In a previous entry, I cautioned readers of the potential disastrous federal income tax consequences that could result from a transfer of one’s IRA to their revocable trust. As you may recall, the transfer of an IRA to a revocable trust triggers the immediate income taxation of the entire IRA. While this remains true, the IRS’s recent ruling in PLR 201116005 distinguishes the different income tax treatment an IRA transfer to a special needs trust would receive.
The IRS has drawn the distinction that unlike a revocable trust, where the entire principal amount of the IRA would be considered for income tax purposes, in a special needs trust, only the income accrued and distributed to a beneficiary will be subject to federal income tax in that taxable year. This decision could prove to have far reaching implications.
I have encountered many clients whose estate planning goal is to ensure that assets are managed either for their benefit or the benefit of another because of a disability. Often, the best vehicle for this type of protection is the special needs trust. As a result of PLR 201116005, it is now possible to transfer an IRA to a special needs trust without triggering the immediate income taxation of the entire IRA. This ruling helps ensure that those disabled persons benefiting from this form of trust receive the maximum benefit from the funds available to them without losing a significant portion of those funds to taxes. I urge anyone that may find themselves in this position to consult an estate planning attorney because you may be able to benefit from this form of proper planning.
– Adam Abramowitz, J.D.