Life and Death Planning for Retirement Benefits

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Chapter 6: Leaving Retirement Benefits in Trust 279
is important, leave the benefits to the various beneficiaries directly (i.e., do not leave the
benefits to a trust to be divided among the multiple beneficiaries) in the beneficiary
designation form. See Form 3.5 For the same reason, if leaving benefits to a
trust for the participant’s surviving spouse, and the trust is to pass outright to the
participant’s issue on the death of the surviving spouse, name the trust as beneficiary only
if the participant’s spouse survives the participant; name the issue directly as contingent
beneficiaries if the spouse does not survive. See and Form 3.4,
7. To avoid the issue of whether funding a pecuniary bequest with the “right to receive IRD”
is a taxable transfer , avoid having retirement benefits pass through a pecuniary
funding formula. If benefits must pass to a trust, make them payable to a trust that will not
be divided up. If benefits are going to a trust that will be divided, either specify clearly (in
both the beneficiary designation form and the trust instrument) which trust share these
retirement benefits go to (so that the benefits pass to the chosen share directly, rather than
through the funding formula), or use a fractional formula (fulfillment of which does not
trigger immediate realization of IRD) rather than a pecuniary formula (which may).
8. Including a spendthrift clause poses no RMD issues, even in a conduit trust. Since the Code
itself imposes spendthrift restrictions on retirement plans (see , such clauses
are favored by government policy.
9. Consider whether certain classes of income should be directed to certain beneficiaries. For
example, in a trust that authorizes the trustee to accumulate retirement plan distributions
, the trust could direct the trustee to distribute all “investment income” to the life
beneficiary, to avoid having the post-2012 “surtax” on investment income
imposed on the trust; this could make sense if it is expected that the trust beneficiary will
probably not have a high enough income to incur the surtax. Such an allocation of a specific
class of income is respected for income tax purposes if it has independent economic effect;
see E).
10. If the trust has charitable and noncharitable beneficiaries, either direct the retirement
benefits to be used to fund the charitable gifts (if the goal is to have the benefits pass income
tax-free to the charities) or forbid such use (if the goal is to achieve a stretch payout for the
trust’s individual beneficiaries).
6.1.02 Trust accounting for retirement benefits
Suppose a trust is the beneficiary of a deceased client’s $1 million IRA. The trust provides
that the trustee is to pay all income of the trust to the client’s surviving spouse for life, and at the
spouse’s death the trustee is to distribute the principal of the trust to the client’s children. The trust
receives a $50,000 required minimum distribution RMD; see from the IRA. Is that
distribution “income” that the trustee is required to pay to the spouse? Or is it “principal” that the
trustee must hold for future distribution to the client’s children? Or some of each?
A. Trust accounting income vs. federal gross income. A retirement plan distribution
generally will constitute gross income to the trust for federal income tax purposes
, but that same distribution may be “principal” (or “corpus,” to use the IRS’s
preferred term) for trust accounting purposes: