Life and Death Planning for Retirement Benefits

Chapter 3: Marital Matters

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required minimum distribution RMD) annually. See Chapter 1 . Thus, if the trust instrument requires the trustee to withdraw the “income” annually, what it is really requiring is that the trustee withdraw from the retirement plan each year the income or the RMD, whichever is the larger amount; see PLR 2005-22012 for an example of a marital trust that specified the trustee had to withdraw the greater of the two amounts. The trustee must calculate both amounts each year in any case. The RMD may be more or less than the income. The spouse is entitled to the “income,” but the marital deduction rules do not require that she receive the entire RMD (if that is larger than the income). If the income of the retirement plan benefit is greater than the RMD, it would be desirable not to have to distribute the excess amount out of the retirement plan if such distribution could have been deferred until later under the minimum distribution rules. The maximum period of deferral for benefits left to a classic QTIP trust that qualifies as a “see-through” ( ¶ 6.2.03 ) is the life expectancy of the oldest trust beneficiary ( ¶ 1.5.03 (D), ¶ 1.5.04 (D)), who is (in most cases) the spouse. If the surviving spouse is age 51 or older at the participant’s death, the RMD based on her life expectancy ( ¶ 1.5.05 ) will be more than three percent of the benefits: The “divisor” at age 51 under the Single Life Table is 33.3, which translates to an RMD of three percent of the value of the plan. Each year the divisor declines and the corresponding percentage increases ( ¶ 1.2.01 , #3). Thus, unless the income rate of the retirement benefit is more than three percent, the RMD for a spouse over age 51 will be more than the income—meaning that the trustee will have to withdraw more than the income. Thus, in many cases, there is no advantage to allowing the trustee to accumulate income inside the retirement plan because the minimum distribution rules will prevent him from doing so. B. Other methods of complying with “entitled” requirement . If the current distribution of “all income” would result in significant acceleration of distributions, the planner will look for a way to avoid such current distribution. Other methods of meeting the “entitled” requirement are permitted in IRS regulations and by Rev. Rul. 2006-26. One approach that some have considered is to treat the retirement plan as “unproductive” ( i.e., non-income-producing) property, which can be held in a marital trust if the surviving spouse is given the right to demand that it be made income producing (see Reg. § 20.2056(b)-5(f)(4) ) or if compensating payments are made to her from other assets of the trust (Reg. § 20.2056(b)- 5(f)(5) ). The problem with this approach is that it is clear (from Rev. Rul. 2006-26) that the IRS does not consider the IRA to be unproductive property if it is invested in income-producing property. Nor is it clear that distributions to the spouse from other (non-retirement plan) assets held by the marital trust could be used to replace the missing income payments with regard to the retirement plan, since the IRS regards them as separate items of QTIP. A more viable approach is to give the surviving spouse the right to demand the income, rather than distributing it to the spouse automatically, as permitted by Reg. § 20.2056(b)-5(f)(8) . Use of this method of complying with the entitled-to-all-income requirement involves substantial additional complications. For more on this alternative, see the author’s Special Report: Retirement Benefits and the Marital Deduction (Including Planning for the Noncitizen Spouse) ( Appendix C ). 3.3.06 Distribute all income to spouse annually