Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

not the trust itself) “will be treated as having been designated as beneficiaries of the employee under the plan ....” Reg. § 1.401(a)(9)-4 , A-5(a). However, treating the trust beneficiaries as if they had been named as beneficiaries directly does not get you very far if the trust beneficiaries themselves do not qualify as Designated Beneficiaries. Accordingly, Rule 5 is that:

5.

All trust beneficiaries must be individuals. ¶ 6.2.09 – ¶ 6.2.11 .

The IRS calls a trust that passes these rules a see-through trust , because the effect of passing the rules is that the IRS will look through, or see through, the trust, and treat the trust beneficiaries as the participant’s Designated Beneficiaries, just as if they had been named directly as beneficiaries of the retirement plan, with two significant exceptions: First, “separate accounts” treatment is never available for purposes of determining the ADP for benefits paid to multiple beneficiaries through a single trust that is named as beneficiary; see ¶ 6.3.02 (A). Second, a trust cannot exercise the spousal rollover option, even if it is a see-through. Reg. § 1.408-8 , A-5(a). See ¶ 1.6.06 .

Dates for testing trust’s compliance with rules

The regulations give no specific testing date for the requirement that the trust must be valid under state law. The examples in the regulation refer to a trust that is valid under state law as of the date of death. ¶ 6.2.05 . The irrevocability requirement must be met as of the date of death. ¶ 6.2.06 .

For the documentation requirement deadline, see ¶ 6.2.08 .

The requirement that the beneficiaries be identifiable must be met as of the date of death. However, if the trust flunks this requirement as of the date of death, it may be possible to cure the problem by actions prior to the Beneficiary Finalization Date. See ¶ 6.3.03 . The requirement that all beneficiaries must be individuals must be met as of the Beneficiary Finalization Date. See ¶ 6.2.10 , ¶ 6.3.03 . The first rule is that “The trust is a valid trust under state law, or would be but for the fact that there is no corpus.” Reg. §1.401(a)(9)-4, A-5(b)(1). There is no PLR, regulation, or other IRS pronouncement giving an example of a trust that would flunk this requirement. A testamentary trust can pass this test, despite the fact that, at the moment of the participant’s death, the trust is not yet in existence; see Reg. §1.401(a)(9)-5, A-7(c)(3), Examples 1 and 2. There is no requirement that the trust be “in existence” or be funded at the time it is named as beneficiary or at the participant’s death. The requirement is that the trust, once it is funded with the retirement benefits after the participant’s death, must be valid under state law. The second rule is: “The trust is irrevocable or will, by its terms, become irrevocable upon the death of the” participant. Reg. § 1.401(a)(9)-4 , A-5(b)(2); § 1.408-8 , A-1(b). Including in the trust the statement “This trust shall be irrevocable upon my death” is not necessary, since any testamentary trust or “living trust” automatically becomes irrevocable upon the testator’s or donor’s death, and therefore passes this test. On the other hand it does no harm to Rule 1: Trust must be valid under state law Rule 2: Trust must be irrevocable