Life and Death Planning for Retirement Benefits

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314 Life and Death Planning for Retirement Benefits
Many practitioners would like to have a blanket trust form that will work for all clients’
situations without further fine tuning. This approach can be hazardous when dealing with
retirement benefits.
It makes sense, if qualification for see-through trust status is important, to include a
“boilerplate” provision either prohibiting the use of the retirement benefits for payments to the
estate for debts, expenses, or taxes, or requiring that no such payments may be made from the
retirement benefits either “at all” or “on or after the Beneficiary Finalization Date.” See
and Form 4.2 If there are no assets available to pay debts, expenses, and taxes other
than the retirement benefits, consider specifying that only certain plans may be used for this
purpose, so that only the plans authorized to be so used will be “tainted” and the other(s) can be
exempted from this problem; or have the participant take withdrawals during life so his estate will
have sufficient nonretirement assets to pay these items.
Similarly, include provisions that: the trust will be irrevocable at the participant’s death
; certain adult adoptions occurring after the participant’s death will be ignored
A)); and property may not be appointed to a non-see-through trust. See Forms 4.1, 4.3, and
4.4, However, do not be misled into thinking that any trust that includes these
“boilerplate” provisions automatically qualifies as a see-through trust, eligible to take minimum
distributions based on the life expectancy of the oldest of the primary trust beneficiaries. This is
absolutely NOT the case!
Qualification as a see-through trust depends on the substantive terms of the trust. A trust
that provides “income to my spouse for life, remainder to the Salvation Army,” can NOT qualify
as a see-through trust because of the “countable” nonindividual remainder beneficiary (namely the
charity). Including a paragraph in such a trust to the effect that “retirement benefits cannot be paid
to any nonindividual beneficiary” does not fix the problem; it just makes the trust even more
defective because now (in this example) the remainder interest in the trust is not disposed of (and
may therefore revert to the donor’s estate, another nonindividual beneficiary). A “boilerplate”
provision prohibiting distributions of retirement benefits to nonindividual beneficiaries can cause
problems; see “Heather Example” at Qualification depends on the substantive terms of
the trust; see ¶ 6.3.
6.4.02 Advance rulings on see-through trust status
One expensive and time-consuming way to achieve certainty regarding the see-through
status of a trust would be to seek a private letter ruling on this point while the client is still living.
The IRS will not rule on “hypothetical” questions, but once the trust is named as the participant’s
beneficiary, the IRS should be willing to rule on whether the trust complies with the trust rules, as
it did for a living taxpayer in PLR 2003-24018. However, the IRS stated in this PLR that it was
“unable” to rule on the Applicable Distribution Period that would apply after the taxpayer’s death
until after the taxpayer had actually died.
The IRS certainly does not limit rulings to completed transactions; see, e.g. , PLR 2002-
42044, in which a surviving spouse proposed (as co-trustee of the trust named as beneficiary of
participant’s IRA) to demand that the IRA be distributed to the trust, and then (as beneficiary of
the trust) to withdraw the distribution from the trust and roll it over to her own plan. The IRS
granted her requested rulings on these proposed transactions, even though these were just as
“hypothetical” as the future death of the taxpayer in PLR 2003-24018.