Trust Beneficiaries Want Remainder of 10 year DB Annuity Directly Paid

[Guest mmaggs]

A Trust for a deceased participant (who had aready started recieving a 10 year annuity) is receiving the remainder of a 10 year benefit from our DB Pension Plan. It was the named beneficiary on the distribution form. The original participant was not RMD age, and would not have been prior to the end of these benefit payments.

The Trust was scheduled to close on 12/31/12, but has remained open. The administrator would like to close the Trust as scheduled, and distribute it's assets to the beneficiaries. Benes are 2 adult children at 50% each.

Question:

If I am provided with a copy of the Trust that identifies the beneficiaries under the Trust and percentages, is it possible to pay the beneficiaries directly the remaining 7 years worth of benefits? Or must they keep the Trust open for that timeframe.

I have a pension answer book, but it's not fully answering my question.

Thanks!

[MoJo]

If the trust is named as the bene of the plan, the trust needs to receive the payments. It isn't your concern what the trust says or does with the money once it is paid to them. That said, I wouldn't want to make the decision myself as to who to pay if the trust ceases to exist - that is the responsibility of a judge, with jurisdiction over the plan. The way in which I've resolved similar issues (where it is unclear to whom the payment(s) should be made is to "interplead" the payment(s) to a court - which is essentially "throwing your hands in the air and saying I (we) don't know who should get the money, you judge, decide). That protects the plan.

You may think it is clear that the trust has but two beneficiaries - but are their contingent beneficiaires, alternate beneficiaries, per stirpes or pro-rata distributions to the heirs of the original beneficiairies and the like? Not decisions the plan/fiduciaries should be making....

[SoCalActuary]

You have a few choices available here.

You can keep the pension trust open, pay fees, and disburse the funds as elected directly to the inheritance trust.

You can create an inherited IRA to receive the present value of remaining payments, assuming the plan allows a commuted present value liquidation under its terms. This can be split between the beneficiaries by direction of the trustee.

You can pay the present value as a taxable amount to the trust, assuming the plan allows a lump sum under these conditions. Then the trust can divide the values.

[Mike Preston]

SoCal, I think you misread the OP. There is no talk of terminating the pension trust. They only want to terminate the inheritance trust.

Personally, I don't understand how the provisions of the inheritance trust call for a 12/31/2012 "scheduled" close date when the trust has an asset that will not be fully received by that point in time. If that is the case, however, the inheritance trust should have provisions in it that deal with what happens.

My guess is that the Trustee of the inheritance trust is already in a pickle because the inheritance trust should have closed and the provisions dealing with what happens with respect to amounts receivable by the inheritance trust after its close haven't been implemented properly.

I would expect the inheritance trust to say that any monies received after the close are treated as additional funds payable to the estate and subject to the will's provisions. This might be a far cry from 50/50.

The plan, on the other hand, has no reason to do anything other than pay the inheritance trust as long as it accepts payments. Once the representative of the inheritance trust tells the plan that the inheritance trust is no longer in existence, then the provisions of the plan kick in and no doubt call for distribution first to the spouse (if living), etc. If the provisions of the plan don't dovetail with the provisions of the inheritance trust it might be necessary to have somebody (like a spouse) disclaim in order to have them match up.

Everybody involved in the inheritance trust needs to be represented by counsel and the qualified plan should follow the instructions of the Trustee of the inheritance trust until it doesn't exist. After that, it must follow its own terms.

This is a complicated enough situation that the qualified plan should probably have its own attorney weigh in, as well.

Things can get very expensive when estate plans go awry. And having the inheritance trust "scheduled" to terminate before it receives the complete benefit from the qualified plan sounds to me like something has gone awry.

[david rigby]

Also check to see if the plan has any provision that will permit an actuarial equivalent lump sum of these remaining payments.

[SoCalActuary]

Thanks Mike. All good points. One solution is for the plan to allow a commuted present value distribution, and that payment to the trust can be distributed under its terms. But this only works if the plan allows it, and larger plans will typically not allow it.

[Guest mmaggs]

Thanks to all who responded. I appreciate it. Certainly a stick situation. I will also reach out to our ERISA Attorney.