Probate & Trust Law Section Conference Manual ... - Minnesota CLE

equired beginning date, and they will be calculated using the spouse’s life expectancy
under the Single Life Table.
4. Another type of trust that qualifies for the marital deduction is the general power of
appointment trust discussed in chapter 3. General power of appointment trusts may fail to
qualify as a designated beneficiary, however, because of the requirement that all beneficiaries
be identifiable. Treas. Reg. § 1.409(a)(9)-4, A-5(6)(3). The IRS has taken the position that all
potential future beneficiaries under a power of appointment should be considered, and the fact
that the power could be exercised in favor of a charity or an individual beneficiary who is
older than the current beneficiary means that the trust does not qualify as a designated
beneficiary. NATALIE B. CHOATE, LIFE AND DEATH PLANNING FOR RETIREMENT BENEFITS
75-76 (5 th ed. 2003). Remember, if there is not a designated beneficiary and the participant
dies before his required beginning date, the account must be paid out in five years.
§ 401(a)(9)(B)(ii). If he dies after his required beginning date, the account will be paid out
over the participant’s life expectancy. § 401(a)(9)(B)(i).
5. One possible solution to the various trust issues is to make the trust a conduit trust. A
“conduit trust” is not an official term, but it is used to describe a trust that requires the entire
minimum required distribution to be withdrawn by the trustee and immediately distributed to
the beneficiary. Treas. Reg. § 1.401(a)(9)-5, A-7(c)(3), Example 2. Using a conduit trust
allows you to disregard the future beneficiaries under the Treasury Regulations. Id. The
reason you are allowed to ignore the future beneficiaries is that presumably all of the
retirement assets will be distributed out to the primary beneficiary if she lives to her full life
expectancy. The problem is that, if the goal is to keep assets in the trust for the future
beneficiaries, a conduit trust may not meet that goal.
D. Post-Mortem Planning Opportunities
Because designated beneficiaries are not determined until September 30 of the year following the year
of the participant’s death, beneficiaries named by the participant who disclaim before that date will not be
considered in determining the designated beneficiary. Treas. Reg. § 1.401(a)(9)-4, A-4(a). Because the rules
allow this “grace period” before designated beneficiaries are finalized, actual beneficiaries named by the
participant in a beneficiary designation may not end up being “designated beneficiaries.” If the primary
beneficiary disclaims, the contingent beneficiary may become the designated beneficiary.
Beneficiaries not qualifying as “designated beneficiaries” may also receive a complete distribution
prior to September 30 of the year following the participant’s year of death, leaving only qualified “designated
beneficiaries.” This is especially useful for the participant who has named a charity as well as a spouse or
child as beneficiary. Under the previous rules, the presence of a charity as a co-beneficiary ruined the other
beneficiary’s opportunity to be a “designated beneficiary.” The current rules allow the IRA to distribute the
charity’s share in full before September 30 of the year after the participant’s year of death, leaving the
remaining portion of the IRA to be distributed to the remaining designated beneficiary.
Under a previous Example, a client left 10% of his IRA to his church and the rest to his wife. When
the client dies, he does not have a designated beneficiary under the Treasury Regulations. A designated
beneficiary must be an individual, so a charity cannot be a designated beneficiary. In order to cure this
problem, the planner can advise the spouse to pay 10% of the IRA to the charity in full satisfaction of its share.
There are no income tax consequences because the church is a tax-exempt organization, and the spouse will
now qualify as the designated beneficiary if the distribution to the church is made before September 30 of the
year following death. The spouse can elect to remain as the designated beneficiary, or she could roll the
account over to her own IRA.
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