Life and Death Planning for Retirement Benefits

Chapter 4: Inherited Benefits: Advising Executors and Beneficiaries

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PLRs 2002-18039, 2005-22012, 2005-37044, 2006-08032, 2006-20026, 2007-03047, and 2007-04033. Despite this string of favorable rulings, however, PLR 2007-42026 ( ¶ 4.5.05 ) signaled a changing IRS attitude towards post-death state court actions reforming or interpreting trusts for minimum distribution purposes. PLR 2010-21038 (see quote at the beginning of this section) states the new IRS position on trust reformations loud and clear. In this PLR, “B” died leaving his IRA to a trust for “C” and “D.” C and D had both lifetime and testamentary powers of appointment over the trusts, including the power to appoint to charity ( i.e., a nonindividual beneficiary). After B’s death, the trustee obtained a court order reforming the trust—eliminating the charitable beneficiaries, prohibiting use of retirement benefits to pay taxes, requiring pass-through of IRA distributions to the individual beneficiaries, etc.—then sought an IRS ruling that the trust qualified as a see-through. The IRS refused to grant the ruling, citing, in support of its position, numerous cases as well as the possibility of collusive reformations solely for the purpose of reducing federal tax. The IRS ruled that “B” had “no DB.” B. Reforming will or trust for other reasons. There are reasons other than attempting to achieve see-through status why a post-death reformation could improve results with respect to retirement benefits. In PLR 2008-50004, the decedent’s IRAs became payable to his estate as beneficiary, as a result of a disclaimer by the named beneficiary of the IRA. The will provided for certain charitable bequests without specifying the funding source for payment of these bequests. A court reformed the will to provide that the IRAs would be the source of funding the charities’ shares of the estate, and the IRS allowed the transfer of the IRAs to the charities (see ¶ 6.1.05 , ¶ 7.4.05 ) in fulfilment of these shares. The combination of disclaimer and reformation diverted the IRAs to the charities without payment of income tax. Consider carefully what cleanup strategy to use. A “cleanup” does not always work as expected. For example, PLR 2008-46028 (also issued as PLR 2008-49020) involved a state court’s interpretation of a beneficiary designation form rather than a reformation. The decedent’s IRA beneficiary designation form said only, in the space provided for the name of the beneficiary, “as stated in wills.” The participant’s will left all of his estate (aside from some specific bequests of tangible personal property) to “Trust T.” Trust T provided for disposition of the entire trust (other than specific gifts of certain real estate) to eight individuals in specified percentages. Rather than obtaining a state court order simply confirming that the meaning of the beneficiary designation form was that the beneficiary of the IRA was “Trust T,” the executor obtained a state court order ruling that: The eight individuals should be treated as having been named directly as beneficiaries by the participant; the individuals were “Designated Beneficiaries” of the participant’s IRA within the meaning of the Code and regulations; and the “separate accounts” rule ( ¶ 1.8.01 ) was applicable in determining the applicable distribution periods for each beneficiary’s share of the benefits! Not only did this court ruling contradict the clear sense of the beneficiary designation form (which pointed to the beneficiary of the WILL, not the beneficiaries of the TRUST), it put the state Choose the right cleanup strategy