Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

In this chapter, PLRs are cited as “authority” for various propositions because of the lack of authoritative guidance. Of course, a PLR cannot be relied upon as authority by anyone other than the taxpayer who obtained it. Furthermore, the fact that the IRS approved a particular trust instrument in a PLR is not equivalent to an IRS endorsement of that form of trust. The firm that obtained the ruling should not attempt to sell the trust form to other taxpayers as, in effect, an IRS- approved prototype document. However, a PLR can serve as “substantial authority” for a position taken on a tax return for purposes of avoiding a penalty. Reg. § 1.6662-4(d)(3)(iii) . Also, a court might hold the IRS bound by a position that the IRS has taken consistently in numerous PLRs. Should a client’s retirement benefits be left to a separate trust that will hold no other assets? Or should the client’s benefits be left to the same trust as the client’s other assets, with that trust being modified to include special provisions that apply only to the retirement benefits? Separate-trusters point to the many practical difficulties of having numerous special provisions that deal only with certain assets. For example, if there is a regular “family pot” trust for the decedent’s minor children, with a conduit provision grafted onto it requiring the trustee to immediately pass out retirement plan distributions (see Form 4.8, Appendix B , for an example), will the trustee have to trace dollars in and out of the trust bank account? How quickly must the distribution be passed on before it merges into the rest of the trust’s cash? Will the trustee, the client, or a later attorney amending the trust recognize and so preserve the intricate web of provisions governing the retirement benefits? But single-trusters pooh-pooh these difficulties as exaggerated or inapplicable, and remind us that separate trust treatment is impracticable for smaller retirement plans. See also ¶ 6.4.05 (opening paragraph plus subsection (F)) and ¶ 6.1.07 for more discussion of when to have separate trusts versus one pooled trust (and related questions). See ¶ 7.3.03 (B) (“Heather Example”) for an example of when separate trusts should be used. Here are the options (A–D) available for a trust that is to be named as beneficiary of a retirement plan and that is intended to provide for a disabled beneficiary, when qualifying for see- through trust status is an important goal ( ¶ 6.2.01 ). Which option is best depends on whether the beneficiary must qualify for need-based government benefit programs, and on the identity of the remainder beneficiary. If qualification for benefit programs is a goal, the donor should consult with an attorney who specializes in drafting this type of trust. If the participant has already died and left benefits outright to a disabled beneficiary, see “E.” A. Conduit trust. Under a conduit trust ( ¶ 6.3.05 ), all of the RMDs, as well as any other distributions the trustee receives from the retirement plan, would have to be promptly distributed to (or applied for the benefit of) the beneficiary. If such distributions are passed out to the disabled beneficiary, they would be considered available income or assets to the beneficiary, thus (unless the distributions are very small) forfeiting eligibility for welfare benefits. Thus, a conduit trust is normally not suitable to be named as beneficiary for a disabled individual if the goal is to avoid forfeiting eligibility for welfare-type disability benefits. If qualification for welfare benefits is not an issue (for example, because the Planning choices: Trust for disabled beneficiary Should you use a separate trust for retirement benefits?