beneficiary designation question

[k man]

A client of ours has given us an IRA beneficiary designation (his son is beneficiary) drafted by his attorney that basically directs the custodian to distribute the RMD based on the son's recalculated life expectancy. the custodian (fidelity) will not take the form.

i noticed a sample beneficiary designation in a forms book i have with similar language except that it is permissive (not mandatory). is this the reason they wont accept the form or are the wrong in not accepting the form?

[mbozek]

The attorney should have read the IRA custodial agreement which makes the beneficary the owner of all rights under the IRA upon the death of the owner, including the right to determine the method of withdrawl. The only way to restrict the IRA withdrawals is to have the payments made to a trustee who will contriol the distributions from the trust.

[k man]

that was my conclusion as well. i cant believe this attorney is trying to insist his form is valid.

[k man]

anyone know anything about something called a "look through trust."

[BPickerCPA]

Maybe the attorney should have read the regulations which requires the payment to the beneficiary on a term certain period, NOT a recalculated life expectancy.

Sounds like maybe the attorney should not be preparing beneficiary designation forms.

[mbozek]

I dont know about look though trust but there is a concept called a conduit trust where the mrd payments from the IRA are paid to a trustee who then pays the amount to the beneficiary. This prevents the beneficiary from having direct access to the IRA to make withdrawals and eliminates any tax on the trust.

[jevd]

A look through trust under the RMD regs is a qualified trust (see regs 1.401(a)9) which allows the distribution to be made to the trust according to the life expectancy of the oldest trust beneficiary. The trust then passes the distribution as stated above. (edited for typos)

FROM RMD REGS

4.6 Q-6. If a trust is named as a beneficiary of an employee, what documentation must be provided to the plan administrator?

A-6.[112]

(a) Required minimum distributions before death.

If an employee designates a trust as the beneficiary of his or her entire benefit and the employee's spouse is the sole beneficiary of the trust,[113] in order to satisfy the documentation requirements of this A-6 so that the spouse can be treated as the sole designated beneficiary of the employee's benefits (if the other requirements of paragraph (b) of A-5 of this section are satisfied), the employee must either—

(1) Provide to the plan administrator a copy of the trust instrument and agree that if the trust instrument is amended at any time in the future, the employee will, within a reasonable time, provide to the plan administrator a copy of each such amendment; or

(2) Provide to the plan administrator a list of all of the beneficiaries of the trust (including contingent and remaindermen beneficiaries with a description of the conditions on their entitlement sufficient to establish that the spouse is the sole beneficiary) for purposes of section 401(a)(9); certify that, to the best of the employee's knowledge, this list is correct and complete and that the requirements of paragraph (b)(1), (2), and (3) of A-5 of this section are satisfied; agree that, if the trust instrument is amended at any time in the future, the employee will, within a reasonable time, provide to the plan administrator corrected certifications to the extent that the amendment changes any information previously certified; and agree to provide a copy of the trust instrument to the plan administrator upon demand.

(b) Required minimum distributions after death.

In order to satisfy the documentation requirement of this A-6 for required minimum distributions after the death of the employee (or spouse in a case to which A-5 of §1.401(a)(9)-3 applies), by October 31[114] of the calendar year immediately following the calendar year in which the employee died, the trustee of the trust must either—

(1) Provide the plan administrator with a final list of all beneficiaries of the trust (including contingent and remaindermen beneficiaries with a description of the conditions on their entitlement) as of September 30 of the calendar year following the calendar year of the employee's death; certify that, to the best of the trustee's knowledge, this list is correct and complete and that the requirements of paragraph (b)(1), (2), and (3) of A-5 of this section are satisfied; and agree to provide a copy of the trust instrument to the plan administrator upon demand; or

(2) Provide the plan administrator with a copy of the actual trust document for the trust that is named as a beneficiary of the employee under the plan as of the employee's date of death.[115]

© Relief for discrepancy between trust instrument and employee certifications or earlier trust instruments.

(1) If required minimum distributions are determined based on the information provided to the plan administrator in certifications or trust instruments described in paragraph (a) or (b) of this A-6, a plan will not fail to satisfy section 401(a)(9) merely because the actual terms of the trust instrument are inconsistent with the information in those certifications or trust instruments previously provided to the plan administrator, but only if the plan administrator reasonably relied on the information provided and the required minimum distributions for calendar years after the calendar year in which the discrepancy is discovered are determined based on the actual terms of the trust instrument.[116]

(2) For purposes of determining the amount of the excise tax under section 4974, the required minimum distribution is determined for any year based on the actual terms of the trust in effect during the year.[117]

Complete regs notated by Noel Ice at

http://www.trustsandestates.net/MRDRegs/MR...htm#_Toc9937225

[k man]

mbozek, what is the basis for the elimination of the tax on the trust? this is the most important thing to our client.

[mbozek]

Generally a trust can deduct from income the amounts properly paid from income or corpus which are required to be distributed.

[k man]

thats right. basic trust accounting rule.