Life and Death Planning for Retirement Benefits

Chapter 3: Marital Matters

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deduction requirements. In the IRS’s view, the retirement plan itself is an item of “terminable interest property” separate from the marital trust. Rev. Ruls. 2006-26, 2006-22 IRB 939, and 2000- 2, 2000-1 C.B. 305. This IRS positions has two implications: A. What to do on the estate tax return. Rev. Ruls. 2006-26 and 2000-2 require the executor, on the estate tax return (Form 706), to elect QTIP treatment for both the retirement benefit and the marital trust when retirement benefits are payable to a marital trust, confirming the approach seen in PLR 9442032 as well as Rev. Rul. 89 89, 1989-2 C.B. 231. B. How to draft the trust and beneficiary designation form . The IRS does not require that all the marital deduction language must be recited in the beneficiary designation form as well as in the trust instrument. Although that would be one way to comply with the IRS’s directive, Rev. Rul. 2000-2 says that the governing instrument requirements are satisfied with respect to a retirement benefit payable to a marital trust if (1) the marital trust document contains the required language ( e.g. , giving the spouse the right to all the trust’s and the plan’s income annually) and (2) the retirement plan document does not contain any provisions which would prevent the trustee of the marital trust from complying with the trust’s provisions with respect to the plan. Accordingly it is advisable to specify in the trust instrument not only that the spouse is entitled to all income of the trust (which is the standard marital deduction trust language) but in addition to specify that the spouse is entitled to all income of any retirement plan payable to the trust . See Form 4.5, Appendix B . If dealing with a would-be marital deduction trust that does not contain this language, and the participant is already deceased, check to see whether the applicable state has enacted a statute automatically correcting this defect. 3.3.04 Entitled to all income: State law vs. IRS One requirement a trust must meet if it is to qualify for the marital deduction is that the spouse must be “entitled for life to all of the income” of the trust. See ¶ 3.3.05 for how to meet the “entitled” part of this requirement. ¶ 6.1.02 (D) explains how “income” must be determined, with respect to a retirement plan that is payable to the marital trust, in order to satisfy the marital deduction requirement that the spouse be entitled to the “income.” A marital trust does not have to specify how “income” will be determined with respect to a retirement plan payable to the trust. If the spouse is entitled to the income of the retirement plan, then the trustee must determine that income in a manner that satisfies the IRS requirements, but the trust instrument does not have to spell out how that is done. In Rev. Rul. 2006-26, the IRS ruled that the “10 percent rule” method of determining “income” with respect to a retirement plan (included in the widely adopted Uniform Principal and Income Act of 1997, “UPIA 1997”) does not satisfy the marital deduction requirement for income; see ¶ 6.1.02 (C). Does this mean that every marital trust drafted prior to that ruling must be amended? No. Any trust that contains the specific direction that the trustee must pay the surviving spouse the income of any retirement plan payable to the trust does not have to be amended to reflect Rev. Rul. 2006-26, for the following reason. Under the IRS’s logic, the “income of the retirement plan” means, as noted in ¶ 6.1.02 , either the internal investment income of the account or an acceptable