Life and Death Planning for Retirement Benefits

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Chapter 6: Leaving Retirement Benefits in Trust 313
B. Conduit distributions must begin at participant’s death. Suppose a trust provides
income to the participant’s spouse for life, with remainder passing to the participant’s issue,
but with each issue’s share to be held in trust until the beneficiary reaches age 30. To make
the trust “pass” the trust rules, can the trust become a conduit trust for the issue on the
surviving spouse’s death? No. Se A).
Reminder: If the spouse predeceases the participant she does not “count” as a beneficiary,
and terms that would have applied had she survived are irrelevant. If the spouse predeceases, you
test the trust by looking ONLY at the terms that apply to the children’s interests, so having a
conduit trust for the children on the participant’s death if the spouse does not survive him could be
appropriate.
C. “Switch” trusts. Under a “switch” or “toggle” trust, the trust is set up as a conduit trust
for one beneficiary, but a “trust protector” is given the power to convert the trust, by
amendment, to an accumulation trust. The amendment power may require the trustee to
also change the remainder beneficiaries of the trust, if some of the remainder beneficiaries
under the conduit trust would not be suitable under an accumulation trust.
The benefit gained by this elaboration is the flexibility to cut down on the beneficiary’s
access to the retirement plan. This flexibility would be desirable if the beneficiary is in financial
trouble. But by definition this approach is helpful in this way only if the beneficiary gets into
trouble during a very narrow window of time—either just before the participant’s death (too late
for the participant to amend his estate plan) or just after it (before the Beneficiary Finalization
Date, which is the deadline by which the trust protector must exercise the amendment power).
The approach is based on PLR 2005-37044, which involved a trust under which a trust
protector had and exercised such an amendment power. Following court proceedings to reform the
trust to the IRS’s liking, the IRS ruled that the exercise of the amendment power did not cause the
trust to lose its see-through status, because the trust protector’s actions: carried out specific
provisions adopted by the participant (i.e., the trust protector did not simply substitute some
provisions of its own devising); were effective retroactively to the date of death and so could “be
treated as a part of” the original trust instrument; and were “treated as a disclaimer under the laws
of” the applicable state. The finding that state law treated this trust amendment as a “disclaimer”
is mysterious because the trust protector’s action was not a disclaimer and was nothing like a
disclaimer.
Some advisors advocate the “switch” trust as a planning technique, seemingly regarding
this single rather messy PLR as if it established an IRS-approved prototype trust. Yet the IRS’s
subsequent turn against post-death trust modifications (se makes it unclear whether this
PLR could be duplicated today. An alternative view is that the “toggle” approach involves
substantial complications, relying on a shaky “precedent,” to obtain a modest benefit.
6.4 Estate Planning with the RMD Trust Rules
Now that we understand the minimum distribution trust rules (see ¶ 6.3), the next
step is to see how these the rules affect estate planning choices.
6.4.01 Boilerplate provisions for trusts named as beneficiary