Life and Death Planning for Retirement Benefits

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Chapter 6: Leaving Retirement Benefits in Trust 303
qualifies as a see-through trust; the nonindividual beneficiary does not “remain” as a beneficiary
as of September 30 of the year after the year of Axel’s death.
6.3.04 Disregarding “mere potential successors”
We now come to the last stand: trust beneficiaries who either definitely will, or someday
may, receive a share of the retirement benefits that are payable to the trust, and who have not been
“removed” as of the Beneficiary Finalization Date. Which members of this group can we disregard,
if any?
Reg. A-7(c), the “mere potential successor rule,” tells us which
beneficiaries in this group are disregarded in applying the trust rules. Reg. A-5(c).
The mere potential successor rule has been stated differently in each version of the regulations
(1987 and 2001 proposed, 2002 final). The final regulation’s version is as follows:
“(c). Successor beneficiary–(1) A person will not be considered a beneficiary for purposes
of determining who is the beneficiary with the shortest life expectancy...or whether a person who
is not an individual is a beneficiary, merely because the person could become the successor to the
interest of one of the employee’s beneficiaries after that beneficiary’s death. However, the
preceding sentence does not apply to a person who has any right (including a contingent right) to
an employee’s benefit beyond being a mere potential successor to the interest of one of the
employee’s beneficiaries upon that beneficiary’s death.” Emphasis added.
How does the “mere potential successor” rule apply to a trust? For purposes of testing trust
beneficiaries for “mere potential successor” status, the world can be divided into two types of
trusts: “conduit trusts” and “accumulation trusts” .
6.3.05 Conduit trust for one beneficiary
“Conduit trust” is not an official term. It is a nickname used by practitioners (and
occasionally by the IRS) for one type of see-through trust, namely, a trust under which the trustee
has no power to accumulate plan distributions in the trust. The IRS regards the conduit beneficiary
as the sole beneficiary of the trust; all other beneficiaries are considered mere potential successors
and are disregarded.
See A) with regard to using a conduit trust for a disabled beneficiary, A)
for a minors’ trust, A) for a trust for the benefit of the participant’s spouse. See
regarding a conduit trust for multiple beneficiaries. See Forms 4.6–4.8, for sample
conduit trust forms.
A. What a conduit trust is. Under a conduit trust, the trustee is required, by the terms of the
governing instrument, to distribute to the individual trust beneficiary any distribution the
trustee receives from the retirement plan (1) after the participant’s death and (2) during the
lifetime of such beneficiary. The trustee has no power to retain inside the trust
(“accumulate,” in IRS terminology) any plan distribution that is made after the donor’s
death during the lifetime of the individual conduit trust beneficiary. Note that:
 The “conduit” provision must come into effect immediately upon the participant’s
death. If the conduit requirement does not begin to apply until some later point in
time (such as after the later death of the participant’s surviving spouse) the trust is