Life and Death Planning for Retirement Benefits

Chapter 6: Leaving Retirement Benefits in Trust

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distribution rules are changed. This happened when § 401(a)(9)(H) suspended required minimum distributions for the year 2009 ( ¶ 1.1.04 ). Under a trust that permitted the trustee to distribute to the beneficiary ONLY the “required” distribution and nothing else, the beneficiary received no distributions at all in 2009. B. Benefits and proceeds thereof. For purposes of minimum distribution rule testing, a trust’s interest in a retirement plan includes not just the retirement plan itself and the distributions from the retirement plan, but also the proceeds resulting from the trust’s reinvestment of the retirement plan distributions. Reg. § 1.401(a)(9)-5 , A-7(c)(1), third sentence. C. Benefits pass from one trust to another. If the beneficiary of the trust is another trust, then both trusts must qualify under the trust rules. Reg. § 1.401(a)(9)-4 , A-5(d). (Note: the IRS seems to ignore this requirement in some letter rulings.) However, if the second trust can be disregarded under the rules discussed at ¶ 6.3, the second trust does not need to comply with the trust rules. Under a conduit trust, for example, the trust’s remainder beneficiaries are disregarded. ¶ 6.3.05 (B). Thus, the remainder beneficiary of a conduit trust can be a trust that does not comply with the trust rules. D. Who tests compliance? The person primarily responsible for verifying that the trust qualifies as a see-through trust is the trustee. The trustee is the one who must comply with the minimum distribution rules by correctly calculating (and taking) the annual required distribution, because the trust will have to pay the penalty for failure to take the RMD ( ¶ 1.9.02 ). The trustee should obtain a legal opinion regarding the trust’s qualification as a see-through trust. The plan administrator of a QRP also cares about compliance, because failure to comply could lead to plan disqualification. The Code allows retirement plan death benefits to be distributed in annual instalments over the life expectancy of the participant’s Designated Beneficiary. ¶ 1.5.01 . Although the general rule is that a Designated Beneficiary must be an individual ( ¶ 1.7.03 ), the regulations allow you to name a trust as beneficiary and still have a Designated Beneficiary for purposes of the minimum distribution rules. Reg. § 1.401(a)(9)-4 , A-5(b), contains the IRS’s four “minimum distribution trust rules” (also called the RMD trust rules): What a “see-through trust” is; the five “trust rules”

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The trust must be valid under state law. ¶ 6.2.05 .

2. “The trust is irrevocable or will, by its terms, become irrevocable upon the death of the” participant. ¶ 6.2.06 .

3. “The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s benefit” must be “identifiable...from the trust instrument.” ¶ 6.2.07 .

4. Certain documentation must be provided to “the plan administrator.” ¶ 6.2.08 .

If the participant dies leaving his retirement benefits to a trust that satisfies the above four requirements, then, for most (not all!) purposes of § 401(a)(9) the beneficiaries of the trust (and