Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

 Transfer the plan itself, rather than a distribution. In the Jody Example, the trustee could transfer the 401(k) plan itself to Angelina, rather than withdrawing money from the plan and distributing the money to Angelina. See ¶ 6.1.05 . Such a transfer generates no gross income at the trust level and accordingly the separate share rule for allocation of DNI never comes into play. The problem of Reg. § 1.663(c)-2(b)(3) is avoided. See ¶ 6.5.07 .  Fund other shares first. If the trustee wants to allocate a particular IRD-corpus item to one beneficiary’s share, the trustee can distribute all the other assets first, fully funding all the other beneficiaries’ shares before the year in which he withdraws funds from the plan. Then he is left with only one asset, the retirement plan, which he cashes out in the later year. This cash can only be used to fund one beneficiary’s share (because all other beneficiaries have received their shares in full in previous years), so the distribution carries out all the DNI. 6.5.07 Income tax effect of transferring plan See ¶ 6.1.05 regarding the ability of a trust or estate to transfer an inherited IRA or plan to the beneficiaries of the trust or estate. This ¶ 6.5.07 discusses the income tax effects of such a transfer to a specific or residuary legatee. For transfer in fulfilment of a pecuniary bequest, see ¶ 6.5.08 . The general rule is that the transfer of an inherited retirement plan “by the estate of the decedent or a person who received such right by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent” triggers immediate realization of the income represented by the retirement plan, because it is the transfer of a right to receive IRD. § 691(a)(2) , first sentence; see ¶ 4.6.03 . However, this general rule does not apply to a “transfer to a person pursuant to the right of such person to receive such amount by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent.” § 691(a)(2) (second sentence). Thus, when a retirement benefit is transferred out of an estate or trust to a beneficiary of the estate or trust, the transferring entity is not taxed on the transfer (for exception see ¶ 6.5.08 ). Instead, the transferee is taxable on the IRD as and when it is paid to such transferee. § 691(a)(1)(C) ; Reg. § 1.691(a)-4(b) . Clothier Example: Clothier’s IRA is payable to his estate. Clothier’s will leaves his personal effects, automobile, and IRA to his sister Wanda, and leaves the residue of the estate to his brother. Clothier’s executor transfers the personal effects, automobile, and IRA to Wanda. The transfer to Wanda is not a taxable event. Wanda withdraws money from the IRA. The withdrawal is taxable to Wanda as IRD. Reg. § 1.691(a)-4(b)(2) . The “person” to whom the right-to-receive-IRD is transferred could be a charity (see PLRs discussed at “B”), or a trust (see PLR 2008-26028), as long as the transferee is the beneficiary entitled to receive that asset under the decedent’s trust or from the decedent’s estate. A. Transfer from trust to trust beneficiary. If the right-to-receive IRD is distributed as a specific bequest from a trust, or upon termination of the trust to a residuary legatee, the beneficiary who is entitled to the item, and not the trust, bears the income tax. Reg. § 1.691(a)-2(a)(3) , (b) , Example 1; § 1.691(a)-4(b)(2) , (3) . See PLRs 9537005 (Ruling 7), and 9537011.