Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

the spouse’s own IRA). However, the regulations do not discuss grantor trusts and there are no rulings 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 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 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, 2006-22 IRB 939. 1.7 The Beneficiary and the “ Designated Beneficiary” This ¶ 1.7 explains what a “beneficiary” is ( ¶ 1.7.02 ); the difference between a “beneficiary” and a “Designated Beneficiary” ( ¶ 1.7.03 ); the problems when an estate is a beneficiary ( ¶ 1.7.04 ); and special rules that apply when there are multiple beneficiaries ( ¶ 1.7.05 – ¶ 1.7.06 ). See ¶ 1.8 for the “separate accounts” rule and how to modify the RMD results after the participant’s death. 1.7.01 Significance of having a Designated Beneficiary The valuable income tax deferral permitted under the “life expectancy of the beneficiary” or “stretch” payout method ( ¶ 1.1.03 , ¶ 1.5.05 (C)) is available only for retirement plan death benefits that pass to a Designated Beneficiary. Not every beneficiary is a Designated Beneficiary. If there is deemed to be no Designated Beneficiary, the payout options (under the applicable “no- DB rule”) will generally be less favorable than a payout over the life expectancy of an individual Designated Beneficiary. Therefore, estate planners must understand the meaning of the term Designated Beneficiary and in most cases will want to take steps to assure that clients have a Designated Beneficiary so as to maximize the value of the client’s retirement plans for the benefit of the client’s chosen beneficiaries. However, there are situations in which it doesn’t matter whether there is a Designated Beneficiary; see ¶ 6.2.01 . 1.7.02 Who is the participant’s beneficiary?