Life and Death Planning for Retirement Benefits

Chapter 3: Marital Matters

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additional complications. For more on this alternative, see the author’s Special Report: Retirement Benefits and the Marital Deduction (Including Planning for the Noncitizen Spouse) ( Appendix C ).

Distribute all income to spouse annually

The easiest way to comply with the all-income requirement is to require the trustee to withdraw from the retirement plan each year, and distribute to the spouse, the “income” of the retirement plan. Reg. § 20.2056(b)-5(f)(8) . This method was “blessed” by the IRS in Rev. Rul. 89 89, 1989-2 CB 231, and Rev. Rul. 2006-26, and is believed to be the most commonly used by estate planners. See, e.g. , PLRs 9321035, 9321059, 9418026, and 9348025. For an example of a form using this method, see Form 4.5, Appendix B . Unless the “income” substantially exceeds the RMD, this method does not have significant tax drawbacks (beyond the usual drawbacks of leaving retirement benefits to a marital trust in the first place; see ¶ 3.3.02 ). Even if use of this method does require distribution to the spouse of an amount significantly greater than the RMD, that would not mean loss of deferral if the spouse rolls over the excess to her own retirement plan. The IRS has repeatedly ruled that a surviving spouse may roll over retirement plan distributions that are made to her through a trust if she was entitled to receive that amount; see ¶ 3.2.09 . While these rulings generally involved the spouse’s rolling over a one-time at-death distribution of the entire plan balance, PLRs 2005-43064 and 2009-44059 affirm that the same principle would allow the spouse to roll over any distributions she is entitled to receive (through the trust) from the inherited retirement plan to the extent such distributions exceed the RMD (which cannot be rolled over; ¶ 2.6.03 ). Prior to 2000, the IRS’s position was that the distribution from the plan of all income annually was the only method available for a retirement benefit payable to a trust to qualify for the marital deduction. Rev. Rul. 89 89, 1989-2 CB 231. In Rev. Rul. 2000-2, 2000-1 CB 305, the IRS reversed this position and acknowledged that a marital trust funded with retirement benefits can use other methods permitted in its regulations for meeting the “entitled for life to all income” requirement. Rev. Rul. 2000-2 announced that it “obsoleted” Rev. Rul.89-89, which led to some confusion among practitioners. The method “blessed” in Rev. Rul. 89-89 for complying with the entitled-to-all-income requirement (namely, requiring annual distribution of all plan income to the spouse) still works; Rev. Rul. 2000-2 obsoleted Rev. Rul. 89-89 only to the extent Rev. Rul. 89- 89 said this was the only method that worked. Suppose a marital deduction trust receives income throughout the year, collects it in a bank account, and then periodically distributes everything in the account to the surviving spouse—say, quarterly or annually. What happens if the surviving spouse dies after the trust has collected some income but before the trust has gotten around to distributing that income to her? The trustee is NOT required to pay this “stub income” to the surviving spouse’s estate as a condition of qualifying for the marital deduction. Reg. § 20.2056(b)-7(d)(4) specifically provides that “An income interest does not fail to constitute a qualifying income interest for life solely because income between the last distribution date and the date of the surviving spouse’s death is not required to be distributed to the surviving spouse or to the estate of the surviving spouse.” Yet some trust-drafters, apparently under the mistaken impression that such a provision is required as a condition of qualifying for the marital deduction, include in their marital trusts a provision that Do not require stub income to be paid to spouse’s estate!