Life and Death Planning for Retirement Benefits

Chapter 6: Leaving Retirement Benefits in Trust

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of the trust, and the older daughter’s life expectancy was the ADP for both daughters’ shares of the IRA ( ¶ 6.3.02 (A)). Another way is to distribute other assets (not the retirement benefits) to the “undesirable” beneficiary in full payment of his, her, or its share of the trust, so that, as of the Beneficiary Finalization Date, the only remaining beneficiaries of the trust and of the benefits are the “desirable” individual beneficiaries. See PLRs 2006-08032, 2006-10026, 2006-10027, and 2006- 20026 for examples of this technique. Finally, the trustee could transfer the retirement benefits out of the trust, intact, to an individual trust beneficiary ( ¶ 6.1.05 ), before the Beneficiary Finalization Date, so that, as of the Beneficiary Finalization Date, the (young, individual) transferee is the only beneficiary of the benefits. The other (older and/or nonindividual) beneficiaries of the trust are disregarded because they have ceased to have any interest in the retirement benefits (do not “remain” as beneficiaries). Merely allocating the benefits to one particular share of a trust would not be sufficient to allow beneficiaries of other shares of the trust to be disregarded, according to PLRs 2005-28031– 2005-28035. B. Qualified disclaimer by September 30. If a beneficiary disclaims his entire interest by the Beneficiary Finalization Date, he no longer “counts” as a beneficiary. See ¶ 4.4.11 (A). If the disclaimant was the oldest beneficiary, the next oldest beneficiary’s life expectancy will become the ADP. Reg. § 1.401(a)(9)-4 , A-4(a). See PLRs 2004-44033 and 2004- 44034, in which “A” died leaving her IRA to a trust for the life benefit of her sister, with remainder to A’s two nieces. The sister (who was older than the nieces) disclaimed her interest in the trust, so that the two nieces became the sole beneficiaries, and the older niece’s life expectancy became the ADP. Similarly, disclaiming a power of appointment can eliminate potential appointees who would otherwise be “unidentifiable” and cause the trust to flunk Rule 3 ( ¶ 6.2.07 ). See PLR 2004-38044, discussed at ¶ 6.3.11 (B). C. Other ways to “remove” a trust beneficiary. The regulation cites distribution and disclaimer simply as examples of ways in which a person who was a beneficiary as of the date of death could cease to be a beneficiary as of the Beneficiary Finalization Date. Reg. § 1.401(a)(9)-4 , A-4(a). Certain post-death amendments of the trust, made before the Beneficiary Finalization Date pursuant to express provisions included in the trust instrument, have been recognized by the IRS for RMD purposes; see PLR 2005-37044 (discussed at ¶ 6.3.12 (C)), and PLR 2005-22012. Also, any beneficiary whose rights are terminated prior to the Beneficiary Finalization Date by operation of the trust terms would not be a countable beneficiary: Axel Example: Axel dies leaving his IRA to a trust which provides that, until his daughter Rose reaches age 35, the trustee will use income and principal for Rose’s benefit. When Rose reaches age 35, the trust will terminate and all trust property will pass outright to Rose. If Rose dies before reaching age 35, the trust will terminate and all property will pass to a charity. On the date of Axel’s death, Rose is age 34½. Based on the terms of the trust as they exist at Axel’s death, the trust has two beneficiaries, Rose and the charity, and “flunks” the RMD trust rules because one beneficiary is not an individual. Six months after Axel’s death, Rose turns age 35 and becomes the sole beneficiary of the trust. Since this is before the Beneficiary Finalization Date, the trust