Planning Options with Retirement Benefits (Special Needs Alliance: Special Needs Require Special Attorneys‪)‬

The 2010 Tax Relief Act raised the amount each of us can give away free of federal gift and estate taxes to $5 Million. Even though the new law only provides a two year "fix," most prognosticated think these increased exemptions from estate and gift taxes will be extended and, as a consequence, most individuals will no longer have to be concerned with these taxes. Unfortunately, the Act does not provide comparable income tax relief benefits. As a result, even families of modest means, whose major assets are retirement benefits, cannot cross income tax planning off their "TO DO" list. Plus, families that include an individual with special needs must contend with the convergence of several competing interests--means-tested benefit issues, income tax planning and charitable goals--when developing an estate plan with retirement benefits. Most retirement benefits (like 401(k) or 403(b) plans and IRAs) grow tax deferred, while held in the account. However, income taxes will be owed when the funds are paid out, regardless of whether paid to the account owner during his or her lifetime or to a special needs trust for a child with disabilities or other beneficiary at the account owner's death. Standard income tax planning involves strategies to stretch out distributions from tax deferred assets to limit income taxes due--strategies that work for beneficiaries who are not on means-tested government benefit programs. For beneficiaries of means-tested government benefit programs, such as SSI, Medicaid and food stamps, trying to combine special needs planning and income tax planning is like mixing oil and water, however. It is very hard to do.