Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

A. Spouse is sole beneficiary: conduit trust. The spouse is considered the sole beneficiary of the participant’s account, for purposes of the special spousal rules explained at ¶ 1.3.03 , ¶ 1.6.03 (D)–(E), ¶ 1.6.04 , and ¶ 1.6.05 , if she is the sole life beneficiary of a qualifying “see-through” conduit trust that is named as sole beneficiary of the benefits. Reg. § 1.401(a)(9)-5 , A-5(c)(2), A-7(c)(3), Example 2, paragraph (ii). See ¶ 6.2.03 for the requirements of a see-through trust. See ¶ 6.3.05 for definition of “conduit trust.” However, for purposes of the spouse’s right to elect to treat an inherited IRA as her own IRA ( ¶ 3.2.03 ), the spouse must be the sole beneficiary of the IRA and this requirement is not satisfied “[i]f a trust is named as beneficiary of the IRA...even if the spouse is the sole beneficiary of the trust.” Reg. § 1.408-8 , A-5(a). Thus a trust for the spouse’s benefit (even a conduit trust) cannot exercise the spousal election or rollover rights that a spouse named individually as beneficiary can exercise. For the spouse’s ability, in some cases, to use a rollover “through” the trust to achieve the same result, see ¶ 3.2.09 . B. Spouse is sole beneficiary: grantor trust. If a trust is the sole beneficiary of the account, and the surviving spouse is treated as the owner of all of such trust’s property under the “grantor trust rules” ( ¶ 6.3.10 ), she should be considered the sole beneficiary of that trust and accordingly should be considered the participant’s “sole beneficiary” for purposes of the special spousal rules explained at ¶ 1.3.03 , ¶ 1.6.03 (D)–(E), ¶ 1.6.04 , and ¶ 1.6.05 (though not for purposes of the spousal rollover and the spousal election to treat an inherited IRA as the spouse’s own IRA). However, the regulations do not discuss grantor trusts and there is no ruling confirming that the grantor trust rules apply in this context. C. Typical QTIP-type trust: spouse is income beneficiary. If the spouse does not have the right to demand distribution to herself of either (i) the entire amount of the participant’s retirement benefits payable to the trust (as under a 100% grantor trust; see “B”), or (ii) whatever amounts are distributed from the retirement plan to the trust during her lifetime (as under a conduit trust; see “A”), the trust is not entitled to any of the special minimum- distribution privileges of the spouse. A typical example is a QTIP trust, under which the spouse is entitled only to “income” for life (with or without limited rights to principal). Many “credit shelter trusts” also fit this model. Even if such a trust qualifies as a see-through trust ( ¶ 6.2.03 ), and the spouse’s life expectancy is the ADP (because she is the oldest beneficiary of the trust; ¶ 1.5.03 (D), ¶ 1.5.04 (D)), “some amounts distributed from...[the retirement plan] to [the trust] may be accumulated in [the trust] during [the spouse’s] lifetime for the benefit of [the] remaindermen beneficiaries.” Therefore the remainder beneficiaries “count” as beneficiaries of the trust, and the spouse is not the sole beneficiary of the trust . Reg. § 1.401(a)(9)-5 , A-7(c)(3), Example 1(iii). Thus, the participant whose sole beneficiary is such a trust for the benefit of his more-than-ten-years-younger spouse can not use the joint and survivor life table ( ¶ 1.2.03 ) to compute his lifetime RMDs. The delayed Required Commencement Date (and related rules) of § 401(a)(9)(B)(iv) ( ¶ 1.6.04 – ¶ 1.6.05 ) do not apply to benefits payable to such a trust. The special method of computing the spouse’s life expectancy ( ¶ 1.6.03 (D)) does not apply; the life expectancy of the oldest trust beneficiary is calculated on a fixed-term basis as described at ¶ 1.5.05 . Rev. Rul. 2006-26, 2006-1 CB 939.