Life and Death Planning for Retirement Benefits

Chapter 6: Leaving Retirement Benefits in Trust

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estate taxes for his issue, and who would just as soon leave it outright to the spouse if it should happen that all the issue predecease the spouse. This is also called the “last man standing” approach, because it provides for an accelerated termination if it should ever occur that only one member of the beneficiary-group is still living, with immediate outright distribution of the entire trust to that individual; see ¶ 6.4.05 (B). Note: Of course there is the possibility that simultaneous deaths may occur with the result that the benefits wind up passing to one or more beneficiaries’ estates ( i.e., nonindividual beneficiaries). Based on Reg. § 1.401(a)(9)-5 , A-7(c)(3), Example 1, and the successful O/R-2- NLP PLRs ( ¶ 6.3.08 (A)), this possibility is ignored when testing a trust for see-through status. Under the so-called “grantor trust rules,” a trust beneficiary who is a U.S. citizen or resident is treated for purposes of the federal income tax as the “owner” of trust assets if such beneficiary has the sole unrestricted right to withdraw those assets from the trust. See § 678(a)(1) , § 672(f) , Reg. § 1.671-3 . If an individual is deemed the owner of all of the trust’s assets under § 678(a)(1) , then retirement benefits payable to such trust should be deemed paid “to” such individual beneficiary for purposes of the minimum distribution rules, and the “all beneficiaries must be individuals” test would be met; however, there is no ruling on point. In PLR 2000-23030, the decedent’s IRAs were payable to a trust that was a grantor trust as to the surviving spouse. The IRS ruled that a transfer of the decedent’s IRAs to or from this trust was deemed a transfer to or from the surviving spouse. See also PLR 2003-23012, in which the surviving spouse was recognized as the participant’s Designated Beneficiary under the annuity rules of § 72 when benefits were payable to a trust deemed owned by the spouse under the grantor trust rules. However, neither of these rulings discussed whether the trust in question qualified as a see-through trust. The IRS has always been more lenient in allowing a spousal rollover through a trust (see ¶ 3.2.09 ) than in recognizing a trust as a see-through. In PLRs 2006-20025 and 2008-26008 (discussed at ¶ 4.6.03 (C)), the IRS allowed beneficiaries who inherited IRAs outright to transfer their inherited IRAs to “grantor trusts” for their own benefit, again lending support to the conclusion that a grantor trust will be deemed “the same as” the individual who is treated as the 100 percent owner of the trust property for income tax purposes. But there is no specific ruling to the effect that a trust that is named as beneficiary of a retirement plan and that is a grantor trust as to a particular individual qualifies as a see-through trust. Treating the trust beneficiary as the “owner” of the benefits for income tax purposes would have two significant results: Income taxes on the trust’s income would be imposed at the beneficiary’s rate; and (presumably) the remainder beneficiary would not be considered a beneficiary of the trust for purposes of the minimum distribution rules. Thus an estate, older individuals, or charities could be named as remainder beneficiaries (to succeed to whatever part of the trust was not distributed to or withdrawn by the owner-beneficiary during his life) without loss of the use of the owner-beneficiary’s life expectancy as the ADP. Similarly, a power of appointment that affected the trust property only after the death of the owner -beneficiary could be disregarded; see ¶ 6.3.11 . Accumulation trust: 100 percent grantor trust