Life and Death Planning for Retirement Benefits

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166 Life and Death Planning for Retirement Benefits
benefits sooner (see “B”) than would be the case if the spouse personally were named as
beneficiary. In addition to the loss of deferral, income-taxable retirement plan distributions to the
trust (to the extent not passed out to the spouse as “distributable net income”; are taxed
to the trust. Trust income tax rates reach the top federal bracket at a much lower level of taxable
income than individual rates do;
If the client is determined not to leave any assets outright to his spouse, but is unhappy
about the adverse RMD and income tax effects of a QTIP trust, consider making the benefits
payable to the credit shelter trust, and using other assets to fund the marital trust. Although using
this approach with income-taxable benefits is contrary to the usual rule of thumb (“don’t waste
your credit shelter paying income taxes”), this move could substantially increase the potential
deferral for the benefits if the spouse is not a beneficiary of the credit shelter trust and the
beneficiaries of the credit shelter trust are much younger than the spouse, because RMDs will be
spread out over a longer life expectancy period if the trust qualifies as a see-through .
A. How a QTIP trust qualifies for the marital deduction. Property qualifies for the estate
tax marital deduction as QTIP if (1) the spouse is entitled for life to all of the income from
the property payable at least annually, (2) no person has the power to appoint any of the
property to someone other than the spouse during her lifetime, and (3) the decedent’s
executor irrevocably elects, on the decedent’s estate tax return, to treat the property as
QTIP. See for how to determine the “income” the spouse is entitled
to. See for how to meet the “entitled” requirement. See for
requirement of a separate QTIP election for the benefits.
Terminable interests are generally not eligible for the marital deduction, but
allows the marital deduction for this type of trust, even though it definitely is a “terminable
interest.” To assure the estate tax is merely deferred not eliminated, provides that the
surviving spouse’s estate includes any property for which the marital deduction was elected at the
first spouse’s death.
B. RMD effects. If the trust qualifies as a see-through trust under the IRS’s minimum
distribution trust rules, then the Applicable Distribution Period (ADP) for benefits payable
to the trust can be based on the life expectancy of the oldest trust beneficiary. See for
how to determine if the trust qualifies as a see-through, and E) or E) for
the ADP. Note that, even if the trust qualifies as a see-through, distributing the benefits
over the single life expectancy of the surviving spouse (as the oldest trust beneficiary)
results in substantially less deferral than would be available if the spouse were named as
outright beneficiary and rolled over the benefits to her own plan; see A)–(C).
3.3.03 IRS regards benefits, trust, as separate items of QTIP
Every estate planning lawyer should know how to draft a trust that complies with the
marital deduction requirements. Many practitioners assume that, once the standard marital trust is
drafted, and the trust is named as beneficiary of the participant’s retirement benefits, qualification
of those benefits for the estate tax marital deduction is assured (assuming the spouse survives the
participant and does not disclaim her interest in the marital trust).
The IRS has a different view. The IRS’s position is that, when a retirement plan benefit is
payable to a marital trust, both the retirement plan benefit and the trust must meet the marital