Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

conduit group are still living. In a conduit trust for one beneficiary ( ¶ 6.3.05 ), we “don’t care” what the trust terms provide after the death of the conduit beneficiary, because those subsequent beneficiaries are disregarded as mere potential successors to the conduit beneficiary. In a conduit trust for multiple beneficiaries, the “we don’t care” point is not reached until ALL of the permissible conduit beneficiaries have died. Any trust that is not a conduit trust is called in this book an accumulation trust (the IRS does not use this term), meaning that the trustee has the power to accumulate plan distributions in the trust. Under an accumulation trust (except, probably, in the case of a 100% grantor trust; ¶ 6.3.10 ) some or all of the potential remainder beneficiaries do “count” ( i.e., they are not disregarded) for purposes of the RMD trust rules. From Reg. § 1.401(a)(9)-5 , A-7(c): “Thus, for example, if the first beneficiary has a right to all income with respect to an employee’s individual account during that beneficiary’s life and a second beneficiary has a right to the principal but only after the death of the first income beneficiary (any portion of the principal distributed during the life of the first income beneficiary to be held in trust until that first beneficiary’s death), both beneficiaries must be taken into account in determining the beneficiary with the shortest life expectancy and whether only individuals are beneficiaries.” Emphasis added. While a conduit trust is guaranteed to pass the IRS trust rules, an accumulation trust may or may not pass the trust rules. Under an accumulation trust, it may or may not be easy to figure out which beneficiaries are disregarded as mere potential successors, because the meaning of this term is clear in some situations but unclear in others. The regulations offer no other guiding principles and contain only one example of an accumulation trust that passes the rules, the ambiguous Example 1 of Reg. § 1.401(a)(9)-5 , A-7(c)(3): “Under the terms of Trust P, all trust income is payable annually to B [spouse of the deceased participant, A], and no one has the power to appoint Trust P principal to any person other than B. A’s children, who are all younger than B, are the sole remainder beneficiaries of Trust P. No other person has a beneficial interest in Trust P.” Emphasis added. In this example, the IRS is making the point that B and the children of A are all considered “beneficiaries” of Trust P, so the surviving spouse is not the sole beneficiary, but her life expectancy is used as the ADP because she is the oldest beneficiary. This example is defective, however, because it does not explain what happens under “Trust P” if all of A’s children predecease B. Either the trust document or state law must have something to say on that point, but the IRS’s example is silent. Yet the only way we would be entitled to disregard the contingent beneficiaries who take in that case is if they are considered “mere potential successors” ( ¶ 6.3.04 ) to the interests of A’s children. The ambiguity is repeated in the IRS’s use of the same example in Rev. Rul. 2006-26, 2006-22 I.R.B. 939. The IRS has resolved this ambiguity in several private letter rulings (which of course are not authoritative); see ¶ 6.3.08 (A). Based on these PLRs, the meaning of Example 1 is that we need not consider who would take the benefits if the children of A predecease the participant’s surviving spouse B, because the children of A are outright (unlimited) beneficiaries, and accordingly any beneficiary who takes only if the children of A die before B is a “mere potential successor.” Accumulation trusts: Introduction