Careful Planning Needed In Determining Beneficiaries


People often have non-tax reasons to name a trust as beneficiary of a retirement plan, such as a desire to avoid making large distributions to beneficiaries who are too young and/or irresponsible to handle them, or a desire to provide for a surviving spouse without potentially disinheriting children from a prior marriage. However, careful planning is required to assure that the beneficiaries of a trust qualify as "designated beneficiaries" of the retirement plan, thereby permitting required minimum distributions (RMDs) to be made over at least the life expectancy of the oldest of them.

A trust must meet four requirements for its beneficiaries to qualify as designated beneficiaries. Three of them (trust valid under state law, trust irrevocable at the grantor's death and proper documentation provided to the custodian by October 31 of the year after death) are relatively easy to meet. The fourth -- that all the trust's beneficiaries qualify as designated beneficiaries -- sounds innocuous enough, but is fraught with pitfalls caused by lack of clarity in the regulations. For example, the IRS may take the position that, if retirement plan assets could be used to pay estate taxes and administrative costs, the estate (which does not qualify as a designated beneficiary) is a beneficiary of the trust, and the trust fails as a designated beneficiary.

Even more problematic is the question of what contingent beneficiaries of the trust must be considered. At least one private letter ruling implies that all contingent remaindermen (i.e. people who receive part of a trust only if prior beneficiaries are deceased), no matter how remote, must be considered. If such a remainderman is a charity, the trust would fail to qualify as a designated beneficiary, or, if such a beneficiary is an older individual (perhaps a distant cousin who could receive because all named beneficiaries are deceased), RMDs could be greatly accelerated. One possible solution is to use the safe harbor in the regulations sometimes referred to as a "conduit trust" - that is, all retirement plan distributions must be immediately distributed to trust beneficiaries.

In general, the following considerations should be kept in mind:

1. A trust should not be named as beneficiary unless there is a good reason to do so.

2. If a trust is named as a beneficiary, it must be very carefully drafted to assure that its beneficiaries will qualify as designated beneficiaries.

3. If a trust is a named as a beneficiary, a contingent beneficiary or beneficiaries should be named after the trust so that, if continuation of the trust is unnecessary at the death of the account owner, the trustee can disclaim the retirement plan and permit the contingent beneficiary or beneficiaries to become the plan's designated beneficiaries directly.

Should you wish to discuss naming retirement plan beneficiaries or any other estate planning issue, please contact one of Eastman & Smith's estate planning attorneys.