sniff test?

[tacks]

Please read the following and tell me how this smells to you:

Son is named beneficiary of deceased Father's IRA.

But he is advised to 'disclaim' the gift. Disclaim is an "unqualified and irrevocable refusal" of a gift. IRC 2518

So the $$ then stays in the estate.

Afterwhich the $$ is then placed in to "special needs trust" for son.

good solid estate planning? Or does it smell like a pile of XXXX?

(i really have no idea myself as it's not something i generally look at)

[DaveO]

Is the son disabled? This may be a way to get the benefit of the money without losing other benefits such as SS disability or SSI. I'm far from expert in this area but I've heard of this strategy in such cases.

[JohnH]

First question is approx how much is the IRA? The only reason for asking is to estimate the amount of tax payable if he leaves things as they are. Then compare any tax savings or other potential monetary benefits to any additional costs or research involved to get things right via the estate. It may be that the only parties who benefit are the executor and/or lawyer.

Edit: Aha! Disablity - hadn't thought of that one...

[Bees Knees]

TTB, page 21-34 says:

Special needs trust. A trust designed to allow assets to be set
aside for a beneficiary who is disabled without disqualifying the
beneficiary from government benefits.

Since the funds used for the special needs trust are coming from the decedent’s IRA, the estate or trust must pay tax on it. TTB, page 13-24 says:

Beneficiary not an individual. If the beneficiary is not an individual
(such as his or her estate), or a designated beneficiary
is not named by September 30 of the year following the year of
the IRA participant’s death, RMD is determined under one of the
following.
• If the decedent was already receiving RMD at the time of death,
use the Single Lifetime Table with the age of the decedent as of
his or her birthday in the year of death, reduced by one for each
year since the year of death.
• If the decedent was not yet receiving RMD at the time of death,
the entire account must be distributed by the end of the fifth
year following the year of the decedent’s death. No distribution
is required for any year before that fifth year.

So in order for the funds to remain in the estate as funds for a special needs trust, my guess is the decedent was already receiving RMD at the time of death, and the special needs trust thus gets to continue to take distributions using the Single Lifetime Table. If that is the case, tax paid by the trust will be spread out over a number of years. Similar to the tax the beneficiary might pay as well.

So given those facts, my guess is this is not being done to avoid or lower taxes. The special needs trust is being set up so that the son will not lose government benefits. The government benefits may be far greater than any tax increase as a result of having the special needs trust pay the tax verses having the son directly receive the IRA and pay tax.

[Davc]

I'm not certain that would be a qualified disclaimer for tax purposes since the person disclaiming is still the ultimate beneficiary. There is a specific exception for a spouse which would indicate that it doesn't fly for anyone else.

http://www.taxalmanac.org/index.php/Reg._25.2518-2

(5) The interest disclaimed must pass either to the spouse of the decedent or to a person other than the disclaimant without any direction on the part of the person making the disclaimer.

[Burke]

The rules for handling estate matters may vary from state to state, and I would attempt to download the law in the particular state involved here. I know I recently had to do so, and when a beneficial interest in an estate is disclaimed, it is treated as if the heir pre-deceased the decedent. That means the interest passes under the will, either to a subsequent heir so directed, or it remains part of the estate assets to be distributed to any others by the terms of the will. Tax Almanac resource quoted above is excellent information.

Here you have a named beneficiary, and the custodian must distribute the assets in the case of a disclaimer, either to a secondary bene so named on the IRA, or to the estate. If the son is the only heir, this may work out. If the will specifies a trust be set up for him, all is okay. However, if there are other heirs under the will and no special needs trust is designated, they might have a problem.

[Burke]

Please read the following and tell me how this smells to you:

Son is named beneficiary of deceased Father's IRA.
But he is advised to 'disclaim' the gift. Disclaim is an "unqualified and irrevocable refusal" of a gift. IRC 2518
So the $$ then stays in the estate.
Afterwhich the $$ is then placed in to "special needs trust" for son.
good solid estate planning? Or does it smell like a pile of XXXX?
(i really have no idea myself as it's not something i generally look at)

Apparently this can be accomplished for a disabled person. See "self-settled trusts.' Here is an article written by an attorney in Michigan about them.

www.fragilex.org/html/self-settled.htm

[Burke]

Here is another good article from Learning Disabilities Assn of America.

https://www.ldanatl.org/aboutld/parents/help/print_specialneedstrusts.asp

[Davc]

Those links address only the legal issues, not the tax issues.

[Burke]

True, but all OP originally wanted to know was if it involved good "estate planning," or was it on the shady side.

[Bees Knees]

I'm not certain that would be a qualified disclaimer for tax purposes since the person disclaiming is still the ultimate beneficiary. There is a specific exception for a spouse which would indicate that it doesn't fly for anyone else.

http://www.taxalmanac.org/index.php/Reg._25.2518-2

(5) The interest disclaimed must pass either to the spouse of the decedent or to a person other than the disclaimant without any direction on the part of the person making the disclaimer.

Section 2518 is part of a series of code sections that deal with gift tax and whether a transfer is considered a completed gift or not.

Maybe they don't care about whether or not it is treated as a completed gift. Maybe the total estate is below the estate and gift tax thresholds. Maybe the only reason for doing it this way is so that the son retains government benefits.

There are many things in life that are done without having some tax benefit associated with it.

[tacks]

Is the son disabled?

Yes, disabled.

[tacks]

First question is approx how much is the IRA?

52,000 dollars