Life and Death Planning for Retirement Benefits

312

Life and Death Planning for Retirement Benefits

individuals cannot later be added to the class of beneficiaries by adoption. See Form 4.3, Appendix B . The rule that it must be possible to identify the oldest member of a class of beneficiaries is similar to the rule against perpetuities, in that the mere possibility that an older beneficiary could be added to the trust after the applicable date is enough to make the trust flunk this rule, regardless of whether any such older beneficiary ever is actually added (unless the potential older beneficiary can be disregarded under the rules explained at ¶ 6.3.04 ). Kit and Julia Example: Kit leaves his IRA to a trust that is to pay income to his daughter Julia for life, and after her death is to pay income to her widower (if any) for his life, with remainder to Kit’s grandchildren. Kit dies, survived by Julia and several grandchildren, none of whom disclaims his interest in the trust. Kit’s trust flunks Rule 3, because Julia, after Kit’s death, could marry a new husband who is older than she. Thus an older beneficiary could be added to this trust after the applicable date, and accordingly as of the applicable date we cannot “identify” the oldest beneficiary of the trust. The “identifiable” test is applied, first, as of the date of death. If the trust flunks the requirement as of the date of death, but the “unidentifiable” beneficiaries are “removed” by some means prior to the Beneficiary Finalization Date ( ¶ 6.3.03 ), the trust would “pass.” Unfortunately, if a trust flunks this test as of the date of death it often is not the type of mistake that can be fixed by the usual remedies of disclaimer or distribution. In the Kit and Julia Example, Julia’s future husband(s) can’t disclaim (and the trustee can’t distribute their share of the trust by the Beneficiary Finalization Date) because we don’t know who they are yet—that’s the whole problem! B. What does “oldest beneficiary” mean? For RMD purposes, “older” does not necessarily mean “born first”; it means having a shorter life expectancy. For RMD purposes, everyone born in the same year has the same life expectancy. See PLR 2002-35038. C. Anyone in the world younger than a certain individual. Sometimes the IRS expresses the “identifiable” requirement thus: “ ...the identity of the beneficiaries ...can be determined by perusing ...[the trust’s] terms.” PLRs 2005-21033, 2005-22012, and 2005-28031 use that exact phrase, and PLR 2002-09057 uses similar wording. What this phrase means, if anything, has yet to be established. If the IRS is suggesting that the “identifiable” test requires only that the identity of the beneficiaries can be determined from the trust instrument then the rule is redundant: A trust under which the identities of the beneficiaries could NOT be determined by “perusing” the trust instrument would presumably not be valid under state law and therefore would violate Rule #1 ( ¶ 6.2.05 ). To date, the IRS has not used Rule 3 in any published ruling to disqualify trusts that are payable to broad or amorphous classes of unknown future beneficiaries or where access to the benefits is dependent on the trustee’s discretion. In PLR 2002-35038, the IRS approved a trust where the remainder interest could be appointed to any individual in the world who was not born in a year prior to the birth-year of the donor’s oldest issue living at the donor’s death. (This ruling is flawed, because the IRS fails to consider what becomes of the benefits if the power of appointment is not exercised; see ¶ 6.3.11 .)

Rule 4: Documentation requirement