Life and Death Planning for Retirement Benefits

Chapter 6: Leaving Retirement Benefits in Trust

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not a conduit trust; see ¶ 6.3.12 (B). A trust cannot start out as an accumulation trust (say, during the life of the spouse), then flip to being a conduit trust for the remainder beneficiary (say the children) after the life beneficiary’s death and still qualify as a see-through. The reason is that the trust may have already accumulated plan distributions (during the spouse’s lifetime), so the trust does not meet the definition of a conduit trust at the participant’s death.  The trustee must pay out all distributions the trust receives from the retirement plan, not just “required minimum distributions.” As the IRS describes it in Reg. § 1.401(a)(9)-5 , A-7(c)(3), Example 2, “all amounts distributed from A’s account in Plan X to the trustee while B is alive will be paid directly to B upon receipt by the trustee of Trust P ... No amounts distributed from A’s account in Plan X to Trust P are accumulated in Trust P during B’s lifetime for the benefit of any other beneficiary.” Emphasis added. B. How a conduit trust is treated under the RMD rules. With a conduit trust for one individual beneficiary, the retirement benefits are deemed paid “to” that individual beneficiary for purposes of the minimum distribution rules, and accordingly the “all beneficiaries must be individuals” test is met. As the IRS explains in Reg. § 1.401(a)(9)-5 , A-7(c)(3), Example 2, under a trust with these terms, “ ...B [the conduit beneficiary] is the sole designated beneficiary of A’s account in Plan X for purposes of determining the designated beneficiary under section 401(a)(9)(B)(iii) and (iv). ...the residuary beneficiaries of Trust P are mere potential successors to B’s interest in Plan X.” Emphasis added. All potential remainder beneficiaries (the persons who would take the remaining benefits if the conduit beneficiary died before the benefits had been entirely distributed) are disregarded because the IRS regards them as mere potential successors to the conduit beneficiary’s interest. The conduit trust for one individual beneficiary is a safe harbor. It is guaranteed to qualify as a see-through trust, and it is guaranteed that all remainder beneficiaries (even if they are charities, an estate, or older individuals) are disregarded under the RMD trust rules. C. Payments for beneficiary’s benefit. Payment to the legal guardian of a minor or disabled beneficiary should be considered payment “to” the beneficiary for this purpose. See ¶ 6.3.12 (A) regarding making the conduit payments to a trust that is a 100 percent grantor trust as to the beneficiary. See ¶ 6.4.04 (A) regarding making the payments to a special needs trust in the case of a disabled beneficiary. D. Payment of trust expenses. In PLRs 2004-32027–2004-32029, the IRS ruled that “The use of Trust T assets to pay expenses associated with the administration of Trust T (in effect, expenses associated with the administration of the Trust T assets for the benefit of [the participant’s three children]) ...does not change” the conclusion that the trust had only individual beneficiaries. The IRS refers to “Trust T” in PLRs 2004-32027–2004-32029 as “a valid, conduit, see-through trust,” even though the trust terminated immediately upon the death of the participant and was distributed outright to the participant’s three children. In other words, Trust T was not the “classic” conduit trust that remains in existence after the participant’s death, passing out all plan distributions to the conduit beneficiary.