Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

to a trust beneficiary in satisfaction of a pecuniary gift triggered realization of income at the trust level under § 691(a)(2) . Citing Kenan v. Comm’r, 114 F. 2d 217 (2d Cir. 1940), the IRS said the trust “has received an immediate economic benefit by satisfying its pecuniary obligation to the Charities with property on which neither Trust nor Decedent have previously paid income tax which is a disposition for § 691(a)(2) purposes.” Is the Chief Counsel correct? The Kenan case involved a fiduciary’s transfer of appreciated property (not IRD) in fulfilment of a pecuniary bequest, and dealt with § 663 (not § 691 ). In the author’s opinion, the second sentence of § 691(a)(2) should govern (and make the transfer nontaxable) when the right to receive IRD is transferred in fulfilment of a pecuniary bequest in (at least) the following two circumstances: Either the governing instrument requires that such bequest be fulfilled with that asset; or (even if the instrument does not explicitly require use of that asset) the fiduciary has no choice because no other asset is available: Ron Example: Ron dies, leaving his $1 million IRA payable to his trust as beneficiary. The trust contains a pecuniary formula marital bequest, under which the marital trust is entitled to $400,000. The trust holds no other assets except the IRA. Ron’s trustee divides the IRA into two separate inherited IRAs, one with a value of $400,000. The trustee transfers this $400,000 IRA to the marital trust and keeps the other IRA for the residuary credit shelter trust. In this example, in the author’s opinion, the IRA is transferred to the marital trust “by bequest from the decedent.” The funding trust is not “selling” or “exchanging” the IRA; it is transferring the IRA to the person entitled to it under the terms of the decedent’s trust. The trustee has no choice regarding which asset to use to fund the marital trust—the IRA is the only asset available. Thus (in the author’s opinion) the transfer is not taxable under § 691(a)(2) . This conclusion is consistent with several PLRs in which the IRS allowed surviving spouses to roll over benefits that were paid to them through pecuniary bequests. See PLRs 9524020, 9608036, 9623056, and 9808043, all of which predate CCA 2006-44020; and 2009- 40031 and 2009-43046 (issued after CCA 2006-44020). If the transfers of retirement benefits in those rulings had been treated as “sales,” the transfers would have triggered immediate realization (deemed distribution) of the underlying income, and there would have been nothing for the spouses to roll over. However, those PLRs did not discuss this issue or mention § 691(a)(2) . In PLR 2006- 08032, a trustee transferred shares of an IRA to charities in fulfilment of their pecuniary bequests; the IRS ruled that the transfers did not constitute distributions or rollovers under § 408 , but did “not address the issue of whether” the trust realized income under § 691 by virtue of these transfers. For planning purposes, it is wise to assume that the transfer of retirement benefits out of an estate or a trust to a beneficiary in fulfilment of a pecuniary bequest will trigger immediate realization of income under § 691(a)(2) and estate planners should draft their instruments in a way that will avoid the problem; see ¶ 6.1.01 , #7. 6.6 See-Through Trust Tester Quiz Use this quiz to test whether a particular trust qualifies as a see-through trust under the IRS’s minimum distribution trust rules ( ¶ 6.2 – ¶ 6.3 ). The quiz is in two parts, PART I (Preliminaries) and PART II (Beneficiaries and substantive terms). PART III provides some answers to the quiz.