IRA Distributions to Third-Party Special Needs Trusts: Avoiding the ‘Five-Year Rule’

For many parents, the majority of their savings is held in some kind of a retirement account, often an Individual Retirement Account (IRA). At age 70 ½, an IRA account holder faces the Required Beginning Date, when he or she must take mandatory distributions from the IRA. These payments are determined by the government and are known as Required Minimum Distributions.

If the parents have a child with special needs, it is often important for the parents’ estate plan to direct Required Minimum Distributions following the parents’ death into a special needs trust (SNT) that has been set up for the child. For income tax purposes, it is sometimes best to stretch these distributions out over as long a period as possible, particularly if the IRA is a large one.

How long the distributions can be stretched out depends. Typically, if an IRA account holder names a “designated beneficiary,” the designated beneficiary’s age determines the amount of the distributions. If there is no designated beneficiary, a “five-year rule” for distribution applies, meaning that the account must be paid out in full within five years after the death of the account owner.

Unfortunately, some SNTs may not qualify as a “designated beneficiary” under the IRS rules. As long as all of the SNT’s remainder beneficiaries are individuals, required distributions are allowed to be made based on the age of the eldest remainder beneficiary. However, sometimes SNTs are drafted so that entities that don’t have life expectancies — such as a charity — are potential beneficiaries. In such cases, the five-year rule applies and IRAs can’t generally avoid the income tax consequences of expedited withdrawal.

The rules governing IRA distributions to SNTs are exceedingly complicated. This is all the more reason to consult with an attorney such as Evan Farr, whose practice focuses on planning for adults and children with special needs.

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About Evan H Farr, CELA, CAP

Evan H. Farr is a 4-time Best-Selling author in the field of Elder Law and Estate Planning. In addition to being one of approximately 500 Certified Elder Law Attorneys in the Country, Evan is one of approximately 100 members of the Council of Advanced Practitioners of the National Academy of Elder Law Attorneys and is a Charter Member of the Academy of Special Needs Planners.


  1. If a special needs individual has received $10,000 as result of judgment in law suit and the money has been placed in a Supplemental Needs Trust, what happens to the money if the beneficiary dies?

    • This money would have needed to go into a first-party SNT, which required payback to Medicaid if the beneficiary dies. After Medicaid is paid back, if there’s any balance, it can go to the contingent beneficiares named in the trust.

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