Life and Death Planning for Retirement Benefits

CHAPTER 6: LEAVING RETIREMENT BENEFITS IN TRUST

Minimum distribution, income tax, and trust accounting considerations when retirement benefits are left in trust. 6.1 Trust as Beneficiary: Preliminaries

This ¶ 6.1 provides, first, a checklist for drafting a trust to be named as beneficiary of a retirement plan. The rest of ¶ 6.1 covers how trust accounting rules apply to retirement benefits payable to a trust as beneficiary; the transfer of retirement benefit accounts into and out of trusts; and the “individual retirement trust” (or “trusteed IRA” or “IRT”).

Trust as beneficiary: Drafting checklist

When the estate plan calls for naming a trust as beneficiary of retirement benefits, use this checklist to review planning and drafting considerations uniquely applicable to such assets: 1. Is there a strong estate planning reason to name a trust as beneficiary, or is there a way to achieve the planning goals without incurring the risks and complications of naming a trust? In view of the complications and other disadvantages involved in making retirement benefits payable to a trust, the bias is in favor of leaving the benefits outright to the intended beneficiaries unless there is a compelling reason to leave them in trust. The rest of this checklist deals with drafting the trust, once it has been decided to name a trust as beneficiary. 2. If the trust contains special provisions dealing with retirement benefits, be sure you define “retirement benefits.” 3. Draft the dispositive terms so they will operate on the retirement benefits in accordance with the donor’s intent. For example: If the trust’s dispositive terms will distinguish between “income” and “principal” consider how these terms will apply to the retirement plan and to distributions from it. See ¶ 6.1.02 . If a beneficiary is given the annual right to withdraw “five percent of the trust principal,” will the withdrawal power apply to the gross value of any retirement benefit that is payable to the trust (with or without a reduction for the built-in income tax “debt”)? Or will it apply only to amounts the trustee has actually withdrawn from the retirement plan? 4. If the trust is intended to qualify for the federal estate tax marital deduction, comply with the requirements described in ¶ 3.3.02 – ¶ 3.3.09 and ¶ 6.1.02 (D). 5. Determine whether see-through trust status is important ( ¶ 6.2.01 ), and, if it is important, make sure the trust complies with IRS’s RMD trust rules. ¶ 6.2 – ¶ 6.3 . “Precatory” language urging the trustee to take steps to achieve the stretch payout is not enough; see ¶ 4.5.06 (A). The trust should be drafted so that it qualifies as a see-through trust without the necessity of any trust amendments or reformations after the client’s death. 6. If the trust is to be divided into multiple shares or subtrusts for the benefit of different beneficiaries upon the client’s death, see ¶ 6.3.01 regarding whether, if retirement benefits are allocated only to one particular share, beneficiaries of the other shares are disregarded for RMD purposes, and ¶ 6.3.02 regarding how the “separate accounts” rule applies to trusts. If the benefits are to pass to multiple beneficiaries, and separate accounts treatment