Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

qualifies as a see-through trust; the nonindividual beneficiary does not “remain” as a beneficiary as of September 30 of the year after the year of Axel’s death.

Disregarding “mere potential successors”

We now come to the last stand: trust beneficiaries who either definitely will, or someday may, receive a share of the retirement benefits that are payable to the trust, and who have not been “removed” as of the Beneficiary Finalization Date. Which members of this group can we disregard, if any? Reg. § 1.401(a)(9)-5 , A-7(c), the “mere potential successor rule,” tells us which beneficiaries in this group are disregarded in applying the trust rules. Reg. § 1.401(a)(9)-4 , A-5(c). The mere potential successor rule has been stated differently in each version of the regulations (1987 and 2001 proposed, 2002 final). The final regulation’s version is as follows: “(c). Successor beneficiary–(1) A person will not be considered a beneficiary for purposes of determining who is the beneficiary with the shortest life expectancy...or whether a person who is not an individual is a beneficiary, merely because the person could become the successor to the interest of one of the employee’s beneficiaries after that beneficiary’s death. However, the preceding sentence does not apply to a person who has any right (including a contingent right) to an employee’s benefit beyond being a mere potential successor to the interest of one of the employee’s beneficiaries upon that beneficiary’s death.” Emphasis added. How does the “mere potential successor” rule apply to a trust? For purposes of testing trust beneficiaries for “mere potential successor” status, the world can be divided into two types of trusts: “conduit trusts” ( ¶ 6.3.05 – ¶ 6.3.06 ) and “accumulation trusts” ( ¶ 6.3.07 – ¶ 6.3.11 ). “Conduit trust” is not an official term. It is a nickname used by practitioners (and occasionally by the IRS) for one type of see-through trust, namely, a trust under which the trustee has no power to accumulate plan distributions in the trust. The IRS regards the conduit beneficiary as the sole beneficiary of the trust; all other beneficiaries are considered mere potential successors and are disregarded. See ¶ 6.4.04 (A) with regard to using a conduit trust for a disabled beneficiary, ¶ 6.4.05 (A) for a minors’ trust, ¶ 6.4.06 (A) for a trust for the benefit of the participant’s spouse. See ¶ 6.3.06 regarding a conduit trust for multiple beneficiaries. See Forms 4.6–4.8, Appendix B , for sample conduit trust forms. A. What a conduit trust is. Under a conduit trust, the trustee is required, by the terms of the governing instrument, to distribute to the individual trust beneficiary any distribution the trustee receives from the retirement plan (1) after the participant’s death and (2) during the lifetime of such beneficiary. The trustee has no power to retain inside the trust (“accumulate,” in IRS terminology) any plan distribution that is made after the donor’s death during the lifetime of the individual conduit trust beneficiary. Note that:  The “conduit” provision must come into effect immediately upon the participant’s death. If the conduit requirement does not begin to apply until some later point in time (such as after the later death of the participant’s surviving spouse) the trust is Conduit trust for one beneficiary