Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

benefits were subject to an obligation to contribute to payment of the deceased participant’s debts, expenses, or estate taxes. See ¶ 6.2.10 . E. Mandated allocation pursuant to formula. Many trusts that create a marital and credit shelter trust (or other subtrusts) by means of a formula specify that retirement benefits are to be allocated to a particular subtrust to the extent possible, and used to fund other subtrusts only if there are no other assets that can be used for such purpose. If the formula and the “to the extent possible” language compel the trustee to allocate the benefits entirely to (say) the marital trust, can the credit shelter trust beneficiaries be disregarded in applying the trust rules? The PLRs on point are contradictory. In PLR 1999-03050, decided under the proposed regulations ( ¶ 1.1.01 ), the IRS ruled that beneficiaries of other shares could not be disregarded; the ruling dealt with this as a “separate accounts” issue (see ¶ 6.3.02 ). However, in PLR 2006-20026, involving an IRA and QRP payable to “Trust T,” the IRS ruled exactly the opposite way. Trust T was to be divided into Subtrusts A and B upon the participant’s death by means of a formula. As a result of applying the formula, the benefits “had to be allocated to Subtrust B.” The ruling then proceeded to analyze only Subtrust B, with no mention of the terms or beneficiaries of Subtrust A. This suggests that the IRS has changed its mind since PLR 1999-03050, and is willing to ignore the beneficiaries of other trust shares, where the funding formula forces the trustee to allocate the benefits to one particular share. F. Mandatory allocation under state law. If applicable state law mandates that the benefits be allocated to one particular beneficiary, subtrust, or share, do we disregard beneficiaries of all other shares in applying the RMD trust rules? The IRS has ruled both ways on this question. In PLRs 2005-28031–2005-28035, the IRS said “no”; these rulings offer no argument or basis for the conclusion. In contrast, PLR 2007-08084 seems to suggest that beneficiaries whose shares cannot (because of applicable state law standards) be funded with the retirement benefits CAN be disregarded. For ease of reference, this discussion will deal with inherited IRAs. Though the same rules apply to all types of benefits subject to the minimum distribution rules, “separate accounts” treatment almost always involves inherited IRAs (including Roth IRAs). When a participant leaves his IRA in fractional or percentage shares to multiple beneficiaries, the inherited account may, if this is permitted by the IRA agreement, be divided into separate “inherited IRAs,” one payable to each of the multiple beneficiaries. Once this division occurs, the separated accounts are treated as separate inherited IRAs for most purposes of the minimum distribution rules (generally, beginning the year after the division). See ¶ 1.8.01 – ¶ 1.8.02 . However, there is a significant exception to the separate accounts rule for retirement benefits payable to a trust: A. No separate accounts for ADP purposes. Separate inherited IRAs established after the participant’s death are NOT treated as separate accounts for purposes of determining the Applicable Distribution Period (even if the division into separate accounts occurs on or before December 31 of the year after the year of the participant’s death), if the division into separate accounts occurs by operation of a single trust that is named as beneficiary. See Separate accounts: benefits payable to a trust or estate