Life and Death Planning for Retirement Benefits

Chapter 6: Leaving Retirement Benefits in Trust

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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); see ¶ 1.7.04 . 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 § 678 , 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 at ¶ 6.3.08 ), 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 This ¶ 6.5 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. § 641 . Fiduciary income taxation is an extremely complex topic; for complete treatment of the subject see sources in the Bibliography . 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 ¶ 2.1.06 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 Chapter 7 . This section deals extensively with income in respect of a decedent (IRD). For definition and basic rules of IRD, see ¶ 4.6 . 6.5.01 Income tax on retirement benefits paid to a trust