Life and Death Planning for Retirement Benefits

Chapter 6: Leaving Retirement Benefits in Trust

325

benefits to a stand-alone conduit trust might consider using an “individual retirement trust” (IRT) instead. ¶ 6.1.07 .

G. Conduit trusts for successive beneficiaries. Here is a question that comes up repeatedly regarding conduit trusts: Question: If there is a conduit trust for one beneficiary (call him Child), and after that beneficiary’s death the trust converts to being a conduit trust for another beneficiary (call her Grandchild), does the ADP switch to the life expectancy of the beneficiary of the second trust (Grandchild in this example) when the first conduit beneficiary dies? Or if there is a conduit trust for the benefit of the participant’s spouse (“Spouse”), which passes to the children at her death, does the trust switch to using the children’s life expectancy as the ADP after Spouse dies? Answer: No. The ADP is always and irrevocably established at the participant’s death based on the life expectancy of the participant’s Designated Beneficiary (or applicable “no-DB rule”). See ¶ 1.5.13 . For a rarely-applicable exception to this rule, see ¶ 1.6.05 (C). By leaving benefits to a conduit trust of which Child (or Spouse) is the conduit beneficiary, the result you get is that the ADP for benefits payable to the trust is the single life expectancy of Child (or Spouse). But that’s ALL you get: Just because you use a conduit trust does NOT mean that the ADP somehow switches or flips upon the Child’s (or Spouse’s) later death and allows the trust to stretch subsequent distributions over the next beneficiary’s life expectancy. Though the IRS’s only example on point deals with a conduit trust for just one beneficiary, the principle should also work with multiple beneficiaries. However, even more is required to draft a conduit trust for multiple beneficiaries. To have a conduit trust for multiple beneficiaries, the requirements would be (based on the language in the IRS regulation): 1. All distributions the trust receives from the retirement plan must be immediately paid out to one or more of the conduit beneficiaries; and 2. As long as any member of the conduit group is living, no plan distributions can be accumulated in the trust for possible distribution to other beneficiaries. Warren Example: Warren dies leaving his IRA to a trust for his children. The trust provides that, as long as any child of Warren is living, the trustee must pay out, to one or more of such children, in such proportions as the trustee deems advisable for their education, support, and welfare, any and all amounts the trustee receives from the IRA, upon receipt. The trust terminates when there is no child of Warren living who is under the age of 40, and the IRA is to be transferred in equal shares at that time to such of Warren’s children as are then living. Warren’s trust “works” as a conduit trust, since only the children can receive benefits from the IRA as long as any child is living. However, this approach does not provide any benefits for the issue of a deceased child of Warren. Davis Example: Davis’s trust is the same as Warren’s, except that Davis’s trust provides that, upon the death of any child of Davis during the term of the trust, such child’s share would be held in trust for later distribution to the deceased child’s issue. Davis’s trust would not qualify as conduit trust, because plan distributions may be accumulated in the trust while some members of the Conduit trust for multiple beneficiaries