The SECURE Act Exception: Stretch IRAs for Disabled Beneficiaries

Families caring for a child with a disability live in a world where small planning details can make an enormous difference. Over the past few years, one of the biggest shifts in that planning came from the SECURE Act of 2019. It quietly rewrote the rules for inherited retirement accounts and, for most families, eliminated one of the most valuable planning tools we had. For decades, beneficiaries could inherit an IRA and “stretch” the distributions over their own lifetime. The longer the life expectancy, the longer the money could remain invested and growing tax-deferred. That stretch strategy was one of the most powerful compounding engines in the tax code. The SECURE Act largely ended that. Today, most non-spouse beneficiaries must withdraw the entire inherited IRA within ten years of the original owner’s death. It doesn’t matter whether the beneficiary is 30 years old or 60 years old. The clock starts immediately, and the account must be emptied within that ten-year window. But there is an important exception that many families have never heard about. If your child is disabled or chronically ill, the stretch IRA may still survive for them. In the language of the law, they may qualify as an Eligible Designated Beneficiary, or EDB. When that status applies, the inherited IRA can still be distributed over the beneficiary’s life expectancy rather than being forced out within 10 years. For families with meaningful retirement assets and a disabled child, that single rule can change the entire tax picture. When structured correctly, the lifetime tax savings can easily reach hundreds of thousands of dollars. I have seen situations where thoughtful planning preserved more than $500,000 that would otherwise have been lost to compressed distributions and higher tax brackets. Yet most families — and frankly many advisors — don’t realize this exception even exists. To understand why the exception matters so much, it helps to understand what the SECURE Act changed. Before January 1, 2020, a non-spouse beneficiary who inherited a traditional IRA could take annual required minimum distributions based on their own life expectancy. If a 30-year-old inherited a $2 million IRA, the first distribution might have been roughly $40,000 to $50,000. The remainder could stay invested inside the IRA and continue compounding tax-deferred for decades. The SECURE Act eliminated that structure for most beneficiaries. Now, someone inheriting a $500,000 IRA at age 35 may face withdrawals of roughly $50,000 per year over 10 years, rather than spreading those distributions across a lifetime. Because IRA withdrawals are taxed as ordinary income, those larger distributions often push beneficiaries into higher tax brackets. In some cases, they even trigger additional taxes, such as the 3.8% Net Investment Income Tax. The result is simple: the government collects its taxes much faster. Disabled and chronically ill beneficiaries, however, were intentionally carved out of this rule. Congress recognized that individuals with disabilities often rely on these assets for lifetime support. As a result, they remain eligible for the original life-expectancy stretch. The IRS definition of disability here mirrors the Social Security standard. Under Internal Revenue Code Section 72(m)(7), an individual is considered disabled if they cannot engage in substantial gainful activity due to a medically determinable physical or mental impairment expected to result in death or last at least twelve months. In practical terms, this often includes individuals receiving SSI or SSDI benefits. Many people with autism, Down syndrome, cerebral palsy, severe mental illness, and other long-term disabilities meet this standard. If your child already receives Social Security disability benefits, they will typically qualify under the tax rules as well. That said, the planning doesn’t end there. In fact, this is where things often become complicated. For families relying on programs like SSI or Medicaid, an outright inheritance can create a serious problem. Assets received directly by the beneficiary may disqualify them from those benefits. That means the inherited IRA cannot simply be left to the child outright. Instead, the account typically needs to flow into a properly structured Special Needs Trust. And that trust must qualify under very specific tax rules. The IRA custodian must be able to “look through” the trust to identify the disabled beneficiary. In technical terms, this is called a see-through trust. To qualify, the trust must meet several requirements: it must be valid under state law, it must become irrevocable at death, the beneficiaries must be clearly identifiable from the document, and the trust documentation must be provided to the IRA custodian by October 31 of the year following death. That last step is surprisingly easy to miss. I have seen well-designed trusts fail simply because the documentation never reached the custodian on time. When that happens, the account is often defaulted to the ten-year rule, eliminating the very benefit the family intended to preserve. The language inside the trust also matters. The document must clearly establish the disabled individual as the primary beneficiary of the IRA distributions. If the structure allows someone else to benefit ahead of the disabled beneficiary, the IRS may refuse to recognize the disabled individual as the qualifying beneficiary for stretch purposes. There is another wrinkle as well. When multiple beneficiaries are named in a trust, the IRS uses the oldest beneficiary's life expectancy to calculate required distributions. If the trust includes others in a way that triggers this rule, the stretch period can shrink dramatically. Once the trust and the beneficiary qualify, families face another important planning decision: whether to structure the trust as a conduit trust or an accumulation trust. A conduit trust requires that each year’s IRA distribution be distributed directly to the beneficiary. This structure typically produces lower taxes, because the income is taxed at the beneficiary’s personal tax rate rather than the compressed tax brackets applied to trusts. However, those distributions count as income for SSI purposes. Even relatively small annual IRA distributions can reduce or eliminate SSI benefits. An accumulation trust works differently. The trust receives the IRA distribution but retains it instead of distributing it to the beneficiary. The trustee can then invest and manage those funds for the beneficiary’s future needs. This structure protects government benefits, because the funds remain inside the trust. The trade-off is taxation. Trust tax brackets are extremely compressed, reaching the highest federal rate at very low income levels. That means accumulated income inside the trust can be taxed at rates exceeding 40 percent. Families therefore face a genuine trade-off: preserve government benefits or minimize income taxes. For many families that rely heavily on SSI and Medicaid, benefit protection is the priority, which is why accumulation trusts are often chosen despite the higher tax cost. There is, however, a middle path that thoughtful planning can sometimes use. One of the most overlooked strategies involves coordinating IRA distributions with an ABLE account. ABLE accounts allow individuals with disabilities to save and invest money while preserving eligibility for certain government benefits. Contributions grow tax-free, and balances up to $100,000 do not count as a resource for SSI. In some situations, families structure the trust as a conduit trust so that the IRA distribution flows to the beneficiary at their lower personal tax rate. The beneficiary can then contribute part of those funds to their ABLE account each year, sheltering the money from SSI resource limits while still benefiting from lower tax rates. This approach requires careful coordination among the trustee, the ABLE account, the beneficiary, and the IRA custodian. But when executed properly, it can preserve a meaningful portion of benefits while significantly reducing lifetime taxes. The numbers can be dramatic. When distributions are compressed over ten years, the tax cost can easily exceed $600,000 on a large IRA. Stretching those distributions over a lifetime may reduce that burden by hundreds of thousands. With thoughtful coordination using trusts and ABLE accounts, the savings can become even larger. All of this leads to one final point that deserves some blunt honesty. Many estate planning attorneys are excellent at drafting wills and basic trusts. But retirement account beneficiary trusts are a very specialized corner of the tax code. They involve detailed coordination between trust law, IRS regulations, Social Security rules, and retirement plan administration. If the documents are drafted incorrectly, the consequences can be enormous. A poorly structured trust can eliminate the stretch IRA entirely or unintentionally disqualify a beneficiary from essential benefits. For that reason, families should work with professionals who specifically understand special needs planning and retirement account beneficiary trusts. The cost of doing it correctly is modest compared to the cost of getting it wrong. For families with a significant IRA and a disabled child, this is planning worth addressing now. Confirm that your child qualifies under the disability rules. Review or establish a properly drafted Special Needs Trust. Decide whether a conduit or accumulation structure makes sense for your situation. Ensure the trust is correctly named as the IRA beneficiary, and coordinate the strategy with your financial plan. The SECURE Act changed the rules for almost everyone. But for families caring for a disabled child, an important exception remains. When it’s structured correctly, that exception can preserve decades of tax-efficient growth and provide meaningful financial security for the person who needs it most.