Life and Death Planning for Retirement Benefits

Chapter 6: Leaving Retirement Benefits in Trust

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particular identified spouse, or to spouses who are younger than the oldest trust beneficiary determined without reference to the power). See Kit and Julia Example, ¶ 6.2.07 (A). In PLR 2004-38044, the participant’s surviving spouse had the power to appoint the trust at her death to the participant’s issue and their spouses; to enable the trust to qualify as a see- through, she disclaimed this power. See ¶ 6.3.03 (B). As a result of the disclaimer of the power, the property would pass outright to the takers in default of exercise of the power, who were the decedent’s issue. C. Power to appoint to charity. A trust that says “The trustee shall pay income to my spouse for life, and upon my spouse’s death the principal shall be paid to such members of the class consisting of our issue and any charity as my spouse shall appoint by her will,” would flunk this rule, because the benefits could pass under the power to a nonindividual beneficiary, the charity. E. Power to appoint to another trust. Under many states’ laws, a power to appoint to individuals includes the power to appoint in trust for such individuals. The IRS has never commented on the effect of such a state law (or of an explicit power in an instrument to appoint to another trust). Since the regulations require that, if benefits are distributable under one trust to another trust, s trusts must comply with the rules ( ¶ 6.2.02 (C)), it would appear that any power of appointment that could be exercised by appointing the benefits to another trust would cause the first trust to flunk the trust rules unless the power is limited to appointing only to other trusts that comply with the rules. One requirement of a see- through trust is that a copy of the trust be given to the plan administrator by October 31 of the year after the participant’s death ( ¶ 6.2.08 (A)). Thus, the power could effectively not be exercised to appoint to a new trust; the power holder would be limited to appointing to other see-through trusts created by the participant at or prior to his death (if there are any such trusts). D. Power limited to younger individuals. See ¶ 6.2.07 (C). As we have seen, there are several ways to qualify a trust as a see-through. What happens if you combine two methods in the same trust? Drafters sometimes look into that idea in an attempt to satisfy the client’s desire to prevent the putative beneficiary from ever actually gaining access to the retirement benefits. A. Conduit trust and 678 grantor trust. If the trust beneficiary has the right to demand distribution of the entire trust to himself, it appears the trust qualifies as a see-through because it is a 100 percent grantor trust; see ¶ 6.3.10 . A trust also qualifies as a see-through if the trustee is required to pass all plan distributions out to the beneficiary immediately (conduit trust; ¶ 6.3.05 ). What if the trustee is not required to automatically distribute all plan distributions to the beneficiary, but the beneficiary has the right to demand immediate payment to himself of all distributions the trustee receives from the plan? The IRS position regarding such a hybrid grantor-conduit trust is not known. Such a trust does not conform with the regulation’s description of a conduit trust Combining two types of qualifying trusts