Trust named as beneficiary for post retirement death benefits

[Belgarath]

Non-ERISA DB plan - a public school.

A participant who is retiring wants to receive her retirement benefit in an option that used her spouse's DOB as the basis to calculate the various optional forms of benefit. But, she wants to reflect their REVOCABLE trust as beneficiary.

I know this wouldn't qualify under the RMD rules, but is it allowable under the "regular" rules? Is it allowable for the plan to calculate the retirement options using the spouse as measuring life, yet have the death benefits paid to a revocable trust (even assuming the spouse is sole beneficiary under the trust)?

[david rigby]

Surprise!  something I've never seen in 4 decades. 

Not having seen the plan document, it would be unexpected for either of these requests to be permitted under an ordinary reading of the provisions.  IOW, "what does the plan say?"

[Peter Gulia]

And consider that a governmental plan might have provisions stated through statutes, administrative-law rules and interpretations, court decisions, and other sources of State and local law.

 

[Belgarath]

In a way I feel better, as I'd never seen this before, either. (Even though I don't have much to do with DB plans anyway.)  We are talking initially about a retirement distribution. The retirement distribution options provide for Life, Life with a 120 month period certain, and the 3 standard J&S options. Section 5.8 referred to at the end is merely the RMD rules.

The plan says the following for death prior to the annuity starting date. But that isn't the situation here.

From all this, it seems to me that the requested distribution cannot be paid to the revocable trust, as even if one decided it was acceptable to use the RMD rules to govern this situation, they require an IRREVOCABLE trust in order to comply. However, I'd love any and all opinions. Thanks!!

(f)    Alternative form of distribution. If the present value of the total death benefit does not exceed $5,000 at the time of distribution, then the Administrator shall direct the immediate distribution of the present value of the death benefit. Otherwise, to the extent the death benefit is not paid in the form of a Pre‑Retirement Survivor Annuity, it shall be paid to the Participant's Beneficiary one of the forms of annuity described below. However, any such annuity may not be in any form that will provide for payments over a period extending beyond either the life of the Participant's designated Beneficiary.

 

(1)   Monthly pension payable over the life of the Participant's Beneficiary.

 

(2)   Monthly pension payable over the life of the Participant's designated Beneficiary, with the provision that, if the Participant's designated Beneficiary dies prior to the completion of 120 monthly payments, such monthly payments shall be continued to the Participant's beneficiary until the monthly payments made to the Participant's designated Beneficiary and the Participant's beneficiary shall total 120.

 

Notwithstanding the above, if the death benefit payable pursuant to Section 5.4 is payable in an annuity, payments shall be subject to the rules specified in Section 5.8.

 

 

[Luke Bailey]

Belgarath, does the plan permit such a change in beneficiary, and is the plan requiring that the spouse consent to this beneficiary designation? If not, isn't it likely that, as Peter suggests, under state law and the plan document the surviving spouse would be owed the money? In other words, isn't it likely that the spouse has rights under the plan as well as the participant?

Moreover, even if the plan permits the surviving spouse to consent to the revocable trust's becoming the beneficiary, unless the plan makes it really clear that the participant can designate someone other than the spouse as his or her beneficiary without the spouse's consent (which seems both unlikely in general and controverted by the plan language that you quote), the surviving spouse might be taxable on the benefit as it is paid under the federal income tax "fruit of the tree" doctrine (see Lucas v. Earl), even though it is paid to the trust. There is guidance to the effect that a disclaimer following the participant's death that meets the estate and gift tax requirements of Section 2518 of the Code can overcome the assignment of income problem, but based on what you have described the surviving spouse's consent to the designation of the trust as beneficiary would fail the requirements for a qualified disclaimer on several grounds.

 

[Belgarath]

Luke, there is no problem with the spouse signing off on spousal rights when retirement distributions begin, to have the trust as the beneficiary. So the questions still are in play. Thanks.

[Larry Gagnon]

I do not have an answer, just a couple of questions. 

How can having THEIR revocable trust as a beneficiary benefit the employee?

I assume "their" means she and her husband.

Without research, I would be amazed if there were a tax benefit possible to naming the trust as opposed to the husband. Can anyone imagine otherwise?

As she indicated, beneficiary payments would cease upon the husband's death in any case.

Note that if the husband receives a payment after his wife's demise, he can put it into a bank account already owned by  the trust.

So, I can only make guesses as to what this is all about and none of them reflect well on her and even less well on her faith in her husband.

But these guesses really make no sense because (I infer) the term "revocable" means he could revoke the trust after her death. I guess it is theoretically possible that her death makes the trust revocable - though I have never heard of such a trust provision. Maybe he legally is incompetent for some reason.

Maybe this issue can be mooted by discussing with her what goals she seeks to achieve.

Maybe I should not have created this memo.

May be.

[FPGuy]

If this is truly a joint ("their") trust), it is probably not the ideal vehicle to inherit a qualified retirement plan as the 100% basis step up at either spouse's death does not apply to IRD. But is less expensive to create and administer than two or more individual trusts. And could have been a DIY project using a template from a be-your-own-lawyer manual.

That being said, is there a question as to whether any of the annuity options do not inherently satisfy DB RMD requirements? Would think not. And that being the case, why would naming the subject trust as beneficiary at either death be an issue if non-participant spouse signs off on it? Things could get complicated down the road for the survivor, tax-wise and perhaps otherwise, but don't see how that would  implicate the Plan.

[loserson]

Why would you even want to do this?  I am confused what they think this achieves.  Seems too clever by half.  Unsure if they are trying to trick somebody (like the IRS or the plan or their lenders) or if they just want to consolidate everything for investment purposes.  Consolidation of assets is the only argument I can think of that makes sense.

Have you asked them if they can just set up a bank account in their own name to receive the distributions and then they can auto-transfer the pension distributions into their trust?  That'd be easy for you and I cannot see what harm it causes them, unless they are technologically unable to set up the auto transfer (in which case they can call the bank or walk into a physical branch).  If they are just consolidating all assets into a trust, they can do the transfers themselves without making you write the checks to the trust.

If they are doing this for testamentary reasons, they can establish a pour-over will that moves all their assets into the trust upon their deaths.  They don't need to pre-fund the trust if this is just testamentary.

Did you look at the plan definition of Beneficiary?  The first plan document I looked at after seeing your question specifically says a trust can be a beneficiary, both in the definitions and in the beneficiary designation.  This plan document got a DL with that provision in it, so the IRS never complained about it.  If your plan doc says trust, or seems to clearly exclude trusts, then you have your answer.

[Belgarath]

Have no idea whatsoever WHY they want to do this. The question was posed to us as to IF they can do this.

The question isn't necessarily so much whether a Trust can be a beneficiary, but whether the measuring life for a J&S calculation can be a person, when the beneficiary is not a person, but is a revocable trust.

Not concerned with the tax implications - we'll just tell them they need to work with their tax counsel as to whether this option (if permissible) is the best way to handle.

Thanks.

[loserson]

The plan I looked at that allowed trust beneficiaries was a DB with a normal form of benefit that was J&S 50.  I don't know if they ever actually paid to a trust a J&S benefit, but the design seemed to expect that they would.  It has no special stipulations or limitations on paying JS to a trust.  So I think it must be permissible at least in some situations.

[FPGuy]

A J & S simply provides for payments in some to continue for as long as one annuitant is living. Would it be an issue of participant had wanted payments to continue past her death to her descendants, as long as the spouse signed off on it?

[Belgarath]

Ok, so I'm not being argumentative here, just having a difficult time with this whole concept. Let's say, for the moment, that it is ok to calculate the benefit based upon the joint life expectancy of the participant and spouse, and further suppose that the non-participant spouse signs off, so that the beneficiary is in fact the trust.

How does this satisfy the RMD requirements, as in order to be considered a "designated beneficiary" for RMD purposes, the trust must be, among other things, irrevocable at death.

Edit - just read above comment by FP - again, I don't know

 

[jpod]

I haven't read all the posts, but cutting to the chase:  Isn't this initially a question of what the plan terms allow?  How likely is it that under the terms of the plan the benefit is payable to anyone other than the participant and, after the participant's death, the contingent annuitant designated?  Probably not likely at all.  Case closed. 

[Belgarath]

Well, maybe you are right and I'm just complicating it too much. The plan language says the following, and I note that it for the "life" of the "designated beneficiary." Does that mean a J&S option is precluded here if the desired beneficiary is a trust?

(b)   Alternative forms of distribution. In the event a married Participant duly elects pursuant to paragraph (a)(2) above not to receive benefits in the form of a qualified joint and survivor annuity, or if such Participant is not married, in the form of a life annuity, the Administrator, pursuant to the election of the Participant, shall direct the Trustee to distribute to a Participant or such Participant's Beneficiary an amount which is the Actuarial Equivalent of the monthly retirement benefit provided in Section 5.1(c) in one or more of the following methods:

 

(1)   Monthly pension payable over the life of the Participant.

 

(2)   Monthly pension payable over the life of the Participant, with the provision that, if a Retired Participant dies prior to the completion of 120 monthly payments, such monthly payments shall be continued to the Retired Participant's designated Beneficiary until the monthly payments made to the Retired Participant and to the Beneficiary shall total 120.

 

(3)   Monthly pension payable over the life of the Participant and the life of the Participant's designated Beneficiary (50% joint and survivor annuity).

 

(4)   Monthly pension payable over the life of the Participant and the life of the Participant's designated Beneficiary (66 2/3% joint and survivor annuity).

 

(5)   Monthly pension payable over the life of the Participant and the life of the Participant's designated Beneficiary (100% joint and survivor annuity).

 

 

[jpod]

I think it all boils down to the plan's definition of "Beneficiary" combined with the usage of the term "Beneficiary" in the pertinent provisions of the plan.  I suspect after considering all that one can only conclude that the Beneficiary whose life is used for purposes of calculating the annuity is the person to whom the benefit must be paid.  Assuming that is the answer, if the administrator is willing to make the payments to a third party well fine but if the question is whether the participant has the right to demand that the answer would be "no."

[Belgarath]

Plan's definition of beneficiary doesn't seem to be very definitive in answering this question? Basic definition follows, and then you get referred to another section (excerpt below) and of course also refers to the standard "has to be the spouse in a J&S option unless the participant and spouse have validly waived, etc., etc..")

"Beneficiary" means the person (or entity) to whom the share of a deceased Participant's interest in the Plan is payable. Section 5.4 contains a definition of "designated Beneficiary" for purposes of that Section.

 

Excerpt from 5.4 -

(b)   Payment of other death benefits. Death benefits payable by reason of the death of a Participant or a Retired Participant shall be paid to such Participant's Beneficiary in accordance with the following provisions:

 

(1)   Upon the death of a Participant subsequent to the Annuity Starting Date, the Participant's Beneficiary shall be entitled to whatever death benefit may be available under the settlement arrangements pursuant to which the Participant's benefit is made payable.

[Luke Bailey]

Belgarath, does the plan have a provision describing how one "designates" a beneficiary, e.g. by form, and whether spousal consent is required? Does the plan have a provision for who is default beneficiary if participant does not designate? If the answer to either of those questions is "no," just seems like a defectively written plan and I would tread very cautiously.

[AndyH]

I agree.  There should be some other language describing who and under what conditions a Beneficiary may be named.   I also agree with jpod,  but the Beneficiary definition was not what I would have expected.

[Belgarath]

Plan has fairly standard language that the beneficiary, if other than the spouse, will be designated on a form satisfactory to the Administrator. Spousal consent is required. Anyway, it appears this subject has been beaten to death, and is unlikely to generate a solid consensus, so I thank you all for your comments. It is now officially Summer, so I will retreat to my survival mode (I hate hot weather) and try to think of more interesting subjects than this one! Thanks again.

In such event, the designation of a Beneficiary shall be made on a form satisfactory to the Administrator.