Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

E. If the participant has already died. Options A–D above apply during the planning stage, while the participant is alive and is trying to choose the best type of trust to name as beneficiary. If the participant has already died, and left the benefits outright to a disabled beneficiary, and qualification for government benefits is a concern, the disabled beneficiary’s guardian could seek to have the benefits transferred to a “(d)(4)(A)” trust for the disabled beneficiary, as was done in PLR 2006-20025 (see ¶ 4.6.03 (C)). In drafting such a trust, qualification as a see-through trust is NOT a concern. Because the benefits were left outright to an individual, the benefits have already qualified for the life expectancy payout; see-through trust status is a concern only when the participant leaves benefits to a trust, not when a beneficiary who has inherited benefits outright subsequently transfers such benefits to a trust. Here are the options available for a trust intended to provide for minor beneficiaries, when qualifying for see-through trust status is an important goal ( ¶ 6.2.01 ). In deciding which to use, consider the donor’s objectives: Is the donor’s main goal to be sure that the “stretch” payout method is available? Or is the money most likely to be spent during the beneficiaries’ childhood, for their education and care, rather than conserved for the beneficiaries’ own retirement years? Also consider the value of the benefits and other assets: Are the benefits and nonbenefit assets each substantial enough to justify establishing separate trusts, one for the benefits and one for the other assets? Are the benefits substantial enough to justify establishing a separate trust for each minor beneficiary, or is the “family pot trust” approach better? Naming a minor directly as beneficiary of a retirement plan is not recommended. This approach may cause the plan administrator not to release the benefits to anyone other than a legal guardian of the minor. In some states, subjecting property to legal guardianship is not only time consuming and expensive, it restricts how the money can be spent for the minor’s benefit. Here are ideas regarding different ways to leave retirement benefits for the benefit of minor beneficiaries: A. Conduit trust (or IRT). A conduit trust may make sense for benefits that are not intended to be the primary support source for the minor beneficiaries, such as a grandparent’s IRA left to grandchildren who are supported by their parents. Also consider a trusteed IRA in this situation ( ¶ 6.1.07 ). Even though a conduit trust partly defeats the purpose of leaving money in trust for a young beneficiary, some practitioners opt for this because it is a safe harbor and because they expect that the RMDs that would have to be passed out to the minor beneficiary (or his guardian or custodian) would be very small because of his young age. A conduit provision “inside” another trust may also be a good way to leave benefits to minors if the retirement benefits are not substantial enough to justify establishing a separate trust. The benefits are left to the same trust as all the other assets, but that trust contains “conduit” provisions requiring the trustee to pass through all retirement plan distributions. See Form 4.8, Appendix B . On the other hand, if the benefits are a significant part of a trust fund that will be providing the primary source of support and education for an orphaned family, a conduit trust may not be a good match. The trustee would be required to distribute to one or more of the children, each year, Planning choices: Trusts for minors