During the course of representing clients in the development of their estate plan, not only is it necessary to make sure that those clients have executed Wills, Trusts, Living Wills, Healthcare Powers of Attorney, Financial Powers of Attorney, Healthcare Authorizations, and Funeral Directives, it is also very important to make sure that those individuals have also reviewed all of their assets and to make sure that they have the correct ownership and/or beneficiary designations on those assets.
One such asset to make sure that the beneficiary designations are correct are retirement types of assets. In a husband and wife situation, the other spouse is usually named as the primary beneficiary, and if those individuals have a Revocable Trust, then the Revocable Trust is named as the contingent beneficiary. In order to make sure that the Trust is to be considered as the beneficiary under the Internal Revenue Code for the retirement assets, the following four items must be accomplished:
1. The Trust is irrevocable or will be irrevocable when the individual retirement asset owner passes away;
2. The Trust is valid under state law;
3. The beneficiaries of the Trust are identifiable according to the requirements of the Internal Revenue Code; and
4. The specific documentation has been forwarded to the retirement asset administrator by October 31 of the year following the year of death of the owner of the retirement asset.
If these items are accomplished, then the Trust will be considered as the beneficiary of the retirement asset. This is very important to determine who the beneficiary of the retirement asset is because that determines when the payout period for the retirement asset to be distributed. Normally, this would be the life expectancy of the oldest trust beneficiary in the Trust. For example, the retirement asset would be paid out according to the age of the oldest beneficiary in the Trust. This is usually a good result, because then there will be less tax to pay and the retirement assets will be able to continue to grow during the payout period.
However, if the items above are not met, then the Trust will not be considered to be the beneficiary. Then the retirement assets must be distributed out basically in five years if the owner of the retirement asset passed away before the retirement asset was in payout mode to the owner, or over the owner’s life expectancy if they had passed away after beginning their required minimum distributions.
Most of the time, the requirements are not hard to accomplish, but certain situations exist in which the third item is not followed. That means that for some reason, based on the terms of the Trust, the beneficiaries of the Trust are not identifiable. Therefore, when looking at this type of situation, it is very important that the terms of the Trust are specifically reviewed to make sure that the beneficiaries in the Trust would qualify and are identifiable so that the Trust can be considered the designated beneficiary of the owner’s retirement assets.
In our Trusts, we also sometimes use what are called “Conduit Trusts.” A Conduit Trust is a Trust within the Revocable Trust which requires the trustee to distribute to the Trust beneficiary any and all amounts that have been withdrawn from the retirement assets. Therefore, the retirement assets are not allowed to accumulate in trust for future beneficiaries.
Therefore, when planning your estate and determining how to title your retirement assets, if you have a Trust, it is very important that you review the Trust to make sure that it qualifies as being named the qualified beneficiary if any of your retirement assets are ever held in that Trust.
Please contact your local estate planning attorney to review these items.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
James F. Contini II, Esq.
Certified Specialist in Estate Planning,
Trust & Probate Law by the OSBA
Krugliak, Wilkins, Griffiths & Dougherty Co., LPA
158 North Broadway
New Philadelphia, Ohio 44663
Phone: (330) 364-3472
Fax: (330) 602-3187