Life and Death Planning for Retirement Benefits

Chapter 6: Leaving Retirement Benefits in Trust

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10020). PLR 2004-53023 refers favorably to trust language that would “wall off” the benefits from being used to pay the decedent’s debts and expenses (though the trust in question did not contain such language).  The trustees asserted either that applicable state law prohibited use of the retirement benefits for this purpose (either directly, or indirectly through the application of some fiduciary standard), or that state law exempted such benefits from creditors’ claims. See PLRs 2002-23065, 2002-28025, and 2006-08032 for examples of this language; other PLRs with similar language and holdings are 2001-31033; 2002-21056, 2002-21059, 2002- 21061; 2002-35038; 2002-44023; 2004-10019–2004-10020; 2005-38030; and 2006- 20028.  The participant’s estate was a beneficiary of the trust as of the date of death (by virtue of the estate’s right to receive funds from the trust for payment of debts, expenses, and/or taxes), but the estate was “removed” as a beneficiary by complete distribution of its share of the trust prior to (or “as of”) the Beneficiary Finalization Date ( ¶ 6.3.03 ). In PLRs 2004- 32027–2004-32029, “as of” September 30 of the year after the year of the participant’s death, the trustee had withdrawn, from the IRA that was payable to the trust, sufficient funds to pay all anticipated debts, expenses, and taxes of the participant’s estate, including a reserve for income taxes that would be due on the IRA distributions themselves. The IRS ruled that on the applicable September 30 the only remaining beneficiaries of the trust were the participant’s three children. See ¶ 6.3.03 (A).  The benefits were subject to the trust’s contingent liability to pay additional estate taxes even after the Beneficiary Finalization Date (for example, if the tax bill were later increased as a result of audit) because there were no other assets available. PLRs 2004-32027–2004- 32029, 2004-40031. In short, there is no PLR or other IRS pronouncement in which the IRS has disqualified a trust either on the basis of a clause permitting the trustee to make payments to the participant’s estate, or on the basis of the trust’s actually making such payments. The IRS seems to agree it would be absurd to disqualify a trust merely because the retirement benefits payable to it may be liable for the participant’s debts, administration expenses, and estate taxes. All retirement benefits are potentially subject to those liabilities regardless of whether a trust is the named benefi ciary. While the threatening IRS hints on the subject make it worthwhile to draft to avoid the issue (see Form 4.2, Appendix B ), there is little to fear even if a trust does contain this clause. A deceased participant’s revocable trust can make an election to be treated as if it were the decedent’s probate estate, or part of the probate estate, for income tax purposes during the administration period. § 645 . A trust’s “645 election” does not adversely affect the trust’s see- through status. Even though the effect of such an election is that the estate and trust are treated as one entity “for all purposes of Subtitle A” of the Code (Reg. § 1.645-1(e)(2)(i) , (3)(i) ), “ ...the IRS and Treasury intend that a revocable trust will not fail to be a trust for purposes of section 401(a)(9) merely because the trust elects to be treated as an estate under section 645, as long as the trust Effect of § 645 election on see-through status