Life and Death Planning for Retirement Benefits

Chapter 3: Marital Matters

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3.3.08 Combination marital deduction-conduit trust A marital trust can also be a conduit trust. Under a conduit trust, the trustee must distribute to the conduit beneficiary (the surviving spouse in this case) ALL distributions the trustee receives from the retirement plan that is payable to the trust; see ¶ 6.3.05 . There are two ways to draft a combination marital trust-conduit trust. One method is to require the trustee to withdraw from the plan each year, and distribute to the spouse, the income of the trust’s share of the retirement plan for such year or the RMD for such year, whichever is greater (and to distribute to the spouse any additional amounts the trustee withdraws from the plan). This combination is used by some practitioners who want a relatively simple structure that clearly qualifies for the marital deduction and as a see-through trust for minimum distribution purposes. See Form 4.7, Appendix B . Another method which might be of interest if the participant has many years to go before he will reach age 70½ is to require the trustee to pass all plan distributions out to the spouse (as always is required under a conduit trust), but give the spouse only the right to demand income ( ¶ 3.3.05 (B)) rather than requiring the trustee to automatically distribute all income regardless of demand. Since such a trust could defer the commencement of distributions until the participant would have reached age 70½ ( ¶ 1.6.06 (A)), this approach could substantially extend the deferral of distributions compared with a standard QTIP trust. All plan distributions could be deferred until the year the participant would have reached age 70½. This approach makes a difference only if the participant died at a relatively young age. 3.3.09 General Power marital trust A General Power marital trust is similar to a QTIP marital trust ( ¶ 3.3.02 ), in that the surviving spouse must be entitled to all of the trust’s income for life. What is different is that the spouse must also have the right to appoint the principal to herself or her estate , which gives the spouse much more control than a QTIP trust gives her. It is used less often than a QTIP, since a client willing to give the spouse this much control would usually be willing to name the spouse as outright beneficiary. For RMD purposes, if spouse is given the power to appoint the trust property at her death to her own estate, the trust will be deemed to have a nonindividual beneficiary ( ¶ 1.7.04 ), and accordingly will not qualify as a see-through trust ( ¶ 6.3.11 ) unless it is a conduit trust ( ¶ 6.3.05 ) or (possibly) a 100 percent grantor trust as to the spouse (see ¶ 6.3.10 ). 3.3.10 Automatic QTIP election for “survivor annuities” § 2056(b)(7)(C) provides that “[i]n the case of an annuity included in the gross estate of the decedent under section 2039...where only the surviving spouse has the right to receive payments before the death of such surviving spouse—(i) the interest of such surviving spouse shall be treated as a qualifying income interest for life, and (ii) the executor shall be treated as having made” a QTIP election for such property unless the executor elects not to have QTIP treatment apply. Retirement plan benefits are considered annuities, includible in the participant’s estate under § 2039 , whether or not paid in the form of true annuities, and thus are subject to this rule. Reg. § 20.2039-1(b) . The automatic QTIP treatment for “annuities” is a nice backup when retirement benefits are left outright to the spouse ( ¶ 3.3.11 ). It can also be helpful when retirement benefits are paid in the form of a true annuity and payments could continue after the surviving spouse’s death.