Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

deduction is important, see ¶ 3.3. See also ¶ 7.5.06 (C) regarding use of a charitable remainder trust for the spouse’s life benefit. A. Conduit trust as credit shelter or QTIP substitute. If a retirement plan or IRA is left to a conduit trust of which the participant’s surviving spouse is the sole life beneficiary, the surviving spouse will be considered the “sole beneficiary” of the plan or IRA for purposes of the minimum distribution rules but not for purposes of the spousal rollover. ¶ 1.6.06 (A). The primary drawback of a conduit-credit shelter trust is that, if the spouse lives long enough, RMDs will eventually cause most of the benefits to be distributed outright to her. Benefits distributed outright to the spouse will not “bypass” her estate and thus to that extent the trust will not save estate taxes. Similarly, if the purpose of leaving benefits to a QTIP trust is to preserve the asset for the younger generation, a conduit trust will defeat that purpose, since most of the benefits will be distributed outright to the surviving spouse if she lives long enough. But a conduit trust for the spouse’s life may be fine if the participant just wants to make sure the spouse does not spend the entire fund at once. Here is another problem with using a conduit trust for the benefit of the surviving spouse: If the participant and the surviving spouse both die before the end of the year in which participant would have reached age 70½, the IRS will claim there is no “Designated Beneficiary” when the benefits pass to the remainder beneficiaries of the trust, even if the remainder beneficiaries are all individuals, causing the benefits to become subject to the 5-year rule on the death of the spouse. See ¶ 1.6.05 for the special “(B)(iv)(II) rule” that applies on the death of the surviving spouse- beneficiary when both spouses die young, and PLR 2006-44022, discussed at ¶ 1.6.05 (C). This drawback is not a factor if the participant has already passed his RBD, but since Roth IRAs have no RBD ( ¶ 5.2.02 (A)) it is a lifelong problem with respect to leaving a Roth IRA to a conduit trust for the participant’s surviving spouse. Contrary to a popular belief, leaving benefits to a conduit trust for the spouse does not allow the Applicable Distribution Period to “flip” to the life expectancy of the children or other remainder beneficiaries at the spouse’s death; see ¶ 6.3.05 (G). B. Accumulation O/R-2-NLP trust. The typical QTIP or credit shelter trust is an accumulation trust ( ¶ 6.3.07 ), meaning that the remainder beneficiaries “count” for purposes of the all-beneficiaries-must-be-individuals rule and the oldest-beneficiary’s-life- expectancy-is-the-ADP rule. See, e.g. , PLR 9322005 (marital trust to a spouse for life, remainder to children; spouse and children regarded as beneficiaries). If the trust is to terminate and pass outright to the participant’s issue on the spouse’s death, the trust will “pass” the rules as an O/R-2-NLP trust provided that at least one issue of the participant survives the participant; if those conditions are met, the trust can provide whatever the participant wants it to provide regarding disposition of the trust assets if all the issue later predecease the spouse. ¶ 6.3.08 . See Form 4.10, Appendix B . If using this format, it is advisable to name the issue directly as contingent beneficiaries of the retirement plan if the spouse does not survive the participant; see Form 3.4, Appendix B . C. Accumulation trust: Shares for issue held until certain ages. If the trust does not pass outright to the participant’s issue upon the surviving spouse’s death, but rather is to be held in trust for some or all of the issue until they reach certain ages, the trust will not qualify