Life and Death Planning for Retirement Benefits

Chapter 6: Leaving Retirement Benefits in Trust

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Reg. § 1.401(a)(9)-4 , A-5(c), as applied in PLRs 2003-17041, 2003-17043, 2003-17044, and 2004-32027–2004-32029; compare ¶ 1.8.01 (B). Accordingly, if a participant wants a life expectancy payout to be available for each of multiple beneficiaries based on each such beneficiary’s own life expectancy (or for each of multiple separate trusts based on the life expectancy of the oldest beneficiary of each such trust), the participant should name the individuals (or trusts) directly as beneficiaries in the beneficiary designation form, rather than naming a single funding trust as beneficiary of the retirement plan. See PLR 2005-37044; ¶ 6.3.01 (B); and Form 3.5, Appendix B . Prior to issuance of the final minimum distribution regulations in 2002, separate accounts treatment was available for multiple beneficiaries taking under a single trust. See PLR 2002-34074 (issued in May 2002, after the final regulations were issued, though this PLR was decided under the proposed regulations; ¶ 1.1.01 ). B. Separate accounts for purposes other than ADP. Although Reg. § 1.401(a)(9)-4 , A-5(c), states that separate accounts cannot be established for any purpose of the minimum distribution rules for benefits that are left to multiple beneficiaries through a single funding trust, PLRs make clear that in fact the IRS means such separate accounts CAN be established for all RMD purposes other than determining the ADP. See ¶ 1.8.01 (C). Thus, for example, if an IRA is payable to a trust that is to terminate immediately upon the participant’s death and be distributed outright to the decedent’s three children, the trust can divide the IRA into separate inherited IRAs and transfer one such separate inherited IRA to each of the children (see ¶ 6.1.05 ). Thereafter, the children’s respective separate inherited IRAs (or “sub-IRAs” as the IRS calls them in some PLRs) will be treated as “separate accounts” for all minimum distribution purposes except determination of the ADP. The ADP for all three children’s shares will continue to be based on the life expectancy of the oldest child. See PLRs 2000-13041 and 2002-35038–2002-35041. Similarly, the IRS has allowed separate accounts treatment for all purposes other than determining the ADP for retirement benefits that pass through an estate. See PLRs 2006-46025; 2006-47029 and 2006-47030, in which two children inherited an IRA through their parent’s estate and were allowed to split it into two separate inherited IRAs, one payable to each child. Even though the IRS ruled that “separate account treatment” was not available, the IRS also said the accounts would be treated as separate accounts, i.e., each child’s RMDs would be determined solely with respect to his “sub-IRA.” What the IRS apparently meant was, separate accounts would not be available for ADP purposes. PLRs 2006-46025, 2006-46027, and 2006-46028 (involving three children who inherited through a parent’s estate) are similar. C. Drafting to achieve separate accounts under one trust instrument. If a participant wants to leave his IRA in separate shares, with each share to be held in trust for a different beneficiary, AND wants each such IRA-share to be payable over the life expectancy of the primary beneficiary for whom it is held, the participant should take the following two steps: Step 1: He must cause a separate trust to be established for each such beneficiary. These separate trusts can be established (i.e. set up and funded) after his death, and can all be established under a single trust instrument, as long as each such trust is (at the time it receives the inherited benefits) a separate trust under applicable state law, with its own taxpayer identification number (TIN) and filing its own annual tax return. It is not possible to have separate account treatment for any RMD