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Contrary to popular belief, a Trust can be a beneficiary of an IRA, either direct or contingent. Why would an
IRA participant (P) want to have a Trust as beneficiary anyway?
Two of the most common reasons for considering a Trust as an IRA beneficiary, direct or contingent, are :
1. The need to use P’s IRA account to fill up P’s Credit Shelter Trust, thereby taking advantage of the estate
tax lifetime credit.
2. In a second marriage situation, P may not want to make Spouse a primary beneficiary of the IRA account
desiring to preserve the residual benefits in the account, all or in part, for P’s children, either at P’s death or
at the death of P’s spouse.
IRS rules require that five conditions be met in order for the Trust to accomplish P’s estate planning
objectives (which will be discussed briefly below):
1. The Trust must be irrevocable;
2. All Trust beneficiaries must be individuals;
3. The beneficiaries must be identifiable from the Trust instrument;
4. A copy of the Trust instrument must be provided to the Plan’s Sponsor;
5. The Trust must be valid under state law.
None of these requirements is insuprable, however, in making such a designation, there are many traps
for the unwary. The designated Trust beneficiary should be drafted and/or reviewed carefully to make sure
that all of these requirements are met. The normal revocable trust, which becomes irrevocable at death,
meets the first requirement according to revised regulations.
Insofar as individual beneficiaries are concerned, should there be charitable beneficiaries, the Trust will
not meet the requirement. The IRS "looks through" the Trust to determine the oldest beneficiary for
purposes of determining the maximum payout period on a joint life basis. Otherwise, only P’s life
expectancy would be used to measure the required maximum payout period.
So far as beneficiaries being "identifiable", the language has to be carefully checked because a group
consisting of "my descendants" will qualify whereas a group consisting of "my descendants and their
spouses" will not.
Providing a copy of the Trust instrument to the Plan’s sponsor is not onerous, but must be complied with
on or before the required beginning date (RBD).
The principal objectives that are normally sought when making a Trust a designated beneficiary are:
1. Having an identifiable life for measuring the maximum distribution period;
2. Avoiding immediate triggering of "income in respect to the decedent" under IRC Section 691.
While IRA benefits are normally subject to income tax as received, the trap to be avoided is having the right
to receive the account be treated as a "sale" that triggers an income tax on the total value of the account
immediately. This disastrous result would arise if the IRA account is used to satisfy a pecuniary bequest.
This result is not as certain as night following day, but there are certainly grounds for the IRS to impose an
income tax in such an event. (Taxation in this event is governed by Section 691, not Section 661-663, which
governs distribution of "appreciated property".
Until this issue is cleared up definitely, a professional should avoid having retirement benefits pass
through a pecuniary funding formula, whether a Trust allocation or a direct bequest. These problems can
be avoided by the wording of the beneficiary designation that is filed with the Plan and/or with the wording
of the Trust document.
This can’t be a "canned" provision. The particular beneficiary designation always depends on unique family
circumstances of P and of P’s spouse, if any. With IRA accounts forming a large percentage of many
estates these days, beneficiary designation, selection and wording, can be crucial.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| January 2000 NAMING A TRUST AS BENEFICIARY OF AN IRA by James R. Modrall III |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |