ElderLaw News

ElderLaw News is a weekly e-newsletter that brings you reports of legal developments and other trends of vital interest to seniors and their advocates. This newsletter is brought to you by The Estate Planning & Elder Law Firm, P.C., William S. Fralin, Esq., President.

Planning For Retirement Benefits Revisited

After the recent newsletter article "Life and Death Planning for Retirement Benefits," another attorney made two follow-up points.

The first point concerns the 10% penalty for distributions from an IRA or retirement plan account prior to the participant turning age 59 1/2. The original article stated that the penalty generally applied; however, there are exceptions. One of the exceptions occurs when a distribution is made to a participant who is younger than 59 1/2 years of age, and who is disabled. For the purpose of this exception, the term disabled means "unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-term duration." Note that this definition requires total disability. Internal Revenue Service Publication 590 states that a person is considered disabled "... if you can furnish proof that you cannot do any substantial gainful activity...." IRS Publication 590 further states that the distribution must be "because" of the disability to qualify for the exemption; however, the IRS, in Private Letter Ruling 2001-26037, stated that any distributions commenced after the participant became disabled would be exempt from penalty. Another reader asked that I call to your attention that distributions following the death of a participant are also exempt from the 10% penalty. Additionally, one must to remember that, although a distribution is exempt from the 10% penalty, the participant (or recipient after the death of the participant) must report the distribution as taxable income.

The second point concerns designating a supplemental needs trust as a beneficiary of an IRA or retirement plan account. In the prior article, one should designate a trust as a beneficiary only if there is a compelling reason to do so. The reason for this statement is the complexity that such an arrangement creates in preserving the right to withdraw the death benefits over the beneficiary's life expectancy. There is a compelling reason, however, designating as a beneficiary a supplemental needs trust created for a disabled person as the beneficiary. If the disabled person is designated as the beneficiary, then the death benefit under the IRA or retirement plan account will be a countable resource for Medicaid or SSI eligibility. A supplemental needs trust, however, is not a countable resource because the trustee has discretion regarding whether to distribute trust funds to or for the benefit of the disabled person. If the supplemental needs trust passes outright at the disabled beneficiary's death to now-living individuals, such as the beneficiary's siblings, the trust may withdraw the IRA or retirement plan account over the life expectancy of the oldest beneficiary.


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The Estate Planning & Elder Law Firm, P.C. is an elder law firm. We represent older persons, disabled persons, their families, and their advocates. The practice of elder law includes estate planning, estate and trust administration, powers of attorney, advance medical directives, titling of assets and designations of beneficiaries, guardianships, conservatorships, and public entitlements such as Medicaid, Medicare, Social Security, and SSI, disability planning, income tax planning and preparation, care management, and fiduciary services. For more information about The Estate Planning & Elder Law Firm, P.C., please visit our website at http://www.chroniccareadvocacy.com.

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