Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

continues to be a trust under state law.” TD 8987, 67 FR 35731, 2002-1 CB 852, 857 (“Trust as Beneficiary”).

6.3 RMD Rules: Which Trust Beneficiaries Count?

There is no special difficulty in determining whether the trust is valid under state law (Rule 1; ¶ 6.2.05 ), and irrevocable at the participant’s death (Rule 2; ¶ 6.2.06 ), or that proper documentation has been supplied to the plan administrator (Rule 4; ¶ 6.2.08 (A)). The hard part of testing a trust under the RMD trust rules is determining whether all trust beneficiaries are individuals (Rule 5; ¶ 6.2.09 ), and which trust beneficiary is the oldest (Rule 3; ¶ 6.2.07 ). The difficulty is determining which trust beneficiaries “count” for purposes of these two rules, and which beneficiaries may be disregarded. This ¶ 6.3.01 deals with the following situation: Retirement benefits are payable to a trust. Upon the participant’s death, that trust is divided or split into two or more separate shares or “subtrusts,” and the retirement benefits are allocated to fewer than all of such shares or subtrusts. A typical example would be a trust that divides, upon the participant’s death, into a marital trust and a credit shelter trust and under which the benefits are allocated entirely to the marital trust; see Foster Example, ¶ 6.1.05 (B). Another common case is a trust under which the benefits are entirely allocated to the share of one of multiple beneficiaries, or may not be used to fund a particular beneficiary’s share. The question discussed here is whether the “identifiable” and “all-beneficiaries-must-be- individuals” tests RMD trust rules 3 and 5; ¶ 6.2.03 ) are applied to the entire trust ( i.e., all possible beneficiaries of all shares and subtrusts created by the trust instrument), or rather are applied only to the beneficiary, share, or subtrust that ends up with the retirement benefits. Can we disregard beneficiaries of shares/subtrusts that do not receive any portion of the retirement benefits? As the following discussion shows, the answer to this question is surprisingly unclear. A. Beneficiaries with respect to the trust’s interest in the benefits. Reg. § 1.401(a)(9)-4 , A-5(a), tells us that, if the trust rules are complied with, “the beneficiaries of the trust (and not the trust itself)” will be treated as having been designated as beneficiaries by the employee. Although A-5(a) uses the phrase “beneficiaries of the trust,” all other references to the see-through trust concept specify that it is not all beneficiaries of the trust who are so treated, but rather only the beneficiaries of the trust with respect to the trust’s interest in the employee’s benefit. See Reg. § 1.401(a)(9)-4 , Q-5; A-5(b)(3), (c); § 1.401(a)(9)-8 , A- 11 (last sentence). Thus, the regulations seem to state that, even if the benefits are payable to a funding trust (such as the participant’s revocable living trust), we are not required to test all potential beneficiaries of the funding trust, if the benefits are allocated only to certain beneficiaries or to particular subtrusts created under the funding trust. Instead, this wording suggests, we look only at the beneficiaries of the subtrust(s) that actually receive(s) (or possibly only at beneficiaries that could receive) the retirement benefits, because they are the only beneficiaries “with respect to the trust’s interest in the benefits.” Unfortunately the IRS pronouncements (all of which are in private letter rulings) are not consistently supportive of this view; see (C)–(F) below. Sometimes the IRS If benefits are allocated to a particular share of the trust