Life and Death Planning for Retirement Benefits

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326 Life and Death Planning for Retirement Benefits
to receive IRD,” is outside the normal DNI rules. Accordingly, transferring the plan itself
to the beneficiary generally does not “carry out DNI.” Se
E. No DNI deduction for distribution to charity. The trust generally does not get a DNI
deduction for distributions to charity. See
F. No DNI deduction for certain pecuniary bequests. Finally, the DNI deduction is not
available for distributions in fulfillment of a bequest of a specific sum of money (“straight”
pecuniary bequest) unless the governing instrument requires that such distribution is to be
paid in more than three instalments (which would be unusual) Reg
Thus a trustee’s distribution in fulfilment of a typical pecuniary bequest such as “pay
$10,000 to my grandchild” will not “carry out DNI” to the grandchild.
A “formula” pecuniary bequest is not considered a bequest of a specific sum of money for
this purpose, so a formula pecuniary bequest can “carry out DNI.” Reg. A
“formula pecuniary bequest” does not mean any pecuniary amount determined by a formula; it
means a bequest of a sum of money determined by a formula where the amount of the bequest
cannot be determined as of the date of death. Many marital deduction bequests are of this type.
See PLR 2002-10002 for an example of a formula pecuniary bequest to a credit shelter trust.
Roddy Example: Roddy dies leaving his $10 million IRA to the Roddy Living Trust. The trust
provides that, upon Roddy’s death, the trustee shall distribute $3.5 million to the Credit Shelter
Trust; this is a flat dollar amount (pecuniary) gift, not derived from any formula. The trustee is to
distribute the balance of the trust property to Roddy’s surviving spouse. The combined federal and
state income tax rate applicable to the trust is 45 percent. The trustee withdraws $6,363,636 from
the IRA, thus creating $6,363,636 of gross income to the trust. The trustee distributes $3.5 million
to the credit shelter trust. This distribution does not “carry out DNI” because it is in fulfilment of
a pecuniary bequest that is not payable in three or more instalments, so the trust gets no DNI
deduction. The trustee then pays $2,863,636 of income taxes on the IRA distribution. The credit
shelter trust is now funded with $3.5 million of after-tax money. The balance of the IRA
($3,636,364) is transferred to Roddy’s widow in fulfilment of her residuary marital
share.
6.5.03 Trust must authorize the distribution
The trustee can distribute to the beneficiary only what the trust authorizes the trustee to
distribute. This is not an income tax rule; it is part of the law of trusts.
If the trust instrument requires the trustee to distribute to the individual trust beneficiary all
retirement plan distributions received by the trust (whether such plan distributions are considered
income or corpus for trust accounting purposes), the DNI resulting from the plan distributions
would be carried out and taxable to the beneficiary. Reg.
The problem is that some trusts are drafted without thought of the income tax consequences
of the retirement plan distributions. Trustees can find themselves in the unhappy situation of not
being able to pass out retirement plan distributions to the beneficiary because the trust instrument
does not authorize it:
Paul Example: Paul leaves his IRA to a credit shelter trust that requires the trustee to pay all
income of the trust to Paul’s wife for life, and hold the principal in trust for distribution to Paul’s