Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

“Younger heirs at law” as “wipeout” beneficiary

Some practitioners use, as the ultimate or “wipeout” beneficiary of a trust, the “heirs at law” of the participant (or of a particular beneficiary) who are living at the applicable time, with a proviso that any “heir at law” who is older than the oldest trust beneficiary (determined without regard to the wipeout provision) shall be deemed to have died prior to the applicable date. There is no PLR to date specifically “blessing” this approach. It appears, based on such PLRs as 2006-10026 and -10027 and 2008-43042 (discussed at ¶ 6.3.08 ), that the IRS would “test” such a provision by determining who would take under the provision if all the other trust beneficiaries died immediately after the participant, thus activating the provision; and that the provision would “work” if there is some identifiable living individual who would take under the provision at the time of the participant’s death. 6.5 Trust Income Taxes: DNI Meets IRD This ¶ 6.5 deals with the income tax treatment of retirement benefits that are paid to a trust and includible in the trust’s gross income. Income taxation of retirement benefits paid to an estate is generally the same as the treatment described here for trusts. § 641 . Fiduciary income taxation is an extremely complex topic; for complete treatment of the subject see sources in the Bibliography . The purpose of this discussion is solely to explain how the trust income tax rules apply uniquely to retirement plan distributions. The discussion here does not apply to a nontaxable distribution from a retirement plan; see ¶ 2.1.06 for a catalogue of no-tax and low-tax retirement plan distributions. For income tax considerations in connection with a trust’s distributions to charity, see Chapter 7 . This section deals extensively with income in respect of a decedent (IRD). For definition and basic rules of IRD, see ¶ 4.6 . When retirement benefits are distributed after the participant’s death to a trust that is named as beneficiary of the plan, the distribution is includible in the trust’s gross income just as it would have been included in the gross income of an individual beneficiary; see Chapter 2 . Qualifying as a “see-through trust” under the minimum distribution rules ( ¶ 6.2.03 ) makes no difference to the trust’s income tax treatment. See-through trust status matters only for purposes of determining when the trust must take distribution of the benefits; it has no effect on the tax treatment of those distributions once they arrive in the trust’s bank account. There are several differences between trust (fiduciary) income taxes and individual income taxes. On the bright side, the trust may be able to reduce its tax by passing the income out to the individual trust beneficiaries ( ¶ 6.5.02 ); and a trust is not subject to the reduction of itemized deductions under § 68 ( ¶ 6.5.04 ). On the negative side, trusts are generally in a higher income tax bracket than human beneficiaries. A trust (unless its existence as a separate entity is ignored under the “grantor trust rules”; ¶ 6.3.10 ) or estate is a separate taxpayer and pays tax on its taxable income at the rate prescribed for trusts and estates. A trust or estate goes into the highest tax bracket (35%) for taxable Income tax on retirement benefits paid to a trust