Life and Death Planning for Retirement Benefits

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Chapter 6: Leaving Retirement Benefits in Trust 323
be treated as the “transferor” of the GST-nonexempt share for GST tax purposes, so there is no
generation-skipping transfer when the share passes to the child’s issue at the child’s death.
However, a general power of appointment at death requires that the child have the ability
to appoint the trust to the child’s estate, which is a nonindividual. § 2041(b)(1); se Thus,
if the child has a general power of appointment at death the nonexempt share trust will flunk the
RMD trust rules, unless it is a conduit trust.
Another solution is to give the child the right to withdraw all of the trust principal during
his life with the consent of a trustee who does not have a substantial interest adverse to the child’s
exercise of such power, instead of giving the child a general power of appointment at death. This
causes the trust to be included in the child’s estate under § 2041(a)(2), (b)(1)(C), making the child
the transferor for GST tax purposes, without causing the trust to have a nonindividual beneficiary.
However, this type of withdrawal power would NOT make the trust a grantor trust under
so the remainder provisions of the trust would still have to comply with the RMD trust rules, just
as was true for the GST-exempt share (see “A”).
6.4.08 “Younger heirs at law” as “wipeout” beneficiary
Some practitioners use, as the ultimate or “wipeout” beneficiary of a trust, the “heirs at
law” of the participant (or of a particular beneficiary) who are living at the applicable time, with a
proviso that any “heir at law” who is older than the oldest trust beneficiary (determined without
regard to the wipeout provision) shall be deemed to have died prior to the applicable date.
There is no PLR to date specifically “blessing” this approach. It appears, based on such
PLRs as 2006-10026 and -10027 and 2008-43042 (discussed a , that the IRS would “test”
such a provision by determining who would take under the provision if all the other trust
beneficiaries died immediately after the participant, thus activating the provision; and that the
provision would “work” if there is some identifiable living individual who would take under the
provision at the time of the participant’s death.
6.5 Trust Income Taxes: DNI Meets IRD
Thi deals with the income tax treatment of retirement benefits that are paid to a trust
and includible in the trust’s gross income. Income taxation of retirement benefits paid to an estate
is generally the same as the treatment described here for trusts.
Fiduciary income taxation is an extremely complex topic; for complete treatment of the
subject see sources in the The purpose of this discussion is solely to explain how
the trust income tax rules apply uniquely to retirement plan distributions.
The discussion here does not apply to a nontaxable distribution from a retirement plan; see
for a catalogue of no-tax and low-tax retirement plan distributions. For income tax
considerations in connection with a trust’s distributions to charity, see
This section deals extensively with income in respect of a decedent (IRD). For definition
and basic rules of IRD, see
6.5.01 Income tax on retirement benefits paid to a trust