Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

benefits by means of a disclaimer from an individual primary beneficiary to a trust named as contingent beneficiary works as a qualified disclaimer only if the disclaiming primary beneficiary is (1) the surviving spouse or (2) not a beneficiary of the trust. PLR 2008-46003 involves a disclaimer disaster caused by violation of this rule. The participant’s prenuptial agreement required her to leave her IRA to a QTIP trust for the life of her spouse. The participant’s children were the remainder beneficiaries of the QTIP trust. Instead of doing what she had agreed to do, the participant named her children directly as beneficiaries of her IRA. Perhaps what the family should have done when this was discovered at the participant’s death was to go to state court seeking an order enforcing the prenuptial agreement and reforming the beneficiary designation to say what the prenuptial agreement said it should say (see ¶ 4.5.05 ). Instead, the children disclaimed their rights as named beneficiaries of the IRA. The disclaimer caused the IRA to pass to the participant’s estate as default beneficiary, whence it passed to the QTIP trust. However, the children did NOT disclaim their remainder interests under the QTIP trust. Thus, despite the disclaimer, this IRA was going to pass right back to the disclaiming children (on the surviving husband’s later death), as remainder beneficiaries of the QTIP trust, so the disclaimer violated § 2518(b)(4) and was not a qualified disclaimer. As a nonqualified disclaimer, the children’s well-intentioned action was treated as a taxable gift of the entire IRA value by the children to the QTIP trust. There was no marital deduction for the transfer to the QTIP trust because, as far as the IRS was concerned, the IRA went from the participant to the children to the QTIP, not directly from the participant to the QTIP. There is no mention of the income tax effects (see ¶ 4.4.03 ). B. Property must pass “without direction” by disclaimant. § 2518(b)(4) also requires that the property pass, as a result of the disclaimer, to whomever it passes to without any direction on the part of the disclaimant. Disclaimers by the surviving spouse are NOT excepted from this rule. If a surviving spouse named as outright beneficiary is to disclaim, she cannot thereafter retain any discretionary distribution powers over the disclaimed benefits (unless limited by an ascertainable standard; Reg. § 25.2518-2(e)(1) ). For example, if the spouse is disclaiming benefits that will pass, as a result of her disclaimer, to a credit shelter trust for the benefit of the deceased participant’s issue, she cannot be a trustee of that trust if the trustee has, say, discretionary power to “spray” trust income among the issue; nor can she have a power of appointment enabling her to, e.g. , decide which issue will receive the trust after her death. See PLR 2005-22012, in which the surviving spouse (because of this rule) disclaimed her testamentary power of appointment under a trust with respect to an IRA that flowed to such trust by virtue of her disclaiming the IRA as beneficiary. The requirement that property must pass “without any direction” on the part of the disclaimant would presumably preclude a disclaimer by one discretionary trust that causes the disclaimed property to pass to a second discretionary trust with the same trustees. C. How to determine who gets the disclaimed benefits. Generally, unless the plan documents provide otherwise, the disclaimed benefits pass as if the disclaimant had died before the participant. For example, normally a disclaimer by the primary beneficiary will