Life and Death Planning for Retirement Benefits

Chapter 6: Leaving Retirement Benefits in Trust

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seems to confuse this question with the entirely different issue of “separate accounts” treatment ( ¶ 6.3.02 ). B. Subtrust named directly as beneficiary of the benefits. One thing is clear: If the participant’s beneficiary designation form names the subtrust directly as beneficiary of the plan, rather than naming the funding trust, then the only beneficiaries who “count” for purposes of the trust rules are the beneficiaries of the subtrust named as beneficiary. PLR 2006-07031. See Form 3.5, Appendix B , for a sample beneficiary designation form leaving benefits in separate shares directly to separate trusts established under a single trust instrument. C. Benefits allocated pursuant to trustee’s discretion. If the trustee has discretion to decide which assets to use to fund which subtrust, and exercises its discretion by allocating the benefits to one particular beneficiary (or share), can other beneficiaries (or beneficiaries of other shares) be disregarded in applying the RMD trust rules? This seems like the worst case for convincing the IRS that other beneficiaries of the trust should be ignored, yet ironically it is one situation in which there is a favorable PLR squarely on point! See PLR 2002-21061 (issued under the 2001 proposed regulations; see ¶ 1.1.01 ), in which all pre-residuary beneficiaries of a trust (including charities) were ignored in determining the Applicable Distribution Period (ADP; ¶ 1.2.03 ) for retirement benefits payable to the trust, because the trustees (although they could have used the benefits to fund the pre-residuary bequests) were legally and financially able to, and did, satisfy the pre-residuary bequests out of other assets of the trust, and the pre-residuary beneficiaries did not have the right under state law to demand that they be paid out of the retirement benefits. D. Instrument mandates allocation; no formula. If the trust instrument requires that the benefits must be allocated to a certain subtrust or to certain beneficiaries, or mandates that the benefits cannot be paid to certain beneficiaries or shares, regardless of the amount of the benefits or any other factors, beneficiaries of the shares to which the benefits absolutely cannot under any circumstances be allocated should be disregarded. Trevor Example: Trevor’s IRA is payable to the Trevor Trust. At his death the assets of the Trevor Trust are to be divided between a marital trust and a credit shelter trust. The trust requires that all retirement benefits are to be allocated to the marital trust, even if that means the credit shelter trust is underfunded. Can the beneficiaries of the credit shelter trust be disregarded in applying the RMD trust rules? It appears the answer to this should be yes, in view of PLR 2006-20026 (see “E”) and the language of the regulation (see “A”). However, in view of the IRS vagueness on these issues, if it is important to Trevor that the credit shelter trust beneficiaries be disregarded, he should name the marital trust directly as beneficiary of his IRA (see “B”). Some PLRs mention, as part of a favorable ruling on see-through trust status, the fact that the trust in question forbade the distribution of retirement benefits to the participant’s estate. These PLRs imply that the IRS will disregard trust beneficiaries who are forbidden, by the terms of the trust, to share in the retirement benefits. However, these rulings are not conclusive, because the IRS has never on the record ruled that a trust was not a see-through trust merely because the