Life and Death Planning for Retirement Benefits

Chapter 6: Leaving Retirement Benefits in Trust

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all distributions the trustee receives from the retirement plan. Even assuming the trustee can pick and choose, each year, which member of the group will receive that year’s distributions, the trustee has no discretion to accumulate distributions for possible later needs. If later changes in the minimum distribution rules, or in the income tax laws, make accelerated distributions either mandatory or desirable ( e.g. , because tax rates are about to go up substantially), the trustee cannot comply with (or take advantage of) the changed tax rules without losing control of the funds. B. Circle Trust: Last man standing. If a conduit trust is not suitable, so an accumulation trust for the minors must be named as beneficiary, the problem becomes, who will receive the benefits if the minor dies while the trust is still in effect? That contingent remainder beneficiary “counts” as a beneficiary for purposes of the minimum distribution trust rules, and it can be difficult to figure who that remainder beneficiary should be. (The minor’s future unborn issue don’t count; see ¶ 6.3.08 (B).) If the trust is for the benefit of several minors, one solution is to provide that if, at any time, there is only one beneficiary of the trust who is still living, the trust terminates at that time and all assets are distributed outright to that one. Thus, the living person who will receive the benefits outright on the death of all other beneficiaries is one of the children who are intended to be the sole or primary beneficiaries of the trust. This is the “Circle Trust” approach (see ¶ 6.3.09 ). This approach makes it unnecessary to name some remainder beneficiary the donor doesn’t really want to name (see “C”). The drawback is that if the provision is triggered the benefits could pass outright to a very young individual (through his legal guardian or a custodian for his benefit). See Form 4.9, Appendix B . C. O/R-2-NLP: Who will be the “NLP” remainder beneficiary? To avoid using a conduit trust, and still qualify as a see-through, practitioners look for ways to make the minors’ trust an O/R-2-NLP trust ( ¶ 6.3.08 ). The typical minors’ trust calls for the trust to terminate and be distributed outright to the minors as each reaches a certain age (for example, age 35), or when all of the siblings have either reached that age or died. To be a see-through under the O/R-2-NLP approach it is necessary to have a younger individual remainder beneficiary who will inherit the benefits outright if all of the minor children die before reaching the stated age. With a trust for an adult beneficiary, the outright remainder beneficiary can usually be the then-living issue of the primary beneficiary, but that approach will not work with minor children who have no issue at the time of the participant’s death. See ¶ 6.3.08 (B). Typically, the donor of a minors’ trust would name a “wipeout” beneficiary, to take the trust property if all of the minor children die without issue while there is still money in the trust. The problem is, if the wipeout beneficiary is a charity or other nonindividual, the trust will flunk Rule 5 ( ¶ 6.2.09 ); and if the wipeout beneficiary is an individual who is older than the oldest minor child, the wipeout beneficiary’s shorter life expectancy will be the ADP ( ¶ 6.2.07 ). See PLR 2002-28025, which involved a trust for the benefit of two minors. The trust was to terminate and be distributed outright to the minors as each reached age 30, but if they both died before reaching that age, the trust would pass to other relatives, the oldest of whom was age 67 at the participant’s death. The IRS ruled that the 67-year-old’s life expectancy was the ADP because