Trust as bene no longer needed, maybe

Hoping to get some feedback on this situation -

we had a participant pass away a number of years ago - large balance - who named a trust as beneficiary.  It is a "see-through" trust so we have been spreading the payments over the two beneficiaries' (grandchildren) lifetimes.  One of the grandkids is now 40, and the trust says they can have whatever is left at age 40 (prior to that it was income only, and I think some percentage of the corpus at age 30 and 35 with the balance at age 40).  We have been making payments to the trust which then in turn pays the beneficiaries.

Do you think we can just start paying the bene directly?  The trust could otherwise effectively be dissolved and I'm pretty sure that would apply to the plan account as well, i.e. the grandchild effectively is the direct beneficiary now, but just checking.

I'm not a lawyer but is there a provision in the trust that allows it to be disolved and would the Trustee agree to disolve it? It may be a form over substance issue where the payments have to continue to go to the Trust even though they then pass directly to the grand kids.

1 hour ago, Bird said:

Do you think we can just start paying the bene directly?  The trust could otherwise effectively be dissolved and I'm pretty sure that would apply to the plan account as well, i.e. the grandchild effectively is the direct beneficiary now, but just checking.

The trust is the legal beneficiary, not the grandkids. Paying the grandkids directly so long as the trust is in effect should not be attempted.  If you dissolve the trust instrument, I have no idea what would happen next. It depends on the terms of the Trust document and applicable state law. My concern would be that if the trust dissolves, how would the interests of the grandkids be protected? The trust (beneficiary) is gone. So now, if I am the plan administrator, the remaining benefits will go to the former participant's estate and be divided in accordance with the applicable state's laws of intestacies or his will. In either case, the will or the laws of the state determine who gets the remainder of the benefits (and it may not be the grandkids). 

Without knowing more facts, my intuition is that you are inviting potentially more problems down the road that you really do not need. 

The trust can indeed be dissolved.  This is the only asset left after distributing cash and whatever else it owned.  So they would be "distributing" (not in the plan sense of the word) the retirement account and "retitling" (again, not really at the plan level b/c it is still in the name of the original owner) - in the plan, this retitling means simply recognizing the bene of the trust as the direct bene of the plan.

Thanks for the feedback, even if I don't agree?.  If nothing else, it highlights the hassles and expense of naming a trust as beneficiary.  (And said trusts might require review in light of the new 10 year payout rule.)

31 minutes ago, Bird said:

The trust can indeed be dissolved.  This is the only asset left after distributing cash and whatever else it owned.  So they would be "distributing" (not in the plan sense of the word) the retirement account and "retitling" (again, not really at the plan level b/c it is still in the name of the original owner) - in the plan, this retitling means simply recognizing the bene of the trust as the direct bene of the plan.

Thanks for the feedback, even if I don't agree?.  If nothing else, it highlights the hassles and expense of naming a trust as beneficiary.  (And said trusts might require review in light of the new 10 year payout rule.)

I never said the trust cannot be dissolved. My feedback was that I don't know what will happen if it is dissolved, but I am concerned about protecting the grandkids, which you explained would be handled. Without some sort of mechanism to protect them (such as retitling) the retirement plan administrator is in a quandary. 

Please read my comments carefully.

Maybe I'm asking a silly question, but if the trust is the beneficiary, why is the money still in the plan? Why hasn't the money been distributed to the trust and then the issues are trust's.?

On 12/31/2020 at 12:41 PM, Bill Presson said:

Maybe I'm asking a silly question, but if the trust is the beneficiary, why is the money still in the plan? Why hasn't the money been distributed to the trust and then the issues are trust's.?

To defer the taxes as long as possible.

On 12/30/2020 at 1:02 PM, Bird said:

Hoping to get some feedback on this situation -

we had a participant pass away a number of years ago - large balance - who named a trust as beneficiary.  It is a "see-through" trust so we have been spreading the payments over the two beneficiaries' (grandchildren) lifetimes.  One of the grandkids is now 40, and the trust says they can have whatever is left at age 40 (prior to that it was income only, and I think some percentage of the corpus at age 30 and 35 with the balance at age 40).  We have been making payments to the trust which then in turn pays the beneficiaries.

Do you think we can just start paying the bene directly?  The trust could otherwise effectively be dissolved and I'm pretty sure that would apply to the plan account as well, i.e. the grandchild effectively is the direct beneficiary now, but just checking.

The terms of the beneficiary designation and trust need to be followed and I would leave these decisions to the trustee. Assuming that at age 40 the beneficiary has the right to completely take all of the trust principal allocable to him or her, the trustee should be able to provide you with paperwork telling you that the plan beneficiary is now the grandchild directly, for that grandchild's portion, and no longer the trust. This would involve the trustee's distributing the trust's interest in that portion of the plan account to the beneficiary. I assume that the arrangement qualified for establishing separate shares of the plan account for each beneficiary.

12 hours ago, Luke Bailey said:

The terms of the beneficiary designation and trust need to be followed and I would leave these decisions to the trustee. Assuming that at age 40 the beneficiary has the right to completely take all of the trust principal allocable to him or her, the trustee should be able to provide you with paperwork telling you that the plan beneficiary is now the grandchild directly, for that grandchild's portion, and no longer the trust. This would involve the trustee's distributing the trust's interest in that portion of the plan account to the beneficiary. I assume that the arrangement qualified for establishing separate shares of the plan account for each beneficiary.

Thanks, that's how I was seeing it and not sure I described it properly.