Life and Death Planning for Retirement Benefits

Chapter 6: Leaving Retirement Benefits in Trust

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directly, the IRT is not suitable for a client who wants RMDs accumulated and held in the trust for future distribution to the same or another beneficiary. 6.2 The Minimum Distribution Trust Rules As explained in Chapter 1 , once a retirement plan or IRA owner (the “participant”) dies, the retirement plan or IRA must make certain annual required minimum distributions RMDs) to the beneficiary(ies) of the account. The most desirable form of post-death payout, generally, is annual instalments over the life expectancy of the beneficiary, because this allows the longest tax deferral (or tax-free accumulation, in the case of a Roth plan). See ¶ 1.1.03 , ¶ 1.5.05 . This sought- after “stretch” or “life expectancy” payout is available only for benefits payable to a “Designated Beneficiary” ( ¶ 1.7.03 ), which generally means an individual. However, IRS regulations allow a trust to qualify for this favorable form of payout if various requirements, explained in this ¶ 6.2 and in ¶ 6.3 , are met. If retirement benefits are left to a “see-through trust” ( ¶ 6.2.03 ), the benefits can be distributed in annual instalments over the life expectancy of the oldest trust beneficiary, just as if the benefits had been left to an individual human Designated Beneficiary ( ¶ 1.5.05 ). In contrast, if the trust does not qualify as a see-through trust under the rules explained here, the retirement benefits must be distributed under the “no-DB rules.” The no-DB (no Designated Beneficiary) rules require that all sums be distributed out of the plan within five or six years after the participant’s death, if the participant died before his required beginning date (RBD) ( ¶ 1.5.06 ); or (if the participant died after his RBD) over the remainder of what would have been the participant’s life expectancy ( ¶ 1.5.08 ). Distribution over the life expectancy of a beneficiary usually provides substantially longer deferral than distribution under the no-DB rules. The fact that a trust qualifies as a see-through trust does not mean that the trust is the best choice as beneficiary of the retirement benefits. Making benefits payable to a trust of which the participant’s surviving spouse is the life beneficiary results in substantially less deferral than would be available (via the spousal rollover) for benefits left to the spouse outright even if the trust qualifies as a see-through; see ¶ 3.3.02 (B). Also, benefits left to a trust may be subjected to high trust income tax rates ( ¶ 6.5.01 ), even if the trust qualifies as a see-through. Another reminder: Complying with the IRS’s minimum distribution trust rules is not a prerequisite of making retirement benefits payable to a trust. If a trust named as beneficiary of a retirement plan flunks the rules, the trust will still receive the benefits; the trust just will not have the option of using the life expectancy of the oldest trust beneficiary as the Applicable Distribution Period (ADP; ¶ 1.2.03 ) for those benefits. There are some situations in which it may make little or no difference whether the trust complies with the trust rules:  Client’s goals; beneficiaries’ needs. It may be appropriate to sacrifice the deferral possibilities of the life expectancy payout method in order to realize the client’s other goals. See ¶ 6.4.05 (D) for an example. Similarly, if it is expected that the retirement plan will When and why see-through trust status matters