Life and Death Planning for Retirement Benefits

Chapter 7: Charitable Giving

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D. Disabled beneficiary. If an individual is receiving means-tested government disability benefits, naming that individual as outright beneficiary of a retirement plan would typically cause the individual to lose his or her government benefits until the inherited retirement plan had been spent down. One alternative is to name a charitable remainder trust for the life benefit of the disabled individual as beneficiary of the retirement plan, and then provide (in the CRT) that the CRT’s annuity or unitrust payments will be made to a special needs trust for the benefit of the disabled beneficiary (see ¶ 6.3.11 ) rather than outright to the disabled beneficiary, as permitted by Rev. Rul. 2002-20, 2002-1 I.R.B. 794. E. Lump sum distribution-only plan. Many qualified retirement plans offer a lump sum distribution as the only permitted form of death benefit. A CRT is a good choice of beneficiary for a lump sum distribution-only plan. By receiving the lump sum distribution tax-free, then paying a unitrust payout for life to, e.g. , the participant’s adult children, the CRT approximates the life expectancy payout that is not available under the retirement plan. A “Designated Beneficiary” of a lump-sum-distribution-only plan (including a “see- through trust” named as beneficiary) can instruct the plan to transfer the lump sum, by direct rollover, to an “inherited IRA” (created for the purpose of receiving the distribution) in the name of the deceased participant and payable to the same beneficiary, thus enabling the beneficiary to receive a life expectancy payout (from the “inherited” IRA) even though that is not an option offered by the plan he actually inherited. § 402(c)(11) ; see ¶ 4.2.04 regarding such “nonspouse beneficiary rollovers.” Despite the existence of this option, there are still factors that make the CRT an attractive alternative compared with naming a see-through trust as beneficiary of a lump- sum-only plan and expecting that trust to have the benefits transferred to an inherited IRA:  Drafting a see-through trust is a complicated and perilous undertaking, in view of the IRS’s problematic “minimum distribution trust rule” regulations. See ¶ 6.2 – ¶ 6.3 . If the trust for some reason does not qualify as a see-through (for example, because the trustee forgets to send required documentation to the plan administrator by October 31 of the year after the year of the participant’s death) the nonspouse beneficiary rollover to an inherited IRA is not available (it’s available only to “Designated Beneficiaries”).  There is the risk that the lump sum benefits, instead of being transferred by direct rollover to an inherited IRA as instructed by the Designated Beneficiary after the participant’s death, will by mistake (either of the plan trustee or the IRA provider) be transferred to a taxable account, causing immediate income taxation of the entire lump sum, with no ability to correct the mistake by rolling the money back into the plan or into an IRA. Transferring intended rollover distributions into a taxable account is one of the most common mistakes made in the retirement benefits area. See, e.g. , PLRs 2007-03036, 2007-04038, 2007- 27027, 2007-09068, 2007-17027, 2007-22030, 2007-27022, 2007-27025, and 2007- 32025. When this mistake happens after the participant’s death it cannot be corrected (unless the beneficiary happens to be the participant’s surviving spouse).

 A recent proposal in Washington circles would seek to raise revenue and “simplify” the retirement rules by abolishing the life expectancy payout method and requiring all (almost