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| NAMING A REVOCABLE TRUST AS BENEFICIARY OF A QUALIFIED RETIREMENT PLAN |
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There are a number of situations where you should consider naming your Living Trust as the beneficiary of your retirement plans[ 1 ]. For example,
- If you are married, have
a taxable estate, and there are not enough non-retirement plan assets
in your estate fully to fund the Family Trust (“credit shelter trust”)
under your Living Trust. The Family Trust is the one that will hold
the “applicable exclusion amount”[ 2
].
You wish the terms of your trust to control the distribution of your
retirement plans, not the beneficiary. For instance, if you have young
children, naming them as beneficiary of your plans directly means that
upon reaching age 18, a child would be able to withdraw all of the plan
assets. If your Trust is the beneficiary, however, then only the Trustee
you have selected would be have the authority to make withdrawals from
the plan.
You wish to keep plan assets out of a child’s taxable estate. Naming
the child directly as the plan beneficiary causes inclusion in the child’s
taxable estate.
Under the Treasury Regulations[
3 ], the underlying
beneficiary of a trust will be your “designated beneficiary” for purposes
of determining required minimum distributions, when the trust is named as
the beneficiary of your retirement plan or IRA, provided that certain requirements
are met. |
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Minimum
Distributions
Under the Treasury Regs., in all
cases except where a spouse more than ten years younger than you is the
“designated beneficiary,” a uniform table of life expectancies is used
to calculate the minimum distribution requirements during your lifetime,
regardless of who is your “designated beneficiary.”[ 4
]
Naming Spouse Directly
If you name your spouse directly as your plan beneficiary, your spouse
will have the ability to “roll over” your plan assets into his or her
own IRA. Your spouse can then name additional beneficiaries following
his or her death. In addition, this can be beneficial if your spouse is
younger than you, since the first distribution can be delayed until after
your spouse reaches age 70½ (otherwise, your spouse would need to begin
withdrawing from the plan on the later of (i) December 31 of the year
after the year of your death, and (ii) December 31 of the year you would
have turned age 70½). All of this may result in a greater deferral of
distributions, saving taxes. However, it will also cause inclusion of
the plan assets in your spouse’s taxable estate. Thus, if it is possible
to shelter some of the plan assets in the Family Trust under your Living
Trust, you should consider doing so if necessary in order to save estate
taxes at your spouse’s death.
Naming Trust: Spouse as Beneficiary
If you name your Living Trust as beneficiary of your plan, our Living
Trusts are specifically written to permit your spouse immediately to withdraw
all of the plan assets and roll them over into your spouse’s own IRA[
5 ].
For all practical purposes, this is the same as naming your spouse directly
as the plan beneficiary (see above). However, if there are estate tax
reasons for doing so, your spouse will be able to “disclaim” any part
or all of your plan assets within nine months of your death. Doing so
will cause the disclaimed assets to pass through the funding clause of
your Living Trust into the Family Trust under your Living Trust, and escape
inclusion in your spouse’s taxable estate. Minimum distributions under
the Family Trust will be based upon the remaining life expectancy of your
spouse at the date of your death, beginning in the year you would have
turned age 70½. If you have already passed that age, then distributions
must start by December 31 of the year after your death. In either case,
unless your plan states otherwise, your Trustee will not have to withdraw
all of the plan assets at once or within five years of your death.
Naming Trust: Child as Beneficiary
If
the trust is for the benefit of a child, then minimum distributions under
the trust will be based upon the remaining life expectancy of your child
at the date of your death, beginning no later than December 31 in the
year after your death. Again, unless your plan states otherwise, your
Trustee will not have to withdraw all of the plan assets at once or within
five years of your death. If there are multiple beneficiaries (e.g.,
several children are the trust beneficiaries), then you use the life expectancy
of the oldest beneficiary. |
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Required Documentation
If you name a trust as beneficiary of your retirement plan, by October 31 in the year after your death the Trustee of your Living Trust will need to furnish the plan administrator (or IRA custodian) with either a copy of the trust document or a list of the beneficiaries (including contingent and remainder beneficiaries with a description of the conditions of their entitlement).
In addition, if your spouse is more than ten years younger than you are, you need to give similar documentation prior to death (there is no deadline stated in the Regulations).
See us for the exact rules for the documentation requirements at the time either of these situations applies to you.
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Boulder ElderLaw
Law Office of K. Gabriel Heiser
4845 Pearl East Circle, Suite 101
Boulder, CO 80301
Ph:(303) 447-6855
fax: (888) 301-9466
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[1] For purposes of this article, “retirement plans” means IRAs and other tax-deferred qualified plans, such as a 401(k), 403(b), § 457, TIAA-CREF, etc.
[2] The "applicable exclusion amount" is $2 million
(for a death in 2006-2008), and it reaches $3.5 million for deaths in 2009.
There are no federal estate taxes on the estate of anyone dying in 2010,
but in 2011, the rates revert to the current rules: there will be only a
$1 million exclusion amount on the estate of anyone dying in 2011 and thereafter.
[3] Treas. Reg. § 1.401(a)(9)
[4] Note that certain beneficiaries do not qualify as “designated beneficiaries”. Naming your estate, a charity, or certain types of trusts, for example, will be treated as if you have no beneficiary, for these purposes.
[5] This has been allowed in a number of IRS Private Letter Rulings.
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