Life and Death Planning for Retirement Benefits

Chapter 6: Leaving Retirement Benefits in Trust

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However, this general rule does not apply to a “transfer to a person pursuant to the right of such person to receive such amount by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent.” § 691(a)(2) (second sentence). Thus, when a retirement benefit is transferred out of an estate or trust to a beneficiary of the estate or trust, the transferring entity is not taxed on the transfer (for exception see ¶ 6.5.08 ). Instead, the transferee is taxable on the IRD as and when it is paid to such transferee. § 691(a)(1)(C) ; Reg. § 1.691(a)-4(b) . Clothier Example: Clothier’s IRA is payable to his estate. Clothier’s will leaves his personal effects, automobile, and IRA to his sister Wanda, and leaves the residue of the estate to his brother. Clothier’s executor transfers the personal effects, automobile, and IRA to Wanda. The transfer to Wanda is not a taxable event. Wanda withdraws money from the IRA. The withdrawal is taxable to Wanda as IRD. Reg. § 1.691(a)-4(b)(2) . The “person” to whom the right-to-receive-IRD is transferred could be a charity (see PLRs discussed at “B”), or a trust (see PLR 2008-26028), as long as the transferee is the beneficiary entitled to receive that asset under the decedent’s trust or from the decedent’s estate. A. Transfer from trust to trust beneficiary. If the right-to-receive IRD is distributed as a specific bequest from a trust, or upon termination of the trust to a residuary legatee, the beneficiary who is entitled to the item, and not the trust, bears the income tax. Reg. § 1.691(a)-2(a)(3) , (b) , Example 1; § 1.691(a)-4(b)(2) , (3) . See PLRs 9537005 (Ruling 7), and 9537011. What if the right-to-receive is transferred to a trust beneficiary under a discretionary power to distribute principal, but the trust is ongoing? Although the regulation refers to a “terminating” trust, the exception applies to any properly authorized transfer from the trust to its residuary beneficiaries, which is in effect a termination of the trust with respect to such asset. See PLRs 2005-26010, 2006-52028, 2008-03002, 2008-26028, and 2010-13033. B. Transfer from estate to estate beneficiary. Similarly, the transfer of a retirement plan by an estate to the estate’s residuary beneficiaries is a nontaxable event. See PLR 2005-20004, in which the participant died leaving his IRAs and a 401(k) plan to his estate. The executor (who was authorized by the will to make distributions in kind) transferred the IRAs and plan to the estate’s residuary beneficiary, a charity, in partial satisfaction of the charity’s residuary bequest. This was ruled not to be an income-triggering assignment under § 691(a)(2) ; accordingly, only the charity realized gross income from the IRAs and plans (when later distributions were received by it). See also the similar PLRs 2002-34019, 2006- 17020, and 2006-33009; 2006-18023 (nonqualified annuity transferred to residuary beneficiaries); 2008-50004; and 2008-50058. Some rulings approving the transfer of an IRA from an estate to the estate beneficiaries as a nontaxable event do not mention § 691(a)(2) : See PLRs 2004-52004, 2006-46025, 2006-46027, 2006-46028, 2006-47029, and 2006-47030.

Funding pecuniary bequest with right-to-receive IRD

¶ 6.5.07 dealt with the transfer of a retirement plan, intact, to a trust or estate beneficiary in fulfilment of a specific or residuary bequest. In Chief Counsel Advice (CCA) 2006-44020, the IRS addressed the tax consequences of a trustee’s transferring an IRA to a beneficiary to fulfill a pecuniary legacy. The Chief Counsel advised that the trustee’s assignment of an interest in an IRA