Life and Death Planning for Retirement Benefits

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322 Life and Death Planning for Retirement Benefits
as an O/R-2-NLP trust unless further steps are taken to assure that the benefits must pass
outright to younger beneficiaries if all the issue die before reaching the specified ages.
Having the trust “convert” at the spouse’s death to conduit trusts for the issue will NOT
work; see B).
Instead, consider providing that the trust terminates early and passes outright to the spouse
if the spouse is the only survivor , and passes outright to the last surviving issue if, at any
time after the spouse’s death, there is only one issue living (“last man standing”; B)).
Alternatively, name a younger individual as the outright “wipeout” beneficiary; see B),
6.4.07 Generation-skipping and “perpetual” trusts
The RMD trust rules pose challenges for an estate planner who is trying to either avoid the
generation-skipping transfer (GST) tax or take advantage of the GST exemption. For details on
the GST tax, see § 2601–§ 2664 and sources in the A client may have the erroneous
idea that a trust named as IRA beneficiary can somehow “stretch out” the IRA distributions
perpetually over the ever-longer life expectancies of succeeding generations. Actually it is not
possible to do that. Se G).
A. Perpetual trusts; GST-exempt shares. Leaving retirement benefits to a generation-
skipping trust is usually not considered advisable because part of the GST exemption will
be “wasted” paying income taxes. However, it can be appropriate for a Roth plan
(distributions from which are not subject to income tax; see , or for a traditional
plan if the client has no other assets suitable for a generation-skipping gift.
Leaving the benefits directly to grandchildren outright, or to conduit trusts for the benefit
of “skip persons,” poses no particular problems. If benefits are left to an “accumulation trust”
for the benefit of the participant’s descendants, the problem from the point of view of
“passing” the RMD trust rules is to name an individual beneficiary who will receive the trust assets
immediately, outright, on the death of all prior beneficiaries. One way to accomplish this is to use
the “last man standing” approach so that, if at some time in the future there is only one issue of the
participant living, the trust terminates and is distributed to that one individual at that time; see
B. Leaving benefits to a “GST-nonexempt” share. A common estate planning technique
for larger estates is for a parent to leave the amount of his GST exemption to a generation-
skipping trust, and the rest of his estate to “GST-nonexempt” trusts for his children. Since
leaving taxable retirement benefits to the GST-exempt trust wastes GST exemption (see
“A”), it is usually considered preferable to leave the benefits to the GST-nonexempt shares.
If the benefits are left outright to the children, or to GST-nonexempt trusts that are conduit
trusts for the children , there is no problem—the children are recognized as the
Designated Beneficiaries. If the benefits are left to an accumulation trust there can be a problem:
The GST-nonexempt trust is by definition not sheltered by the parent’s GST exemption. Therefore
to avoid having a GST tax imposed on the trust at the child’s death (when the trust passes to the
child’s issue, who are grandchildren of the original donor) it is common practice to give the child
a general power of appointment by will over the GST-nonexempt share. This causes the child to