Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

avoided by distributing, each year, the required percentage of the retirement plan assets and the required percentage of the nonretirement assets. This method of implementing the unitrust approach was blessed, for a marital deduction trust, in Rev. Rul. 2006-26 ( ¶ 6.1.02 (D)).

Transferring a retirement plan out of a trust or estate

When a trust terminates, the trustee can transfer, intact, to the residuary beneficiaries of the trust, any IRA or other retirement plan then held by the trust. The same applies to the participant’s estate (if the benefits pass to the estate as either named or default beneficiary), and to the estate of a beneficiary who dies prior to withdrawing all the benefits from an inherited retirement plan: The estate can transfer the IRA or plan to the estate’s beneficiaries. This ¶ 6.1.05 explains the legal basis under which such transfers are permitted. See ¶ 6.5.07 – ¶ 6.5.08 for the federal income tax effects of such a transfer. A. Transferability of retirement benefits . An IRA is transferable. The owner of an IRA (whether such owner is the participant or the beneficiary of the account) can transfer the ownership of the account to another person or entity. Nothing in § 408 (the statute the creates IRAs) prohibits transferring an IRA; on the contrary, the Code recognizes that IRAs can be assigned, since it discusses transfer of an IRA in connection with divorce ( § 408(d)(6) ) and pledging the account as security for a loan ( § 408(e)(4) ). The Treasury’s Chief Counsel confirmed in CCA 2006-44020 that an IRA is transferable. The question is not whether the account can be transferred; the question is whether such transfer will terminate the account’s status as an IRA, causing an immediate deemed distribution. See ¶ 2.1.06 . With respect to nonIRA plans, such as QRPs, the plan account generally “may not be assigned or alienated” ( § 401(a)(13)(A) ); this is ERISA’s “anti-alienation rule” (see ¶ 4.4.09 (A)). The anti-alienation rule is intended to prevent assignment (voluntary or involuntary) of the benefits to creditors of the participant or beneficiary, or any attempt to borrow against or sell the benefits. The rule has no bearing on the disposition of the benefits at the death of the participant (when the benefits are “assigned” to the beneficiary), or at the subsequent death of the beneficiary (which, again, causes the benefits to be “transferred” to someone else) or upon the termination of the existence of the beneficiary (in the case of an estate or trust which is closing). Transfers of benefits out of a trust or estate to the trust or estate beneficiary(ies) are transfers to the participant’s beneficiary, not transfers away from the beneficiary. Numerous PLRs have recognized these principles; the PLRs take it for granted that the benefits can be transferred out of an estate or trust, and address only the income tax consequences of such transfers. See “C” below. For an opposing viewpoint, see “D” below. A trust can make such a transfer to its beneficiaries regardless of whether the trust qualifies as a “see-through trust” under the minimum distribution rules (¶ 6.2) ; an estate can make such a transfer even though an estate can NEVER qualify as a “Designated Beneficiary” ( ¶ 1.7.04 ). The transfer of an inherited retirement plan or IRA from a trust or estate to the beneficiary(ies) of the trust or estate has no effect on the Applicable Distribution Period for the benefits. Such a transfer is solely for the purpose of allowing the trust or estate to terminate or otherwise cease to have control of the benefits. Furthermore, there is not much point in doing this type of transfer (and the plan probably won’t allow it anyway) if the plan is a qualified plan and is