Take-Away: The SECURE Act 2.0 provides some practical relief to special needs trusts, specifically an applicable multi-beneficiary trust, or AMBT.

Background: Under the SECURE Act, if an IRA was made payable to an irrevocable trust that was established for a disabled or chronically ill individual, the stretch distribution rule was available for these eligible designated beneficiaries, but only if the irrevocable trust met the definition of an applicable multi-beneficiary trust, or AMBT.

AMBT: The SECURE Act provides that an AMBT could have other beneficiaries besides the disabled or chronically ill trust beneficiary, i.e. the other trust beneficiaries did not have to be eligible designated beneficiaries. However, those other trust beneficiaries had to be individuals for the trust to qualify as an AMBT.

Impact of Charity as Trust Beneficiary. A charity is not an individual. Consequently, if a charity was named as a remainder beneficiary of a trust that was established for a disabled or chronically ill beneficiary, that would have eliminated the trustee’s ability to stretch payments from the inherited IRA payable to the trust over the eligible designated beneficiary’s life expectancy. Rather, the trust would have been required to use the remaining single life expectancy of the deceased IRA owner, or the 5-year distribution rule, depending upon the age of the IRA owner when he/she died.

SECURE Act 2.0: The SECURE Act 2.0 changed the AMBT rules. Now, a qualified charity (qualified being described under IRS rules, presumably a 501(c)(3) charity) will be treated as a designated beneficiary of an AMBT, thus permitting a stretch distribution from the inherited IRA to the trust using the special needs beneficiary’s, i.e. the disabled or chronically ill beneficiary, life expectancy.

Example: Fred has a  grandson, Pete, who is seriously afflicted muscular dystrophy. Fred creates a special needs trust for Pete, and names this trust as the beneficiary of Fred’s IRA. Pete is an eligible designated beneficiary. The trust provides that upon Pete’s subsequent death, the trust’s remainder beneficiary will be the American Muscular Dystrophy Society, a 501(c)(3) tax exempt organization. After Fred’s death, distribution from the inherited IRA can now be paid to the AMBT over Pete’s life expectancy. On Pete’s subsequent death, what is left in the trust, including the balance of the inherited IRA, will be paid to the Society for its general charitable purposes.

Effective Date: Unlike many of the SECURE Act 2.0 provisions, this change to the AMBT ‘rules’ is immediately effective.

Conclusion: This would be a good time to revisit existing third-party special needs trusts to see if they might benefit from this Tax Code amendment arising from the SECURE Act 2.0.