs beneficiaries because they can also receive government benefits for their care and support.

Other Beneficiaries Who Do Not Have Disabilities
Planning gets even more complicated if there are multiple IRA beneficiaries (siblings and grandchildren, for example).  The trust will only be exempt from the 10-year rule if the individual with special needs is the only beneficiary of the trust during her life. If the trust also permits distributions to a spouse or children, it won't qualify and the IRA will have to be completely withdrawn within 10 years. The best solution may be to establish a see-through accumulation trust for the special needs relative, and set up a separate trust for other heirs.

In light of the new rules, consult with your special needs planner to review the language in your special needs trust (if you have one). You want to be sure that your retirement assets will be distributed in a way that best protects the money you have set aside for your loved ones.
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For more on the SECURE Act, click here.

The Department of Health and Human Services (HHS) will now give states the option to obtain a portion of their federal Medicaid funding via so-called "block grants." This potentially dramatic change is billed as a way to improve state flexibility in running Medicaid programs. Although beneficiaries with disabilities should not be directly affected, the change could result in significant service cuts for millions of adults who secured Medicaid coverage through the Affordable Care Act.
Since its launch in 1965, Medicaid has operated as an open-ended entitlement program, meaning it does not include any pre-set funding limits. It is a joint partnership between the federal government and the states: Each state runs its own Medicaid program with the help of matching funds from the federal government.


The Trump administration has been exploring options for block-granting Medicaid since last March. A block grant funding structure would end the open-ended nature of Medicaid’s federal-state partnership. Instead, states that choose the block grant arrangement would receive a pre-set amount of money in exchange for increased flexibility in how they administer their programs. 


The question of what increased program flexibility would look like is central to all debates surrounding block grants. Advocates of block grants—from the Reagan administration to former House Speaker Paul Ryan—have argued that block-granting is necessary to ensure the program's long-term funding stability. Disability rights advocates, among other groups, fear it is just a back-door way to slash benefits.


Announced on January 30, 2020, the new HHS plan, dubbed "Healthy Adult Opportunity," would allow states to apply for waivers to cover healthy adults under age 65 using a block grant.  This means that the states most likely to apply for the waivers are those that have not expanded Medicaid under the Affordable Care Act but may now do so given the increased flexibility in how to design their program, or those that have expanded Medicaid but wish to reduce costs. 
But funds designated to pay for services for children, pregnant women, and people with disabilities could not be block-granted.  Likewise, states cannot block grant services that are required under the Medicaid statute, such as emergency and hospital services. The Affordable Care Act—specifically its much-publicized 10 essential health benefits provision—significantly expanded this list of required services.


On the other hand, states have significant discretion when choosing to fund other services, for example, various prescription drugs and dental care. States that opt for a block-grant funding structure would likely impose cuts to these services. States that choose to block grant could also impose higher premiums and co-pays than those currently allowed under Medicaid, and as well as work requirements for beneficiaries, an effort that has largely been stymied in the courts.  Moreover, if enrollment in Medicaid dramatically increases due to a health crisis or a recession, states that received a pre-set amount of funding may not have enough money to cover everyone, resulting in additional cuts to services.


Opponents of the block grant concept contend it is illegal because only Congress can make such program changes, and litigation against the proposal is almost certain.  In addition, it is unlikely that a state could get a waiver before 2021, when there may be a new federal administration.
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For more on the administration's block grant guidelines, click here.