Life and Death Planning for Retirement Benefits

Chapter 6: Leaving Retirement Benefits in Trust

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Accumulation trust: O/R-2-NLP

Under the approach exemplified in the PLRs discussed at “A” below, you test an accumulation trust by “counting” all successive beneficiaries down the “chain” of potential beneficiaries who could take under the trust, until you come to the beneficiary(ies) who or which will be entitled to receive the trust property immediately and outright upon the death of the prior beneficiary(ies). That “immediate outright” person, entity, or group is (or are) the last beneficiaries in the “chain” that you need to consider. If the immediate outright beneficiary(ies), and all prior beneficiaries in the “chain,” are individuals, then the trust qualifies as a see-through trust, with the life expectancy of the oldest member of that group serving as the ADP. Any beneficiary who might receive the benefits as a result of the death(s) of the immediate outright beneficiary(ies) is ignored as a “mere potential successor.” These tests are applied at the time of the participant’s death, “as if” the first trust beneficiary died immediately after the participant, and the next beneficiary in the chain died immediately after the first beneficiary, and so on until you reach the first “immediate outright” beneficiary, where you stop. The tests are not re-applied at the later actual death of any beneficiary. It makes no difference who in fact inherits the benefits when the first beneficiary later dies. Rather, the “snapshot” of beneficiaries is taken once and only once, at the time of the participant’s death, based on the identities of beneficiaries who actually survived the participant and on the hypothetical death of each of these beneficiaries immediately after the participant’s death or immediately after the death of the prior beneficiary in the “chain.” This type of trust is called an “outright-to-now-living-persons” (O/R-2-NLP) trust in this book. It is recommended that practitioners use conduit trusts ( ¶ 6.3.05 ) and O/R-2-NLP trusts as often as possible when drafting trusts that are to be named as beneficiary of retirement benefits, since these are the only types of trusts as to which we have clear guidance that they “work.” For how to have an O/R-2-NLP trust for a disabled beneficiary, see ¶ 6.4.04 (B); for minors, see ¶ 6.4.05 (B); for the participant’s surviving spouse, see ¶ 6.4.06 (B). A. Authority for the O/R-2-NLP approach. As explained at ¶ 6.3.07 , the only example of a nonconduit see-through trust in the regulations is ambiguous. In PLR 2004-38044, the IRS resolved that ambiguity. In this PLR, “A” died, leaving his IRA payable to a trust. The trust benefitted the participant’s spouse, B, for her life. Upon B’s death the principal would be divided among the participant’s “lineal descendants then living,” with each descendant’s share to be distributed to him outright (unless he was under age 30, in which case distribution was to be delayed until he had attained age 30). At the time of the participant’s death, his spouse survived him, and he had three living children, C, D, and E, and apparently no deceased children. The three children had already attained age 30 at the time of the participant’s death. Thus, if the spouse had died immediately after the trust’s establishment, the three children would have taken the trust principal (including the remaining retirement benefits) outright and immediately. Since the spouse’s interest in the trust was “not unlimited” (she was entitled only to a life income interest, plus principal in the trustee’s discretion), it was “necessary to determine which other beneficiaries of Trust Y must be considered in determining who, if anyone, may be treated