Life and Death Planning for Retirement Benefits

Chapter 6: Leaving Retirement Benefits in Trust

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the GST tax, see § 2601–§ 2664 and sources in the Bibliography . A client may have the erroneous idea that a trust named as IRA beneficiary can somehow “stretch out” the IRA distributions perpetually over the ever-longer life expectancies of succeeding generations. Actually it is not possible to do that. See ¶ 6.3.05 (G). A. Perpetual trusts; GST-exempt shares. Leaving retirement benefits to a generation- skipping trust is usually not considered advisable because part of the GST exemption will be “wasted” paying income taxes. However, it can be appropriate for a Roth plan (distributions from which are not subject to income tax; see ¶ 5.2.03 ), or for a traditional plan if the client has no other assets suitable for a generation-skipping gift. Leaving the benefits directly to grandchildren outright, or to conduit trusts for the benefit of “skip persons,” poses no particular problems. If benefits are left to an “accumulation trust” ( ¶ 6.3.07 ) for the benefit of the participant’s descendants, the problem from the point of view of “passing” the RMD trust rules is to name an individual beneficiary who will receive the trust assets immediately, outright, on the death of all prior beneficiaries. One way to accomplish this is to use the “last man standing” approach so that, if at some time in the future there is only one issue of the participant living, the trust terminates and is distributed to that one individual at that time; see ¶ 6.3.09 . B. Leaving benefits to a “GST-nonexempt” share. A common estate planning technique for larger estates is for a parent to leave the amount of his GST exemption to a generation- skipping trust, and the rest of his estate to “GST-nonexempt” trusts for his children. Since leaving taxable retirement benefits to the GST-exempt trust wastes GST exemption (see “A”), it is usually considered preferable to leave the benefits to the GST-nonexempt shares. If the benefits are left outright to the children, or to GST-nonexempt trusts that are conduit trusts for the children ( ¶ 6.3.05 ), there is no problem—the children are recognized as the Designated Beneficiaries. If the benefits are left to an accumulation trust there can be a problem: The GST-nonexempt trust is by definition not sheltered by the parent’s GST exemption. Therefore to avoid having a GST tax imposed on the trust at the child’s death (when the trust passes to the child’s issue, who are grandchildren of the original donor) it is common practice to give the child a general power of appointment by will over the GST-nonexempt share. This causes the child to be treated as the “transferor” of the GST-nonexempt share for GST tax purposes, so there is no generation-skipping transfer when the share passes to the child’s issue at the child’s death. However, a general power of appointment at death requires that the child have the ability to appoint the trust to the child’s estate, which is a nonindividual. § 2041(b)(1); see ¶ 1.7.04 . Thus, if the child has a general power of appointment at death the nonexempt share trust will flunk the RMD trust rules, unless it is a conduit trust. Another solution is to give the child the right to withdraw all of the trust principal during his life with the consent of a trustee who does not have a substantial interest adverse to the child’s exercise of such power, instead of giving the child a general power of appointment at death. This causes the trust to be included in the child’s estate under § 2041(a)(2), (b)(1)(C), making the child the transferor for GST tax purposes, without causing the trust to have a nonindividual beneficiary. However, this type of withdrawal power would NOT make the trust a grantor trust under § 678 , so the remainder provisions of the trust would still have to comply with the RMD trust rules, just as was true for the GST-exempt share (see “A”).