Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

as Taxpayer A’s designated beneficiary ....” In other words, if the first trust beneficiary is not entitled to outright distribution of the entire trust, or even of all distributions the trustee receives from the retirement plan, we must keep looking; we must also count as beneficiaries (for purposes of applying the tests in the IRS’s RMD trust rules #3 and #5) the beneficiary(ies) who will take the trust when the first beneficiary dies. However, the ruling goes on to say that we can stop our search once we reach the children who are the apparent remainder beneficiaries under this trust. Because they will take their shares outright and immediately when the prior beneficiary dies, we do not need to go further and find out who would take the benefits if any of these three children predecease the surviving spouse. From the ruling: “Since the right of each child to his/her remainder interest in the ...[trust] was unrestricted at the death of Taxpayer A, it is necessary to consider only Taxpayers B through E [ i.e., the spouse and the three children] to determine which of them shall be treated as the designated beneficiary of Taxpayer A’s interest in” the IRA. (Note: The ruling should say “to determine which of them shall be treated as the oldest designated beneficiary”; all of them are Designated Beneficiaries, and the oldest Designated Beneficiary’s life expectancy will be the ADP.) This is consistent with, and clarifies, Example 1 of Reg. § 1.401(a)(9)-5 , A-7(c)(3). Later PLRs 2005-22012, 2006-08032, and 2006-10026 confirm this interpretation of the regulation. B. Finding an “O/R” beneficiary (future issue don’t count). The O/R-2-NLP trust requires the existence of at least one now-living person who would be entitled to outright distribution of the benefits upon the prior beneficiary’s death. It is not always easy to find a younger individual to name as outright immediate beneficiary after the first beneficiary’s death. Future unborn issue can NOT be counted for this purpose because you cannot assume they will ever exist. See, e.g. , PLR 2008-43042, in which father died leaving his IRA to a trust for his son “C.” C was to receive all of the trust funds no later than age 40. If he died before reaching age 40, the trust would pass to C’s descendants, if any, otherwise to C’s “heirs at law.” At the time of father’s death, C had no descendants living. His “heir-at-law-apparent” was his mother. The IRS ruled that the countable beneficiaries of the trust were C and his mother. PLRs 2006-10026 and - 10027 are similar. One way to deal with the mystery of which beneficiaries are disregarded is to draft the trust so that there are no beneficiaries you need to disregard. If the trust property cannot be distributed to a nonindividual beneficiary, then it passes Rule 5 ( ¶ 6.2.09 ). For example, if the trust provides “income to spouse for life, remainder outright to our issue living at spouse’s death; provided, if at any time during spouse’s life there is no issue of ours living, the trust shall terminate and be distributed to spouse,” it is impossible for the trust assets to pass to anyone other than spouse or issue, all of whom are individuals. If spouse dies before issue, issue get the benefits. If issue die before spouse, spouse gets the benefits. This is nicknamed a “circle trust” because the group of beneficiaries is a closed circle. This approach could be appropriate for a client who is leaving benefits to a credit shelter trust for the spouse only to save Accumulation trust: “Circle” trust