Life and Death Planning for Retirement Benefits

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218 Life and Death Planning for Retirement Benefits
PLRs 2002-18039, 2005-22012, 2005-37044, 2006-08032, 2006-20026, 2007-03047, and
2007-04033.
Despite this string of favorable rulings, however, PLR 2007-42026 signaled a
changing IRS attitude towards post-death state court actions reforming or interpreting trusts for
minimum distribution purposes. PLR 2010-21038 (see quote at the beginning of this section) states
the new IRS position on trust reformations loud and clear. In this PLR, “B” died leaving his IRA
to a trust for “C” and “D.” C and D had both lifetime and testamentary powers of appointment
over the trusts, including the power to appoint to charity (i.e., a nonindividual beneficiary). After
B’s death, the trustee obtained a court order reforming the trust—eliminating the charitable
beneficiaries, prohibiting use of retirement benefits to pay taxes, requiring pass-through of IRA
distributions to the individual beneficiaries, etc.—then sought an IRS ruling that the trust qualified
as a see-through. The IRS refused to grant the ruling, citing, in support of its position, numerous
cases as well as the possibility of collusive reformations solely for the purpose of reducing federal
tax. The IRS ruled that “B” had “no DB.”
B. Reforming will or trust for other reasons. There are reasons other than attempting to
achieve see-through status why a post-death reformation could improve results with respect
to retirement benefits. In PLR 2008-50004, the decedent’s IRAs became payable to his
estate as beneficiary, as a result of a disclaimer by the named beneficiary of the IRA. The
will provided for certain charitable bequests without specifying the funding source for
payment of these bequests. A court reformed the will to provide that the IRAs would be
the source of funding the charities’ shares of the estate, and the IRS allowed the transfer of
the IRAs to the charities (see ¶ 7.4.05) in fulfilment of these shares. The
combination of disclaimer and reformation diverted the IRAs to the charities without
payment of income tax.
4.5.07 Choose the right cleanup strategy
Consider carefully what cleanup strategy to use. A “cleanup” does not always work as
expected.
For example, PLR 2008-46028 (also issued as PLR 2008-49020) involved a state court’s
interpretation of a beneficiary designation form rather than a reformation. The decedent’s IRA
beneficiary designation form said only, in the space provided for the name of the beneficiary, “as
stated in wills.” The participant’s will left all of his estate (aside from some specific bequests of
tangible personal property) to “Trust T.” Trust T provided for disposition of the entire trust (other
than specific gifts of certain real estate) to eight individuals in specified percentages.
Rather than obtaining a state court order simply confirming that the meaning of the
beneficiary designation form was that the beneficiary of the IRA was “Trust T,” the executor
obtained a state court order ruling that: The eight individuals should be treated as having been
named directly as beneficiaries by the participant; the individuals were “Designated Beneficiaries”
of the participant’s IRA within the meaning of the Code and regulations; and the “separate
accounts” rule was applicable in determining the applicable distribution periods for each
beneficiary’s share of the benefits!
Not only did this court ruling contradict the clear sense of the beneficiary designation form
(which pointed to the beneficiary of the WILL, not the beneficiaries of the TRUST), it put the state