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Retirement Plan Distributions to Trusts

by Gary A. Loftsgard, CFP

 

This article demonstrates how two subjects of client interest-retirement planning and estate planning-can be applied together wherein an integrated planning approach can make each more effective by their incorporation than if applied alone.

Gary A. Loftsgard, CFP, is founder and president of Integrated Trust Systems (ITS) of Scottsdale, Arizona, a national estate planning company founded in 1985.

Sweeping proposed regulations concerning the Comprehensive Retirement Security and Pension Reform Act of 2001 were issued on January 11, 2001, which had a significant impact on the minimum distribution rules (MDRs)^1 for retirement plans. The proposed regulations were finalized and became law on May 2, 2001. Additional provisions to the act were later codified on April 16, 2002.

The regulations updated all life expectancy tables including the Single Life Table. The Single Life Table determines the applicable divisor^2 in relation to a designated beneficiary's current age when vesting occurs. The applicable divisors are used to recalculate (each year) the minimum annual amounts that can be distributed from a decedent taxpayer's retirement account to a designated beneficiary(s).

Under the new laws, retirement plan owners may use remarkable estate planning strategies with trusts through a combination of the new recalculation rules and the IRS's recent acquiescence in allowing a trustee to receive minimum distributions on behalf of a plan beneficiary. By blending the MDRs into resourceful estate-planning modes, plan owners will be able to employ certain post-mortem restrictions on withdrawal rights over certain retirement plan distributions that were not obtainable under prior law.

Recalculations Make It Possible

Because the Uniform Table applies only to the payout requirements for the plan owner, separate periodic distribution terms are recalculated for the plan's designated beneficiary using the Single Life Table, regardless of the owner's age at death. The ability to use separate tables eliminates the former requirement for the owner to make an upfront, joint-life-expectancy-election for payout purposes, which became irrevocable at death.

As a result of the new rules, plan beneficiaries may now realize a greater deferral benefit through the single-life recalculations and increased divisor numbers that equate to longer tax-deferred growth periods (assuming the beneficiaries are younger than the plan owner) than previously available under the old laws. Moreover, the recalculation allowances are good news for those planning their estates since provisos can be selectively applied to each respective beneficiary of a trust, and thus controlled by the terms of the trust. That is because of the government's permission to allow a plan administrator to "see through the trustee" to the trust's beneficiary(s).

Retirement Plans Payable to Trusts

In this discussion, references to trusts are a general reference to revocable living trusts (RLTs)-although not exclusively. If drafted properly, RLTs will always become "qualified" trusts /after/ the death of the grantor(s) for MDR purposes (as discussed later). All retirement plan distributions can be payable to any trust, including "nonqualified" trusts. But qualified trusts^3 will generally be able to take advantage of the favorable MDRs so that the plan administrator will be allowed to "see through the trustee" for the purposes of making minimum distributions to the trust's beneficiaries.

Trusts that allow a plan administrator to see through the trustee for the purposes of employing the MDRs for the designated beneficiaries, /and/ satisfy the four qualifying terms (as discussed later) prescribed under Treasury Regulations Section 1.401(a)(9) et al., are commonly referred to as designated beneficiary trusts (DBTs).

Note

If a trust fails to qualify as a DBT by not meeting one or more of the qualifying terms, the life expectancy of the account owner would be used to determine the payout terms of the retirement account to the trust if the account owner has already reached his or her required beginning date (RBD) at the time of death. Or if the account owner has not reached his or her RBD at the time of death, then the account would be distributed to the nonqualified trust under the five-year rule. Also, notwithstanding that a trust may qualify as a designated beneficiary, certain terms (or lack thereof) under which a certain plan administrator may be required to process the distributions of the plan could inhibit (or even prohibit) distributions to a DBT for purposes of optimizing the MDRs. Each plan must be analyzed to determine if it can be payable to a trust for minimum distribution purposes.

A trust cannot own a retirement plan. But a trust can be selected as either a primary or contingent beneficiary of a retirement plan for the purpose of receiving death-benefit payments. The choice generally turns on the plan owner's personal estate planning objectives, estate value, and other factors. Several matters may come under consideration when determining how to allocate distributions of a particular plan to a particular trust, but two important issues should never be ignored: estate taxes and control.

For example, if a couple has children and their aggregate estate-including the value of the husband's retirement plan-is less than the current federal exemption equivalent amount, then the likely choice would be for the wife to be the primary beneficiary and the trust to be the contingent beneficiary. This strategy would allow the wife, assuming that she has not reached her RBD and that she survives her husband, to roll his plan over to her own retirement plan (such as her IRA) at his death. She could then make their trust the primary beneficiary of her IRA and thus have the trust control the IRA distributions that would be vested to their children at her death.

Assuming their aggregate estate is not large enough to create a concern about transfer taxes, the forfeiture of the husband's transfer tax credit relating to the transfer of his interest in the plan to his wife (through Section 2056 unlimited marital deduction) will not be an issue. If the husband survives his wife in this scenario, then at his death the trust would control the plan distributions because their trust was named as the contingent beneficiary of the husband's retirement plan.

Conversely, if the wife wanted to maintain control of her plan to the exclusion of her husband in the event that she predeceases him, then naming their marital A/B (pecuniary credit shelter) trust as the primary beneficiary of her plan-with a specific provision excluding the surviving spouse as a beneficiary of the retirement plan assets-is the proper choice. In such an event, her interest in the plan would be funded to the modified credit shelter trust "B" (which becomes irrevocable) at her death. This would ensure that her interests would ultimately benefit her own children rather than her husband's new spouse or his potential creditors.

Trusts Are Flexible and Effective Planning Tools

Without question, trusts offer a combination of versatility and planning capabilities not otherwise available for the retirement plan owner. Here are three common examples of this point:

  1. Any trust can be the beneficiary of multiple plans (including multiple IRAs) belonging to one owner or of separate plans of one or both spouses, and thus help centralize certain common goals through the use of one structure.
  2. A trustee of a designated beneficiary trust can be named as the sole beneficiary of a self-directed IRA, which may be important for families with young or incapacitated children, as the imminent death of the IRA owner may otherwise leave the account without an appointed fiduciary.
  3. State statutes provide judgment protection from creditor claims against non-grantor beneficiaries of a trust. This can lengthen the protection term of the plan by virtue of the DBT restricting beneficiaries' proclivities to making lump-sum withdrawals from an account.

Through discreet planning, a DBT can impose age-based allocation restrictions over a retirement plan in tandem with the current MDRs. Such planning strategies can fulfill a plan owner's desire for post-mortem control using payout provisions that will "enforce" the minimal withdrawal terms allowed under the MDRs. If a longer withdrawal period can be applied to a retirement account, the funds will obviously realize tax-deferred accumulations for a longer period /if the money stays in the account./ Of course, the longer money stays in an account growing tax-deferred, the more the account may ultimately be worth to the beneficiary.

The resulting difference between a retirement plan invoking the default five-year-rule distribution method (or even a lump-sum withdrawal) compared with one making distributions over the lifetime of a young designated beneficiary is quite obvious. (See the Single Life Table abstract in Table 1). Only the creator of a DBT using restrictive withdrawal terms in the DBT can effectively apply the divisors (on the table) for minimum distributions purposes in lieu of the designated beneficiary's own discretion.

Control Is the Goal with Trusts

Avoiding probate is a worthy objective when transferring any asset. But probate avoidance is rarely the reason for making retirement plans payable to a trust, because distributions to designated beneficiaries-exclusive of a trust-usually avoid probate through payable-on-death terms generally included in retirement plan contracts. Trust planning with retirement accounts is primarily about the post-mortem control that a trust grantor can obtain, especially now in light of the see-through^4 allowances that can be used in combination with the new MDR recalculation options.

As pointed out, a deceased plan owner's child/beneficiary may use the benefit of the MDRs' minimal withdrawal terms over the course of the beneficiary's life expectancy; however, there is no guarantee that the beneficiary will use the minimal distribution terms when left to personal discretion. Indeed, the vested beneficiary is confronted with a weighty decision (because there is a choice) of whether to make an immediate, complete withdrawal of the entire plan. Without a trust, or some type of annuity payout arrangement, there is no controlling instrument to ensure that the beneficiary will not take more than the allowable minimum distributions, or even withdraw the entire account all at once.

Note

When focusing on MDR rules as they pertain to naming trusts as beneficiaries of retirement plans, the attention is primarily on IRAs. It's not that non-IRA plans do not have a designated beneficiary provision (they usually do), but most employers are not going to incorporate optimal MDR provisions into an employee retirement plan contract. The differences usually turn on matters of economics rather than separate applications of law because of associated administrative costs. As a result, non-IRA retirement plans are usually paid to the beneficiary(s)-the same as would be done with a trust if it were the beneficiary-as a lump sum distribution or over a five-year period. The default terms of most non-IRA plan distribution arrangements are probably quite different than the average participant's distribution objectives. That is one reason why many participants eventually roll their retirement plans over to an IRA upon retirement.

Preserving managerial control over assets beyond the grave has always been one of the primary reasons for anyone to establish a trust. For example, naming a minor-aged child or a spendthrift child as a direct beneficiary of an equity account would not be wise planning. In fact, if a minor or an incapacitated child were vested with a retirement account from a decedent who left no governing instrument, then a guardian's court in the child's state of domicile would likely have to establish a trust instrument-under that state's statutory terms, with a state-appointed fiduciary-to receive the distributions on behalf of the minor or incapacitated child even though a guardian for the child had been appointed by the parent.

Anyone who becomes a beneficiary of a significant sum of money is obviously faced with critical choices. Not only should account management be an issue for the transferor to consider, but that instant wealth-as in a large lump-sum withdrawal from a retirement plan-can create serious, long-term problems for the transferee. This concern would seem to take on even more weight in a situation where a young child has lost the guidance of a deceased parent or guardian.

Trusts that Qualify as a Designated Beneficiary

As noted earlier, trusts must satisfy certain requirements to be deemed a designated beneficiary trust. A properly drafted DBT will be authorized to receive plan distributions on behalf of a designated beneficiary for up to a term equal in length to the designated beneficiary's actuarial lifetime (if so arranged in the DBT) as allowed under the new MDRs.

Note

Unlike a trust, an estate cannot qualify as a designated beneficiary of a qualified retirement plan. (See Treasury Regulations Section 1.401(a)(9)-4 and Private Letter Ruling 2001-26401). That means that if an IRA owner dies before his or her RBD with a simple will or no will at all, without naming a qualified beneficiary(s) or a DBT as the beneficiary(s) of his IRA, the five-year payout rule automatically applies regardless of the ages of the decedent's heirs because the estate-which is a nonqualified beneficiary-will become the beneficiary of the decedent's IRA by default.

Although the MDRs and the requirements pertaining to those rules generally apply only to natural persons, trusts are an exception to that requirement. A trust may qualify to receive minimum distributions under the favorable MDR terms if it passes four tests:

  1. Be valid under state law
  2. Be completely irrevocable (a revocable living trust becomes irrevocable at the death of the grantor), including with regard to beneficiary changes (that is, the trustee cannot be granted powers to sprinkle assets at its discretion or to designate other beneficiaries)
  3. Have natural individuals as beneficiaries who are separately identifiable and are thus qualified to receive benefits from a retirement plan (estates, corporations, partnerships and charities or any other institutions as such do not qualify as beneficiaries of a retirement plan)
  4. Be presented to the plan administrator when created or enforced as an irrevocable trust (for example, generally at the death of the grantor) by October 31 of the year following the owner/grantor's death, in order to certify the beneficiaries of the trust as of September 30 of the same year.

Charities as Beneficiaries of DBTs

Grantors will often name their favorite charities as beneficiaries of their trusts. This can cause a nonqualifying trust problem if not addressed properly because a charity is not a qualified beneficiary. Although a comprehensive discussion of the subject is beyond the scope of this article, realize that it is possible for a grantor to name a nonqualifying beneficiary in the trust and yet secure the use of the recalculation and minimum distribution rules for the other natural beneficiaries.

A trust containing a charitable allocation may qualify as a DBT if (1) the charitable distribution from the trust (a) occurs before September 30 of the year following the year of death of the grantor and (b) comprises only non-retirement plan assets, and (2) the remainder of the trust following the charitable distribution(s) is allocated in definitive shares (but not pecuniary/dollar amounts) to the natural beneficiaries.

Charitable Trusts as Beneficiaries

Charitable remainder trusts (CRTs), as defined in IRC Section 664, can be beneficiaries of retirement accounts (see PLR 199901023). Although a post-mortem transfer of a decedent's retirement plan to a CRT (or to a charitable gift annuity contract) is deemed a transfer to a nonqualified beneficiary, it is essentially a non-event because qualified charities are tax-exempt. Therefore, the ultimate recipient of the transfer-the qualified charity-does not pay the income tax, nor does the decedent owner's estate, for that matter. Thus, the transfer of a retirement account to a CRT is not reduced by income tax, just as a living person's outright, present-interest gift of a retirement account to charity is not reduced by income tax.

As with a retirement account, the value inside the CRT grows tax-deferred and is taxed to the income beneficiary(s) when distributions are made. In addition, the post-mortem transfer will generate an estate tax deduction based on the future interest value allocated to charity through the CRT. With a CRT (as with the minimum required distributions that can be used with a qualified DBT), the grantor can restrict accelerated distributions of income and principal from the account to the beneficiaries through annuity or unitrust payouts. Because the aggregate income stream allocated to CRT beneficiaries is used to determine the actual value that the decedent ultimately transferred to the income beneficiaries for estate tax purposes, this strategy may be more attractive for families with older children/ beneficiaries.

Two Separate Account-Designation Methods

After making the determination that a (qualified) trust is to be a designated beneficiary of an IRA, a choice must be made as to how the IRA accounts are to be received and managed by the trust in order to use the minimum required distribution terms. Two such accounting methods of choice can generate results quite different from one another and should be individually analyzed before a decision is made.

Either accounting method, for purposes of identifying the actual beneficiary(s) of the plan, must employ an "intermediary" approach between the trustee of the trust and the plan administrator. The beneficiary appointments should be clarified with the plan provider's administrator at the plan level, not just by the trust. Let's look at each method.

The Singular Method

The singular designation method identifies the trustee as the effective designated beneficiary of the plan in proxy for the beneficiaries of the DBT. IRS Private Letter Ruling 9809059 states that plan benefit(s) cannot be considered as being divided into separate accounts for the beneficiaries at the grantor's death simply because the trust is partitioned in separate shares and not separate trusts. As a result, the life expectancy of the oldest living beneficiary of the trust at the time of the grantor's death will be used as the divisor in recalculating the minimum distribution payouts to all beneficiaries of the trust, regardless of the other beneficiaries' ages. If the beneficiaries of the trust are close in age (for example, 14, 12 and 10), then using this method would not create a significant loss in deferred earnings for the younger beneficiaries in such case, and therefore has no real disadvantage.

The Multipart Method

The multipart designation method requires the establishment of /separate trusts/ for each qualified beneficiary of the trust, rather than just separate shares, to meet the separate accounts rule^5 as described under Treasury Regulation 1.401(a)(9)-8, A-2(a)(2). By applying the TR-1.401 separate accounts rule to the (remainder) retirement plan interest in the trust, the trustee will effectively recast individual share designations into separate trusts for minimum distribution purposes, but only as to the plan's remainder interest. Using this method, each beneficiary's life expectancy may be applied instead of the oldest beneficiary's age in calculating respective minimum distributions.

To create separate trusts for accounting purposes, the trustee needs to perform two essential administrative procedures. One is to establish separate accounts for each beneficiary at the plan level. That arrangement should be made with the plan provider immediately after the death of the participant/grantor, per the stipulations of the grantor trust. The second is to establish separate tax ID numbers for each trust account and administer accordingly-using separate accounting ledgers, 1041 returns, et cetera.

At first glance, the multipart method may seem the right thing to do in each case; but there is a downside. Requiring separate trust accounting will encumber the trustee with additional administrative work beyond that required by the singular method. Mandating separate accountings, 1041 returns, and communiqués for each beneficiary will undoubtedly incur additional administrative costs to the trust. But the choice is there.

There is no question that the use of trusts in estate planning, particularly with revocable living trusts, has become very prominent over the past 20 years. There are several reasons for the public's interest in RLTs. Let's compare two case studies that will help further illustrate the point.

Case Study No. 1

Mr. Abernathy has accumulated an IRA account now valued at $265,000. A frugal lifestyle and a recent rollover from his 401(k) after his retirement two years ago attributed to the significant fund. He is now trying to establish and implement an effective estate plan.

He survived his first wife and has one daughter, Heidi, who is 16 years old. He feels that his second wife has ample funds of her own that will adequately meet her needs in the event of his death. He believes that it is unnecessary to direct any of his account funds to his wife if she should survive him. His main post-mortem concern is having his estate benefit his daughter.

Mr. Abernathy's IRA account now makes up over half of his total estate considering his one-half undivided interest in the residence (owned jointly with his wife), his personal property, and his two bank accounts. Noting that his wife's financial stability precludes the necessity of giving her access to any of the IRA funds, he decides to name his daughter as the beneficiary of his entire IRA. He felt even better about his decision when he was informed of the new "stretch IRA" rules that would enable Heidi to take incremental distributions from a tax-deferred account over her entire life expectancy.

When setting up his estate plan, Mr. Abernathy was not informed that because the one-half undivided interest he owns in the residence is held in a right-of-survivorship deed with his wife, his daughter will receive none of his interest in the residence if he predeceases his wife. It will be distributed entirely to his wife immediately at his death. Mr. Abernathy dies the following year, which is the same year his daughter turns 17. He is survived by his wife and daughter. His IRA is now worth $280,000.

Shortly after Mr. Abernathy's death, Heidi receives notification from the IRA provider that she just became heir to a significant IRA cash account. Heidi also learned that she does not have to receive a lump-sum distribution from the IRA because her current life expectancy-which is long because of her youth-can be used as the divisor for purposes of calculating minimum distributions. Even though Heidi knew she had an exercisable right to withdraw up to the full amount of the IRA in any given year, she demonstrated maturity beyond her young age. She decided to obtain maximum tax-deferral of the IRA funds and thus began taking only minimal withdrawals.

Heidi gets married at age 19. Unfortunately, her young husband has quickly proved to be a spendthrift who has a penchant for fast cars, expensive clothes and lots of entertainment. Alas, it doesn't take long for the newlyweds to find ways to spend money on things they "have to have." Heidi's well-intentioned money management goals give way to the pressure at hand. Two years into her marriage and four years from the date of her father's death, Heidi has spent down the entire IRA.

Clearly, Mr. Abernathy should have taken a few simple but important steps to help promote Heidi's financial security with the money he so judiciously tucked away in the IRA account. He could have easily prevented this problem by creating a "qualified" living trust with certain age-based withdrawal features, and then appoint the trust as the beneficiary of the IRA. Moreover, the trust could have held his undivided interest in the house-along with the IRA account-wherein Heidi (instead of Heidi's stepmother) would have received her father's interest in the house upon her stepmother's death. Mr. Abernathy simply failed to create an adequate estate plan, and now it's too late!

Case Study No. 2

Frank Wiserton and his wife, Samantha, have been prudent investors over the years. They examined ways to optimize deferred growth in their asset management portfolio. The Wisertons named each other as the primary beneficiary of their respective IRAs and appointed their living trust as the contingent beneficiary. They have two sons, ages 15 and 18.

Frank predeceases Samantha and leaves his $160,000 IRA to her. Because Samantha is under age 70 1/2, she is able to roll Frank's IRA over to her own IRA and still allow the funds to grow tax-deferred. Samantha dies 5 years later at the age of 63 and leaves an increased IRA account of $370,000 to her two surviving sons, in trust. Before she died, she arranged with her IRA provider to have the IRA divided into two separate accounts at her death. Each account will be payable to the trustee of her living trust "in proxy" for the benefit of her sons.

Because the trust stipulates that the Wisertons' sons cannot receive outright distributions of principal until they reach age 35 (half of the amount) and age 40 (the remaining half), the trustee will distribute only the minimum required distributions received each year from the IRA administrator until they obtain their respective age-based allocation periods. With this arrangement, the Wisertons believe that they have sufficient control over the money-management issues facing their young sons. Through the use of well-designed trust provisions, they removed a potential temptation from their children to take a large lump-sum distribution at a young age by (1) requiring fractionalized distributions over a period of years and (2) prohibiting lump-sum withdrawals until they reach ages 35 and 40. The sons cannot completely cash out of the entire IRA plan until they reach age 40.

With their trust, the Wisertons obtained yet another benefit for their children. The undistributed portions of the IRA account will be managed by the (successor) trustee of their trust-an asset manager of their predetermined choice. The IRA provider is now acting as an agent of the trustee to allocate the distributions to the trustee, and to make the reports required by law of an IRA administrator.

Six years after Samantha's death, the youngest son is involved in a car accident at age 26 and a judgment is placed against him because of his role in the accident. The judgment orders that he pay $85,000 more than what his insurance covered. He has only $7,200 in liquid non-exempt assets available to satisfy the claim, as all his other assets (such as car and home) are exempt from the judgment. The only other liquid asset coming due under his control is his one-half share of the IRA account (when he attains age 35). Because the creditor is not willing to wait that long (nine years), the creditor settles for 11 cents on the dollar. So, the son has to pay only 11 percent ($8,558) of the outstanding claim against him, which he is able to do in two years. The trust proves to be an adequate insulator from beneficiary creditors.

The Wisertons met their estate planning goals. They protected their children from the potential hazards of sudden wealth and a creditor spend-down. They took advantage of the new IRA minimum distribution rules for the benefit of their children. To accomplish their estate planning goals, they used prudent management control over their family estate with the use of a "qualified" family living trust.

Final Estate Planning Considerations

Regardless of whether a qualified plan owner designates his or her trust as a beneficiary of the plan, the value of the plan will be includable in his or her estate for transfer tax purposes. A prime example of the importance of choosing a proper designated beneficiary is with the realization that a retirement plan can qualify for the marital deduction if transferred to a spouse or it can be transferred under the shelter of the unified credit, up to a certain amount, when conveyed to non-spousal beneficiaries such as children.

For a married retirement account owner who has a very large estate, it may make sense to simply name his or her spouse as the primary beneficiary of the retirement plan, with the trust as contingent beneficiary. Naming the trust, rather than the spouse, as the primary beneficiary of a large retirement account could ultimately cause an unnecessary estate tax liability-in addition to the income tax liability-as a result of transferring the plan through the credit shelter trust to non-spouse beneficiaries. If the account owner uses a credit shelter trust to transfer his or her retirement account values, with possibly other assets, to the children when those (combined) values exceed the available exemption equivalent amount ($1 million in 2003), the account owner's estate will incur an immediate estate tax liability-starting at 41 percent of the value in excess-due nine months after death.

Conversely, if the account owner's spouse receives a large distribution from the plan through the marital deduction, the participant's unified credit will not be unnecessarily used to shelter any of deceased spouse's qualified plan from transfer tax. However, with that method, the spouse may acquire an estate tax problem that previously did not exist. It is obvious that, for married participants with moderate to large estates, transfer tax planning with retirement plans may be extremely important to avoid potential estate tax liabilities.

One last item to consider in planning for qualified retirement plan dispositions is the doctrine of spousal rights. Court cases have recently surfaced in California regarding certain spousal rights over a decedent spouse's plan. However, this issue generally does not affect IRAs. The tax planner would do well to have the participant account owner and the participant's spouse document in writing their intent as to how the retirement plan should be treated for ownership purposes. The participant cannot expect his plan to pass entirely through a credit shelter trust when designating his revocable living trust as the beneficiary of his plan if, in fact, he may not have outright (sole and separate) interest in the plan under state law.

Endnotes

  1. The minimum distributions rules (MDRs) as described under Internal Revenue Code (IRC) Section 401(a)(9) require minimum, gradual distributions from the death benefit of a qualified retirement account to a payee (designated beneficiary) so as to deplete, or nearly deplete, the payee's vested (inherited) tax-deferred account over his or her actuarial lifetime. MDRs effectively describe the terms to compute how a retirement plan account-revalued each year-is to be distributed in any given year to a payee with a (codified) declining life expectancy. MDRs also apply to Roth IRAs as they pertain to beneficiary distributions. Because a Roth IRA is not governed by the required beginning date (RBD) rules, the beneficiary must take distributions per the MDRs as though the Roth IRA owner never attained the beneficiary's RBD.
  2. The applicable divisor is simply a number (as applied to the Single Life Table) equal to the remaining number of years that a designated beneficiary is expected to live. For example, a beneficiary age 18 has an actuarial life expectancy of 65 years. Therefore, 65 will be the applicable divisor for a beneficiary in the year he or she reaches 18. If the beneficiary becomes vested with a retirement account at age 18 as a result of the owner's death, then the value of the account will be divided by 65 and the dividend is the minimum amount that must be paid to the beneficiary.
  3. For a trust to be deemed a qualified trust for minimum distribution purposes, it must ultimately have and properly identify "qualified beneficiaries" with distinguishable shares or percentage allocations. The trust must also be registered with the plan provider by October 31 of the year following the year of the account owner's death. The qualified trust must always meet the four primary tests as described in this article. Such a trust is also known as a designated beneficiary trust (DBT).
  4. The so-called see-through rules allow a trust to become a designated beneficiary trust (if it meets certain conditions) so the plan administrator can "see through the trustee" to the trust's beneficiaries. As a result, the trust beneficiaries will be treated as the qualified designated beneficiaries of the plan. The see-through rules simply allow the plan administrator to allocate the plan distributions to the trustee through the use of the favorable MDRs.
  5. Treasury Regulation 1.401(a)(9)-8, A-2(a)(2) describes the application of separate accounting rules for required distributions which would pertain to trusts as beneficiaries of qualified plans. Nothing in the new regulations indicates that the "separate-interests rules" cannot be applied to trusts with (qualified) beneficiaries where the trust effectively creates separate trusts/accounts for each beneficiary. A copy of the trust-which identifies the see-through beneficiaries of the account (established by September 30) for separate accounting purposes-must be provided to the account administrator by October 31 of the year following the year of the account owner's death.

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