Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

Nevertheless, since the IRS calls it a “conduit trust,” the conclusion that payment of trust expenses out of the retirement plan assets does not adversely affect conduit status should remain valid. In PLR 2006-20026, the IRS blessed a conduit trust under which “asset management fees” would be paid directly to the trustee of the conduit trust out of the retirement plan assets, and would “not flow through” the trust. E. Drawbacks of the conduit trust. The conduit trust is not suitable for every situation, because it lessens the trustee’s control considerably. Also, to work as intended, the conduit trust depends upon the minimum distribution rules’ staying exactly as they are under present law; if changes in the law require or encourage faster distributions, the trust beneficiary will receive the money much sooner than the participant intended. Practical problems include the apparent requirement of “tracing” retirement plan distributions. The trustee must show that each distribution received from the plan is paid “directly” to the conduit beneficiary “upon receipt” by the trustee. Thus, the plan distributions need to bounce into and out of the trustee’s bank account in short order. Possibly the trustee could arrange to have distributions sent directly from the IRA or plan to the conduit beneficiary (bypassing the trust’s bank account). There is no indication that the trust can take “credit” for distributing to the conduit beneficiary something other than the actual distribution received from the retirement plan. For example, suppose the minimum distribution from the IRA to a particular conduit trust for a particular year is $10. Early in the year (before taking any distribution from the IRA) t he trustee pays $15 to the conduit trust beneficiary (from other assets of the trust). Now the trustee receives the $10 RMD from the IRA. The trustee apparently must pass the $10 IRA distribution out to the conduit beneficiary upon receipt by the trust, even though the trustee has already paid the beneficiary more than that amount during the year in question. There is also the risk that the trust will receive a larger-than-intended distribution by mistake. There are cases where a trustee has requested a small distribution, or even just sent in the paperwork to have the IRA titled as an inherited IRA payable to the trust, and the IRA provider has erroneously cashed out the entire IRA and placed the funds in a taxable account in the name of the trust. One negative effect of such an erroneous distribution is loss of deferral (because a nonspouse beneficiary cannot “roll over” a distribution from an inherited plan, even if the distribution was made in error; ¶ 4.2.02 (A)). The negative effects are compounded if the erroneous distribution is paid to a conduit trust, under which the trustee is compelled to immediately pass out the entire plan distribution to the conduit beneficiary (even if that has the effect of terminating the entire trust). Finally, the conduit trust does not work for a client whose goal is to keep the retirement plan proceeds in the trust for the benefit of later beneficiaries. If the conduit beneficiary lives to a normal life expectancy he will have received all or almost all of the benefits and the remainder beneficiary will receive little or nothing. F. Conduit trust drafting pointers. There are two ways to create a conduit trust. One is by including “conduit” provisions (that apply only to the participant’s retirement benefits) in a trust document for a trust that will also hold other assets. The other approach is to have a separate “stand-alone” trust that holds no assets other than retirement benefits that are eligible for a life expectancy payout. See ¶ 6.4.03 . A participant considering leaving