Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

was obtained reforming the beneficiary designation to name the daughter as beneficiary. The IRS refused to grant a ruling that the daughter should be treated as the participant’s “Designated Beneficiary” for minimum distribution purposes. One could say that this negative ruling simply reflects the factual differences between the 2006 and 2007 PLRs, but that’s not what the ruling says. The language of the later ruling suggests rather that the IRS is closing the door on post-death reformations as a way to improve the Designated Beneficiary situation for RMD purposes, reversing the prior longstanding trend of the IRS’s apparent strong approval of post-death “cleanup” actions; see ¶ 4.5.06 for more on the longstanding trend and the new IRS position. Though the outlook is cloudy for reformation of a beneficiary designation form as a way to improve the minimum distribution results, it still can be useful for other “cleanup” jobs, such as undoing a designation signed under “undue influence” (PLR 2007-07158) or (as a way to reduce probate costs) redirecting benefits from an estate (as named beneficiary) to a trust (that was the residuary beneficiary of the estate) (see PLR 2006-52028). “[A]bsent specific authority in the Code or Regulations, the [post-death] modification of ...[a trust] will not be recognized for federal tax purposes.” —Frances V. Sloan, IRS, in PLR 2010- 21038. The post-death “reformation” of the decedent’s trust or will should be granted by a court and recognized by the IRS if it appears that (for example) the attorney who drafted the document made a mistake and did not write what the now-deceased client told him to write. But many PLR requests involving post-death reformations do not involve such “scrivener’s errors.” Rather, it often appears that the income tax effects of the estate plan were simply ignored until after the client’s death, at which point “reformation” was used (by collusion among the beneficiaries, with the consent of a compliant judge) to redraft the documents in a way that (they hoped) would produce better income tax results. The IRS is not going to accept this type of “reformation.” See, e.g. , PLR 2009-44059, in which the participant died leaving his IRA to a trust for the benefit of his surviving spouse and issue. The surviving spouse and the remainder beneficiaries, with state court blessing, agreed to terminate the trust (so the surviving spouse could roll over the IRA held in the trust). The IRS denied the rollover. How can the IRS ignore a state court order reforming a will or trust? It’s easy. With regard to questions of state law, state probate court judgments and rulings are NOT binding on the IRS. The only state court whose judgment the IRS must defer to on such questions is the highest court in the state. Estate of Bosch, 387 U.S. 456 (1967). Thus, generally, the IRS is not impressed with lower state court orders, and will make its own independent judgment regarding state law matters, even if you have a court order supporting your position. A. Reformation of trust to achieve see-through status. See ¶ 6.2 – ¶ 6.3 for the rules a trust must comply with in order to qualify as a “see-through trust” for minimum distribution purposes (so that benefits can be paid out to the trust over the life expectancy of the oldest trust beneficiary rather than under the “no-DB” rules). The IRS has in the past “blessed” post-mortem court actions that caused noncomplying trusts to be reformed, settled, divided into separate trusts, or otherwise re-engineered to comply with the trust rules. See, e.g. , Reformation of trust or will