Life and Death Planning for Retirement Benefits

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Chapter 6: Leaving Retirement Benefits in Trust 309
as Taxpayer A’s designated beneficiary ....” In other words, if the first trust beneficiary is not
entitled to outright distribution of the entire trust, or even of all distributions the trustee receives
from the retirement plan, we must keep looking; we must also count as beneficiaries (for purposes
of applying the tests in the IRS’s RMD trust rules #3 and #5) the beneficiary(ies) who will take
the trust when the first beneficiary dies.
However, the ruling goes on to say that we can stop our search once we reach the children
who are the apparent remainder beneficiaries under this trust. Because they will take their shares
outright and immediately when the prior beneficiary dies, we do not need to go further and find
out who would take the benefits if any of these three children predecease the surviving spouse.
From the ruling: “Since the right of each child to his/her remainder interest in the ...[trust] was
unrestricted at the death of Taxpayer A, it is necessary to consider only Taxpayers B through E
[i.e., the spouse and the three children] to determine which of them shall be treated as the
designated beneficiary of Taxpayer A’s interest in” the IRA. (Note: The ruling should say “to
determine which of them shall be treated as the oldest designated beneficiary”; all of them are
Designated Beneficiaries, and the oldest Designated Beneficiary’s life expectancy will be the
ADP.) This is consistent with, and clarifies, Example 1 of Reg. A-7(c)(3).
Later PLRs 2005-22012, 2006-08032, and 2006-10026 confirm this interpretation of the
regulation.
B. Finding an “O/R” beneficiary (future issue don’t count). The O/R-2-NLP trust requires
the existence of at least one now-living person who would be entitled to outright
distribution of the benefits upon the prior beneficiary’s death. It is not always easy to find
a younger individual to name as outright immediate beneficiary after the first beneficiary’s
death.
Future unborn issue can NOT be counted for this purpose because you cannot assume they
will ever exist. See, e.g., PLR 2008-43042, in which father died leaving his IRA to a trust for his
son “C.” C was to receive all of the trust funds no later than age 40. If he died before reaching age
40, the trust would pass to C’s descendants, if any, otherwise to C’s “heirs at law.” At the time of
father’s death, C had no descendants living. His “heir-at-law-apparent” was his mother. The IRS
ruled that the countable beneficiaries of the trust were C and his mother. PLRs 2006-10026 and -
10027 are similar.
6.3.09 Accumulation trust: “Circle” trust
One way to deal with the mystery of which beneficiaries are disregarded is to draft the trust
so that there are no beneficiaries you need to disregard. If the trust property cannot be distributed
to a nonindividual beneficiary, then it passes Rule 5 .
For example, if the trust provides “income to spouse for life, remainder outright to our
issue living at spouse’s death; provided, if at any time during spouse’s life there is no issue of ours
living, the trust shall terminate and be distributed to spouse,” it is impossible for the trust assets to
pass to anyone other than spouse or issue, all of whom are individuals. If spouse dies before issue,
issue get the benefits. If issue die before spouse, spouse gets the benefits. This is nicknamed a
“circle trust” because the group of beneficiaries is a closed circle. This approach could be
appropriate for a client who is leaving benefits to a credit shelter trust for the spouse only to save