Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

give up whichever one is less important. If the charitable gifts are high priority, consider giving up the life expectancy payout. In the Heather Example, if the total value of Heather’s retirement plan had been $100,000 out of her total estate of $2 million, she might decide the life expectancy payout was not of significant value, and therefore not bother taking steps to try to preserve it. B. Create separate trusts. Consider creating separate trusts to receive the retirement benefits and the nonretirement assets. If Heather places high priority on both the deferred payout of her $1 million IRA over the life expectancy of her children, and on allowing the children to appoint their shares of the other $1 million of assets to charity, she could direct the trustee to establish two separate trusts for each child, one for the child’s share of the IRA and one for the child’s share of the other assets. The power to appoint to charity would apply only to the trusts that held no retirement benefits. The drawback of this approach is the administrative inconvenience and cost of extra trust bookkeeping. C. Use a Charitable Remainder Trust. Consider whether an income tax-exempt Charitable Remainder Trust (CRT; ¶ 7.5.04 – ¶ 7.5.07 ) would be a better choice of beneficiary than the client’s “regular” trust. D. Use a Conduit Trust. Under a Conduit Trust, each time the trust receives a distribution from the retirement plan, the trustee must immediately pass that distribution out to the life beneficiary. For RMD purposes, the remainder beneficiary of a Conduit Trust does not “count” as a beneficiary; thus, having a charity as remainder beneficiary of a Conduit Trust does not violate the “all trust beneficiaries must be individuals” rule. See ¶ 6.3.05 . Luigi Example: Luigi wants his daughter Lee, age 41, to receive a stream of income from his $3 million IRA. A stream of minimum required IRA distributions over her life expectancy would be just right. However, he does not want her to have outright control of the entire IRA after his death. Although a stream of RMD payments from the IRA would not be guaranteed to last for Lee’s entire life (it would last only until the end of her IRS-defined life expectancy), he thinks a stream of RMD payments probably would last for her lifetime because she has a below-average life expectancy due to her medical condition. If she does die prematurely, he wants any money left in the IRA to go to the charity that funds research into Lee’s illness. He could leave the benefits to a Conduit Trust for Lee with remainder to the charity. There would be no estate tax charitable deduction (because this is not a Charitable Remainder Trust; ¶ 7.5.04 ), but, as a Conduit Trust, the trust would be able to use Lee’s life expectancy as the ADP (because the charitable beneficiary can be disregarded). E. Use disclaimer to fix the problem after the fact. Another way to eliminate a nonindividual beneficiary is to have it disclaim the benefits by means of a qualified disclaimer. See ¶ 4.4 . This approach is not for the planning stage, but may help “clean up” a trust if the participant has already died. It would be unusual for a charity to consider