Opinion: I want to leave a Roth IRA to my sister with special needs – what’s the best way to do it?

Q.: I have a Roth IRA that I would like to leave to my sister. She has mental health issues and I want to have a way to leave money to distribute monthly without paying everything in management fees. Do you have any suggestions? Thank you.


A.: Rachel,

Thanks for reading the columns and asking the question. Two basic options spring to mind.

Before I get into the two most common techniques I see for controlling the flow of money to a beneficiary, I want to point out that you should consult with an attorney to determine what would work best for you and your sister. In order for your wishes to be carried out, you must have all applicable documents properly drawn up and executed.

Read: Do I have to file a tax return if most of my income comes from Social Security?

In particular, if your sister is receiving or may be eligible to receive any kind of assistance from state or federal programs, it is imperative that you work with a lawyer who specializes in “special needs” planning. This area of ​​law can become quite complex and additional assets or income from an inheritance can reduce or eliminate these benefits.

That said, probably the most popular option for providing monthly income to a beneficiary would be to leave the Roth IRA to a trust set up for their benefit. Monthly payments would be determined based on the guidelines written in the trust document. You can also give the trustee some flexibility to pay additional amounts at various times or under certain circumstances. Any funds left over when your sister dies could be made available to family, friends or charity.

Leaving the assets in a trust provides some protection against your sister’s decision-making as well as creditors and scammers. For example, these trusts generally do not allow the trustee to disburse funds to pay off student loans for the beneficiary’s new boyfriend or a boat for a neighbor’s birthday. These are two attempts to scam heirs that I have seen that have been thwarted by trusts.

While some flexibility can be built into the trust agreement, it is difficult to ensure that the language of the trust meshes well with tax law and other rules such as those affecting people with special needs. specials. Do not attempt to create a trust using over-the-counter software. Hire a qualified attorney.

An obvious disadvantage of using a trust is the cost. It costs money upfront to create trust. When you pass and the trust recovers the assets there are ongoing asset management, tax, accounting and legal fees, so trusts tend to be better options with larger amounts or when issues arise. special needs apply.

Instead of a trust, you could arrange to have an “immediate” annuity purchased for your sister upon your death. An annuity would provide a guaranteed monthly income. Checks come in regularly for as long as you want, up to its entire life, however long it lasts. The annuity company issues a simple 1099-R that she can use to file her personal tax return. No accounting fees, legal fees or trust tax returns are required.

The main disadvantage of an annuity for your sister is its limited flexibility if her needs change. Checks will continue to arrive and cannot be changed. The funds are not invested as they would be in a trust, so inflation can erode its purchasing power. Also, there is usually no access to additional funds beyond payments and there are no funds left for anyone else after their death. Now, there are annuity contracts that meet some of the limitations of traditional immediate annuities, but these will pay a lower monthly amount.

Using an annuity would not be as viable if it were a traditional IRA due to taxation and the SECURE Act rules for inherited IRAs. An annuity can work for your sister because you’re working with a Roth IRA and the account can be emptied immediately after you pass, tax-free. This would satisfy the rules of the SECURE Act and make the funds available to purchase the annuity.

Even though the annuity approach is more what you would want for your sister than the trust approach, you should still consult a good estate planning lawyer because from your question it sounds like he would best to organize your estate plan. compel the purchase of the annuity. Otherwise, your sister may have unlimited access to the funds.

If you have a question for Dan, please. send him an e-mail with “MarketWatch Q&A” on the subject line.

Dan Moisand is a Financial Planner at Moisand Fitzgerald Tamayo and serves clients nationwide from offices in Orlando, Melbourne and Tampa Florida. His comments are for informational purposes only and cannot replace personalized advice. Consult your advisor to find out what is best for you. Some questions are edited for brevity.

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