Naming a Third-Party Special Needs Trust as a Beneficiary of Retirement Accounts

A third-party special needs trust (SNT) is an essential estate planning tool for families who want to provide financial support for a loved one with a disability without jeopardizing their eligibility for government benefits. When structured correctly, naming a third-party SNT as the beneficiary of retirement accounts—such as an IRA or 401(k)—can ensure long-term financial security for the beneficiary while preserving access to programs like Medicaid and Supplemental Security Income (SSI).

One of the main benefits of directing retirement assets to a third-party SNT is protecting the beneficiary’s eligibility for means-tested government assistance. If a person with a disability directly inherits retirement funds, their assets may exceed the financial limits required to qualify for SSI or Medicaid, leading to a loss of essential benefits. By placing the funds in a properly drafted SNT, the trust can manage distributions in a way that supplements, rather than replaces, government assistance.

Another advantage is structured asset management. Retirement accounts often require beneficiaries to take required minimum distributions (RMDs), which could result in financial mismanagement if left directly to the individual. A trustee managing the SNT can ensure that distributions are used for the beneficiary’s needs, such as housing, therapy, or assistive technology, without disrupting public benefits.

However, careful planning is necessary due to complex tax implications. Since inherited retirement accounts are subject to income tax upon withdrawal, it is important to work with an attorney or financial planner to structure the trust properly. A conduit or accumulation trust within the SNT can help manage distributions efficiently while minimizing tax burdens.

By naming a third-party special needs trust as a beneficiary of retirement accounts, families can provide long-term financial stability for their loved one with a disability while ensuring continued access to critical public benefits.