Life and Death Planning for Retirement Benefits

Chapter 6: Leaving Retirement Benefits in Trust

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cooperative financial institution, and then transfer it to the beneficiaries. Since options #1–#3 involve substantially increased taxes or costs, #4 is encouraged.

Can a participant transfer an IRA to a living trust?

A participant’s transfer of an IRA (or other retirement plan account) to a trust that is entirely a grantor trust as to him ( ¶ 6.3.10 ) should not be treated as an “assignment” of the account, since an individual and his grantor trust are deemed to be in effect “the same person” under Rev. Rul. 85-13, 1985-1 CB 184, provided that no person other than the participant can receive any distributions from the trust during the participant’s life. The trust into which the IRA is transferred would be named as both owner and beneficiary of the IRA. If the trust permits distributions to anyone other than the participant during the participant’s life, the transfer might (despite Rev. Rul. 85-13) be considered a transfer of the benefits to another person, which would terminate the account’s status as an IRA. See ¶ 2.1.04 (B). Thus, the typical living trust provision that allows distributions to be made during the grantor’s lifetime for the benefit of the grantor’s dependents may not be suitable for a trust that is to hold the grantor’s retirement benefits prior to his death. Before permitting an IRA owner to transfer his IRA into a grantor trust, the IRA provider might require that the trust be irrevocable and nonamendable. If the grantor transfers his IRA to an amendable or revocable trust, the IRA administrator would have no way to know whether the trust had later been revoked or amended in some way that would disqualify the IRA. To date there is no ruling or authority confirming or contradicting these conclusions with respect to a participant’s transfer of his benefits to a grantor trust. See ¶ 4.6.03 (C) regarding the ability of a beneficiary to assign an inherited plan to a grantor trust. Individual retirement arrangements can be established in either of two legal forms, a custodial account ( § 408(h) ) or a trust ( § 408(a) ); both are treated identically for all tax purposes. Most IRAs are established as custodial accounts rather than as trusts. This Chapter deals with naming a trust as beneficiary of an IRA or other retirement plan; however, it should be noted that in some cases an IRA owner can use a “trusteed IRA” (also called an “individual retirement trust,” or “IRT”) in place of a standard custodial IRA payable to a separate trust as beneficiary. A Roth IRA can also be in the form of a trusteed IRA. An IRT can combine the substantive terms of a trust and the tax characteristics of an IRA or Roth IRA. The client (IRA owner) puts the trust terms and conditions into the IRT document. The document must comply with the minimum distribution rules and all other requirements of § 408 , but otherwise there’s no limit on what it may provide, other than what the IRT provider is willing to accept. Troy Example: Troy has a $1 million trusteed IRA with XYZ Trust Company. XYZ manages the investments and pays the annual RMD to Troy, along with such additional distributions as Troy may request from time to time. Upon Troy’s death, XYZ, as Trustee and IRA provider, continues to hold the account for the benefit of Troy’s beneficiary, his wife Joy. As provided in the IRA- trust document, XYZ pays to Joy, annually, the greater of the RMD or the income earned by the IRA, and such additional amounts as XYZ, as trustee, deems advisable for her health and support. Individual retirement trusts (trusteed IRAs)