Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

he was the “oldest trust beneficiary.” PLRs 2006-10026 and 2008-43042 (see ¶ 6.3.08 ((B)) are similar.

What the IRS Should do

Here are some possible approaches for dealing with this problem. With each, a separate trust just for the retirement benefits may be required, since the remainder beneficiary provisions may be different for the benefits than for the other assets.  One approach is for the donor to plug in the name of a younger individual as the wipeout beneficiary, perhaps a young niece, nephew, or other relative. The drawback of this approach, obviously, is that the donor ends up potentially leaving the retirement benefits to someone he is not really interested in benefitting.  Another approach, used successfully in PLR 2002-35038, is to give the trustee the power to distribute the remainder to any individual beneficiary who was born in the same year as the donor’s oldest child or in a later year (or give the minor children the power to appoint to any younger beneficiaries). Unfortunately, the IRS’s rulings approving this approach are seriously defective, in that the rulings fail to mention what would happen to the benefits if the power of appointment were not exercised. Realistically, the trust instrument would still have to name a younger individual wipeout beneficiary to address this possibility.  A third approach is to name, as the wipeout beneficiary, heirs at law who are younger than the oldest “real” beneficiary; see ¶ 6.4.08 . D. Dump the stretch; buy life insurance. Young parents of young children might consider drafting the trust to say exactly what they want it to say, ignoring the see-through trust requirements, and purchasing life insurance to assure adequate funds for payment of any extra income taxes caused by loss of see-through status. This may make more sense than accepting the drawbacks of approaches A–C. E. Staged distributions at various ages. Trusts for minors often provide for a staged distribution of principal, e.g. , half at age 25, balance at age 30. Such staged distributions create several headaches when the trust is beneficiary of a retirement plan. One is whether The IRS’s position produces absurd results, as can be seen in these letter rulings. The IRS could easily eliminate this absurdity, and solve the headache of providing for minor beneficiaries, by adopting a simple convention as an add-on to the O/R-2-NLP concept. The IRS could make a rule that an individual will be considered an “unlimited” trust beneficiary (so successors to his interest can be disregarded as “mere potential successors”) if his interest in the benefits is to pass to him outright either (1) immediately upon the death of the donor or of another beneficiary [as the rule already provides] or (2) upon the beneficiary’s attainment of a certain age that is not older than age 45 (or age 35, or age 30, or whatever age the IRS prefers). By adopting that rule, the IRS would immediately make legal the most standard and normal trust provision for minor beneficiaries, which is that they will come into outright possession upon attaining a certain age—an age that (under the vast majority of trust instruments) they have an overwhelming likelihood of attaining, according to the IRS’s own actuarial tables.