Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

have to be cashed out shortly after the participant’s death to pay estate taxes or for other reasons, there is no point in making the trust qualify as a see-through.  Trust beneficiary older than participant (plans that permit stretch payouts). If the participant dies after his RBD, leaving benefits to a see-through trust, the ADP is the life expectancy of the participant or of the oldest trust beneficiary, whichever is longer. If the trust is not a see-through, the ADP is the participant’s life expectancy. If the participant is past his RBD, and the oldest trust beneficiary is the same age as (or older than) the participant, the ADP will be the same whether or not the trust qualifies as a see-through. Thus, qualifying as a see-through trust is IRRELEVANT if (1) the participant was past his RBD when he died and (2) the oldest trust beneficiary is either close in age to or older than the participant. However, if the plan in question pays death benefits only in the form of a lump sum (see ¶ 1.5.10 ), a trust-named-as-beneficiary will have to qualify as a see-through trust even if the participant died after his RBD and was younger than (or the same age as) the oldest trust beneficiary, IF the trust wants to stretch distributions over the participant’s remaining life expectancy. The trust will be able to use that “short stretch” payout only if it can have the lump sum transferred out of the lump-sum-only plan by direct rollover to an inherited IRA (see ¶ 4.2.04 ); and the nonspouse beneficiary rollover option is available only to individual beneficiaries and see-through trusts. See ¶ 4.2.04 (C).  Charitable trust. Passing the trust rules is irrelevant for an income tax-exempt charitable remainder trust; see ¶ 7.5.04 .  Lump sum is best form of distribution . There is no need to comply with the RMD trust rules if the trust qualifies for and plans to take advantage of a lump sum distribution income tax deal such as that available for “net unrealized appreciation” (NUA) of employer stock or for a participant born before 1936. See ¶ 2.4 – ¶ 2.5 . Here are introductory points regarding how to deal with the “minimum distribution trust rules.” A. Should you discuss RMDs in the trust instrument? The RMD trust rules do NOT require the trust instrument to specify that the trustee must withdraw the annual RMD from the retirement plan. § 401(a)(9)(B) requires the RMD to be distributed from the plan or IRA to the trust-named-as-beneficiary whether or not the trust instrument mentions the subject. Nevertheless, practitioners frequently do mention the requirement of withdrawing the RMD in the trust instrument, because it doesn’t hurt to remind the trustee that he is supposed to comply with the minimum distribution rules. Also, including language dealing with the minimum distribution rules makes it clear that the drafter was aware of these rules and that the dispositive terms of the trust are not meant to conflict with them. In a marital deduction trust (¶ 3.3) it is common to specify that the trustee must withdraw from the retirement plan “the greater of” the income (that the spouse is entitled to under the marital deduction rules) and the RMD. Finally, if it ever becomes necessary to interpret the trust instrument in some unforeseen fashion, the court will look to the grantor’s intent, so specifying that the grantor intends the trust to qualify as a see-through should help in that situation. Avoid tying trust distributions too tightly to the minimum distribution rules, which could result in the beneficiary’s receiving more or less than the trust-grantor envisioned if the minimum RMD trust rules: Ground rules