Life and Death Planning for Retirement Benefits

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320 Life and Death Planning for Retirement Benefits
a retirement benefit is an asset of the trust that is capable of being valued and divided; while
many practitioners assume the answer is “yes” with respect to an IRA (which is normally
a mere custodial account holding easily-valued securities), the answer is less obvious for a
nonassignable benefit under a traditional pension plan.
Another issue is whether the built-in income tax “debt” should be deducted in valuing the
retirement benefits for purposes of determining the amount distributable to the beneficiary. A third
is the hassle of dividing and transferring an inherited retirement plan; see In view of these
complications, consider not using such staged distribution for a trust that will hold retirement
benefits.
F. Whether to have a separate trust for each minor. If the benefits are left to a typical
“family pot” trust for the benefit of all of the donor’s children collectively, then (assuming
the trust qualifies as a see-through) the ADP will be the life expectancy of the oldest child.
The donor could leave the benefits to separate trusts, one for the benefit of each child, to
enable each child’s trust to use that child’s life expectancy as the ADP.
The drawbacks of this approach are: the money is divided into rigid predetermined shares,
without the ability of the trustee to distribute more money on behalf of a child who needs it more;
and, unless the trusts are conduit trusts, you still have the problem of finding a younger remainder
beneficiary if the child dies before reaching the age for outright distribution. If the remainder
beneficiaries of each individual child’s separate trust are the other siblings, you are right back with
the oldest child’s life expectancy being the ADP for all the trusts.
G. Custodianship under UTMA. Another choice (ideal where there are not enough assets to
justify a trustee’s fee) is to leave the benefits to a custodian for the child under the Uniform
Transfers to Minors Act (“UTMA”). § 3(a) of UTMA permits a “person having the right
to designate the recipient of property transferable upon the occurrence of a future event”
to nominate (“in a writing designating a beneficiary of contractual rights”) a custodian to
hold such property under the Act on behalf of a minor beneficiary.
The main drawbacks of leaving benefits to a custodian under UTMA are that the
beneficiary becomes entitled to the money outright at a certain age (typically 18 or 21, depending
on state law), and that age may be younger than the age the parents would ideally like. Also, the
benefits must be left to specific individuals (such as, typically, equal shares to the surviving
children). You lose the flexibility of leaving benefits to a “family pot” trust where the trustee has
discretion to spend more for one child than another depending on their needs.
The IRS has never ruled on the question of who is considered the Designated Beneficiary
when benefits are paid to a custodian under UTMA. Presumably the IRS would recognize that the
minor is the “beneficiary.”
6.4.06 Planning choices: Trust for spouse
Here are options to consider for a trust intended to provide life income to the participant’s
surviving spouse, including a credit shelter or QTIP trust, when qualifying for see-through trust
status is an important goal . If the client is naming any type of trust for the spouse as
beneficiary, be sure the client understands the income tax drawbacks of leaving benefits to a trust
for the spouse as opposed to outright to the spouse; see B). If qualifying for the marital