Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

seems to confuse this question with the entirely different issue of “separate accounts” treatment

( ¶ 6.3.02 )

Subtrust named directly as beneficiary of the benefits.

One thing is clear: If the

participant’s beneficiary designation form names the subtrust directly as beneficiary of the

plan, rather than naming the funding trust, then the only beneficiaries who “count” for

purposes of the trust rules are the beneficiaries of the subtrust named as beneficiary. PLR

2006-07031. See Form 3.5,

Appendix B ,

for a sample beneficiary designation form leaving

benefits in separate shares directly to separate trusts established under a single trust

instrument.

Benefits allocated pursuant to trustee’s discretion.

If the trustee has discretion to decide

which assets to use to fund which subtrust, and exercises its discretion by allocating the

benefits to one particular beneficiary (or share), can other beneficiaries (or beneficiaries of

other shares) be disregarded in applying the RMD trust rules?

This seems like the worst case for convincing the IRS that other beneficiaries of the trust

should be ignored, yet ironically it is one situation in which there is a favorable PLR squarely on

point! See PLR 2002-21061 (issued under the 2001 proposed regulations; see

¶ 1.1.01 )

, in which

all pre-residuary beneficiaries of a trust (including charities) were ignored in determining the

Applicable Distribution Period (ADP

; ¶ 1.2.03 )

for retirement benefits payable to the trust, because

the trustees (although they could have used the benefits to fund the pre-residuary bequests) were

legally and financially able to, and did, satisfy the pre-residuary bequests out of other assets of the

trust, and the pre-residuary beneficiaries did not have the right under state law to demand that they

be paid out of the retirement benefits.

Instrument mandates allocation; no formula.

If the trust instrument requires that the

benefits must be allocated to a certain subtrust or to certain beneficiaries, or mandates that

the benefits cannot be paid to certain beneficiaries or shares, regardless of the amount of

the benefits or any other factors, beneficiaries of the shares to which the benefits absolutely

cannot under any circumstances be allocated should be disregarded.

Trevor Example:

Trevor’s IRA is payable to the Trevor Trust. At his death the assets of the

Trevor Trust are to be divided between a marital trust and a credit shelter trust. The trust requires

that all retirement benefits are to be allocated to the marital trust, even if that means the credit

shelter trust is underfunded. Can the beneficiaries of the credit shelter trust be disregarded in

applying the RMD trust rules?

It appears the answer to this should be yes, in view of PLR 2006-20026 (see “E”) and the

language of the regulation (see “A”). However, in view of the IRS vagueness on these issues, if it

is important to Trevor that the credit shelter trust beneficiaries be disregarded, he should name the

marital trust directly as beneficiary of his IRA (see “B”).

Some PLRs mention, as part of a favorable ruling on see-through trust status, the fact that

the trust in question forbade the distribution of retirement benefits to the participant’s estate. These

PLRs imply that the IRS will disregard trust beneficiaries who are forbidden, by the terms of the

trust, to share in the retirement benefits. However, these rulings are not conclusive, because the

IRS has never on the record ruled that a trust was not a see-through trust merely because the