Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

is important, leave the benefits to the various beneficiaries directly ( i.e., do not leave the benefits to a trust to be divided among the multiple beneficiaries) in the beneficiary designation form. See Form 3.5, Appendix B . For the same reason, if leaving benefits to a trust for the participant’s surviving spouse, and the trust is to pass outright to the participant’s issue on the death of the surviving spouse, name the trust as beneficiary only if the participant’s spouse survives the participant; name the issue directly as contingent beneficiaries if the spouse does not survive. See ¶ 6.3.02 and Form 3.4, Appendix B . 7. To avoid the issue of whether funding a pecuniary bequest with the “right to receive IRD” is a taxable transfer ( ¶ 6.5.08 ), avoid having retirement benefits pass through a pecuniary funding formula. If benefits must pass to a trust, make them payable to a trust that will not be divided up. If benefits are going to a trust that will be divided, either specify clearly (in both the beneficiary designation form and the trust instrument) which trust share these retirement benefits go to (so that the benefits pass to the chosen share directly, rather than through the funding formula), or use a fractional formula (fulfillment of which does not trigger immediate realization of IRD) rather than a pecuniary formula (which may). 8. Including a spendthrift clause poses no RMD issues, even in a conduit trust. Since the Code itself imposes spendthrift restrictions on retirement plans (see § 401(a)(13) ), such clauses are favored by government policy. 9. Consider whether certain classes of income should be directed to certain beneficiaries. For example, in a trust that authorizes the trustee to accumulate retirement plan distributions ( ¶ 6.3.07 ), the trust could direct the trustee to distribute all “investment income” to the life beneficiary, to avoid having the post-2012 “surtax” on investment income ( ¶ 2.1.02 ) imposed on the trust; this could make sense if it is expected that the trust beneficiary will probably not have a high enough income to incur the surtax. Such an allocation of a specific class of income is respected for income tax purposes if it has independent economic effect; see ¶ 7.4.03 (E). 10. If the trust has charitable and noncharitable beneficiaries, either direct the retirement benefits to be used to fund the charitable gifts (if the goal is to have the benefits pass income tax-free to the charities) or forbid such use (if the goal is to achieve a stretch payout for the trust’s individual beneficiaries). Suppose a trust is the beneficiary of a deceased client’s $1 million IRA. The trust provides that the trustee is to pay all income of the trust to the client’s surviving spouse for life, and at the spouse’s death the trustee is to distribute the principal of the trust to the client’s children. The trust receives a $50,000 required minimum distribution RMD; see Chapter 1 ) from the IRA. Is that distribution “income” that the trustee is required to pay to the spouse? Or is it “principal” that the trustee must hold for future distribution to the client’s children? Or some of each? A. Trust accounting income vs. federal gross income. A retirement plan distribution generally will constitute gross income to the trust for federal income tax purposes ( ¶ 6.5.01 ), but that same distribution may be “principal” (or “corpus,” to use the IRS’s preferred term) for trust accounting purposes: Trust accounting for retirement benefits