Life and Death Planning for Retirement Benefits

Chapter 3: Marital Matters

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However, the ultimate choice of remainder beneficiaries remains with the participant -donor; compare the General Power marital trust ( ¶ 3.3.09 ). Leaving retirement benefits to a QTIP trust is no tax bargain. Making benefits payable to a marital trust, as opposed to the spouse individually, often results in forced distribution of the benefits sooner (see “B”) than would be the case if the spouse personally were named as beneficiary. In addition to the loss of deferral, income-taxable retirement plan distributions to the trust (to the extent not passed out to the spouse as “distributable net income”; ¶ 6.5.02 ) are taxed to the trust. Trust income tax rates reach the top federal bracket at a much lower level of taxable income than individual rates do; ¶ 6.5.01 . If the client is determined not to leave any assets outright to his spouse, but is unhappy about the adverse RMD and income tax effects of a QTIP trust, consider making the benefits payable to the credit shelter trust, and using other assets to fund the marital trust. Although using this approach with income-taxable benefits is contrary to the usual rule of thumb (“don’t waste your credit shelter paying income taxes”), this move could substantially increase the potential deferral for the benefits if the spouse is not a beneficiary of the credit shelter trust and the beneficiaries of the credit shelter trust are much younger than the spouse, because RMDs will be spread out over a longer life expectancy period if the trust qualifies as a see-through ( ¶ 6.2.03 ). A. How a QTIP trust qualifies for the marital deduction. Property qualifies for the estate tax marital deduction as QTIP if (1) the spouse is entitled for life to all of the income from the property payable at least annually, (2) no person has the power to appoint any of the property to someone other than the spouse during her lifetime, and (3) the decedent’s executor irrevocably elects, on the decedent’s estate tax return, to treat the property as QTIP. § 2056(b)(7) . See ¶ 3.3.04 for how to determine the “income” the spouse is entitled to. See ¶ 3.3.05 – ¶ 3.3.06 for how to meet the “entitled” requirement. See ¶ 3.3.03 for requirement of a separate QTIP election for the benefits. Terminable interests are generally not eligible for the marital deduction, but § 2056(b)(7) allows the marital deduction for this type of trust, even though it definitely is a “terminable interest.” To assure the estate tax is merely deferred not eliminated, § 2044 provides that the surviving spouse’s estate includes any property for which the marital deduction was elected at the first spouse’s death. B. RMD effects. If the trust qualifies as a see-through trust under the IRS’s minimum distribution trust rules, then the Applicable Distribution Period (ADP) for benefits payable to the trust can be based on the life expectancy of the oldest trust beneficiary. See ¶ 6.2 for how to determine if the trust qualifies as a see-through, and ¶ 1.5.03 (E) or ¶ 1.5.04 (E) for the ADP. Note that, even if the trust qualifies as a see-through, distributing the benefits over the single life expectancy of the surviving spouse (as the oldest trust beneficiary) results in substantially less deferral than would be available if the spouse were named as outright beneficiary and rolled over the benefits to her own plan; see ¶ 3.2.01 (A)–(C).

IRS regards benefits, trust, as separate items of QTIP

Every estate planning lawyer should know how to draft a trust that complies with the marital deduction requirements. Many practitioners assume that, once the standard marital trust is drafted, and the trust is named as beneficiary of the participant’s retirement benefits, qualification