Life and Death Planning for Retirement Benefits

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Chapter 3: Marital Matters 165
interest”; , followed by several exceptions to the exception (certain terminable
interests do qualify for the marital deduction after all!). The key to qualifying for the marital
deduction, therefore, is to make sure that any property left to the surviving spouse either (1) is not
a “terminable interest,” or (2) if it is a terminable interest, it qualifies for one of the exceptions to
the “terminable interest rule.” Here are the steps to follow:
A. Choose a method. Benefits can qualify for the marital deduction if left to the spouse
outright , to a “QTIP” marital trust , to a “General Power” marital trust
, or in certain forms of annuity .
B. If using a trust, take three extra steps. If leaving benefits to a QTIP or General Power
marital trust, you need to cover three additional points to make sure the benefits qualify for
the marital deduction. First, you need to understand the IRS’s concept of how the
“terminable interest rule” applies to retirement benefits payable to a marital trust; see
Second, you need to assure that the “income of the retirement plan” is determined
correctly for marital deduction purposes; see Third, you must make sure the
spouse is “entitled” to all that income; see
C. Don’t forget RMDs. Work out how the minimum distribution rules will work
with the method you have chosen. See comments under each method, and
D. Pay attention to funding formula. If the benefits are payable to a trust that is to be
divided, at the participant’s death, between a “marital trust” and a “credit shelter” (or
bypass) trust, it is recommended that either the division be by means of a “fractional”
(rather than a “pecuniary”) formula, or, if a pecuniary formula is used, that the benefits be
made payable directly to the marital trust so they don’t become subject to the pecuniary
formula; see
E. Spousal consent. Finally, under certain types of retirement plans, benefits cannot be left
to a trust without the consent of the participant’s spouse. See
3.3.02 Leaving retirement benefits to a QTIP trust
The most popular method of leaving retirement benefits to benefit the surviving spouse is
leaving the benefits to her outright . The second most popular is to leave benefits to a
“qualified terminable interest property” (QTIP) trust.
The “classic” QTIP trust provides for all income of the trust to be paid to the surviving
spouse for her life, with the principal being paid to the donor’s issue on the spouse’s death. The
spouse may or may not be given access to the principal of the trust during her life (such as through
a standard based on health and support, or in the trustee’s discretion, or through a 5-and-5 power).
The spouse may or may not be given a limited power to appoint the principal at her death.
However, the ultimate choice of remainder beneficiaries remains with the participant-donor;
compare the General Power marital trust .
Leaving retirement benefits to a QTIP trust is no tax bargain. Making benefits payable to
a marital trust, as opposed to the spouse individually, often results in forced distribution of the