Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

B. Provide life income for multiple adults. Naming a noncharitable trust for multiple adult beneficiaries of varying ages produces a nightmare from the point of view of required minimum distributions (RMDs): Either the trust must use the oldest beneficiary’s life expectancy to measure RMDs, or the participant must name multiple separate trusts, one for each beneficiary, which could have the effect of chopping up the assets into too many too-small pots. See ¶ 6.2.01 and ¶ 6.3.02 for background of that conclusion. By naming as beneficiary, instead, one CRT that pays a unitrust payout for life to several adult beneficiaries, the participant avoids all RMD problems (because the tax-exempt CRT can cash out the plan benefits immediately upon the participant’s death, with no income taxes). The trust produces a more-or-less steady income which can be split among the human beneficiaries. When any of the individual beneficiaries dies, his income share passes to the surviving members of the group, thus providing a crude form of inflation protection. Because the value of the charity’s remainder interest (determined actuarially using IRS tables) must exceed 10 percent of the total trust value as of the date of the participant’s death, this approach will only work with a small group of adult beneficiaries ( e.g. , a group of 50-something siblings or friends and 80-something parents); see ¶ 7.5.07 (B). § 664(d)(1)(D) . Ogden Example: Ogden is single, age 45. He has worked for several companies and as a result he has money in several different qualified plans, 403(b)s, and IRAs. His estate planning goals are: to provide for his parent’s needs, if they survive him; to provide something for his siblings; and to benefit charity. He creates a CRT which will pay a five percent unitrust payout in equal shares to the living members of the group consisting of his parents (who are in their 70s) and two siblings (ages 42 and 48). His estate has other assets to pay the estate taxes applicable to his other assets and to the noncharitable interests under the CRT (see ¶ 7.5.07 (A) for why this is a concern). C. For spouse, as a QTIP alternative. For a charitably inclined participant, leaving retirement benefits to a CRT for the life benefit of his surviving spouse can sidestep the drawbacks and risks involved in leaving such benefits outright to the spouse or to a noncharitable trust for her benefit (but see ¶ 7.5.07 (C) regarding spousal consent). Leaving benefits outright to the spouse has major tax advantages (primarily the spousal rollover), but only if the spouse rolls the benefits over to her own retirement plan after the participant’s death, and there is no way to guarantee that she will actually do that. Also, the spouse might blow money left to her outright on expenditures the participant wouldn’t approve of, and/or leave what’s left of it at her death to a beneficiary the participant wouldn’t approve of. If the participant leaves the benefit to a QTIP trust to head off these outcomes, there are major income tax drawbacks; see ¶ 3.3.02 for details. In contrast, if benefits are left to a CRT for the spouse’s life benefit, the spouse will get an income stream for life, without the drawbacks of leaving benefits to a QTIP trust. There will be no need for the spouse to roll benefits over on the participant’s death. The participant can choose the ultimate beneficiary (which has to be a charity of course). If the spouse is the only human beneficiary (strongly recommended), there will be no estate tax on the benefits either at the participant’s death or at the spouse’s death (due to the combination of the charitable and marital deductions). § 2056(b)(8) .