TRUST AS A BENEFICIARY OF A RETIREMENT PLAN OR IRA

A combination of events have occurred which makes it easier for New Yorkers to use a revocable trust (a trust created during your lifetime and one that is amendable by you at any time) to be the beneficiary of your retirement assets. First, NY has amended its trust law to allow a person to be the creator, trustee and beneficiary of his or her own trust. Thus one person (YOU) could act as grantor, trustee and beneficiary. We could not do that until a year or so ago. Now also the IRS has proposed a rule which allows a revocable trust to be the beneficiary of your retirement plan assets. Why is this a good idea? Well it allows you to provide for flexibility. You may always amend the trust. You may have a child who has not sufficiently matured, a child who has creditors, a child in a less than happy marriage (divorce today is a fact of life and planning around it is appropriate), a grandchild for whom you want to provide an education fund, etc. The trust, which is wonderful concept for a host of reasons, allows your trustee to parcel out funds after you are gone based on need and maturity so that you know that the retirement funds will be used for what you would have used them for had you been alive. Once you have died, the trust becomes irrevocable which is precisely where you want to be. The trust becomes your agent.

Having said that, it is important to realize that a revocable trust can not be a "designated beneficiary" of a retirement plan. So for example if an IRA owner dies before 70½ and the plan assets are not paid to a surviving spouse of the owner, the rules require that the assets of the plan must be distributed by the end of the year which includes the fifth anniversary of the owner’s death or over the designated beneficiary’s life expectancy. If there is no designated beneficiary, then the five year rule applies. Only individuals may be designated beneficiaries. Under the proposed regulations (which taxpayers may rely on), a trust may be the beneficiary of the retirement plan assets and at the same time name the trust beneficiaries as the designated beneficiaries of the retirement plan. The trust must conform, however, to certain IRS requirements. This will allow us to pay the retirement plan assets over the lifetime of the oldest trust beneficiary and avoid the five year rule.

You will thus be able to keep some control and achieve the maximum period of withdrawal thereby increasing returns for the beneficiaries.

How about Generation Skipping? Your children are well-heeled and you want to provide for grandchildren. How about having a trust for grandchildren? You’ll use some of the $1.0 exemption (to be indexed) for generation skipping purposes because grandchildren are in a skip generation. But look at the length of the payout period. What you are now doing is creating the potential of a very long accumulation period for your grandchildren or any one or more of them. If the IRA is a Roth IRA, the tax savings will be substantial since the monies are growing not only tax deferred but tax free as well.