Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

which the spouses’ joint life expectancy is to be used as the ADP. The person who must fulfill this requirement is the participant (not the trustee, as is the case when the participant dies). C. If incorrect trust documentation is supplied. If the participant (in the case of lifetime RMDs) or the trustee (in the case of post-death RMDs) completes the certifications incorrectly, or sends a copy of the wrong trust instrument to the plan administrator, the regulations let the plan off the hook. The plan will not be disqualified “merely” because of these errors, provided “the plan administrator reasonably relied on the information provided and the required minimum distributions for calendar years after the calendar year in which the discrepancy is discovered are determined based on the actual terms of the trust instrument.” Reg. § 1.401(a)(9)-4 , A-6(c)(1). This wording suggests that the trust can still qualify as a see-through, even though incorrect information was provided to the administrator initially. The 50 percent penalty (which is payable by the person required to take the RMD; see ¶ 1.9.02 ) will be still be based on what should have been distributed “based on the actual terms of the trust in effect.” Reg. § 1.401(a)(9)-4 , A-6(c)(2). The result of compliance with the first four rules is that the trust beneficiaries will be treated, for most purposes, as if the participant had named them directly as beneficiaries (for exceptions see ¶ 6.3.02 (A) and ¶ 1.6.06 ). The next step, therefore, is to make sure that these trust beneficiaries qualify as Designated Beneficiaries, i.e., that they are individuals. ¶ 1.7.03 . The first pitfall under this rule is that an estate is not an individual and therefore an estate cannot be a Designated Beneficiary. See ¶ 1.7.04 . Therefore, if any part of the trust’s interest in the benefits will pass to the participant’s estate, there is a risk that the participant has no Designated Beneficiary; see ¶ 6.2.10 . Once that hurdle is cleared we consider which trust beneficiaries, if any, can be disregarded in applying this rule. See ¶ 6.3. Typically, a trust provides that the trust must or may contribute funds to the decedent- trustor’s estate for payment of the decedent’s debts, expenses, and taxes. Such a provision raises a concern: If the estate (a nonindividual) is deemed to be a beneficiary of the trust, the trust will “flunk” Rule #5 ( ¶ 6.2.09 ). However, despite suggestions in some PLRs (see, e.g. , PLR 9809059) that such a provision might disqualify a trust, there is no evidence that the IRS really does (or ever did) take this position. There is no published instance of any trust’s ever having lost see-through status on account of such a clause. Many PLRs blessing see-through trusts do not even mention the subject; see PLRs 2002- 08031, 2002-11047, 2002-18039, 2003-17041, 2003-17043, and 2003-17044. If this type of clause is a problem, the risks of disqualification can easily be avoided either at the planning stage or (with a bit more care) in the post-mortem stage. Every letter ruling that does mention such a clause in a trust finds some reason why the trust nevertheless qualifies as a see-through. The IRS has recognized trusts as see-throughs, despite a trust clause calling for payments to the estate for debts, expenses, and/or taxes, where:  The trust forbade the distribution of retirement benefits to the participant’s estate (PLRs 2002-35038–2002-35041) or to any nonindividual beneficiary (PLRs 2004-10019–2004- Rule 5: All beneficiaries must be individuals Payments to estate for expenses, taxes