New Proposed Rule: Trusts as Beneficiaries of Qualified and Other Retirement Plans

• Publication year: 1998
• Pages: 63
• Citation: Vol. 27 No. 8 Pg. 63

27 Colo.Law. 63 Colorado Lawyer 1998.

1998, August, Pg. 63. New Proposed Rule: Trusts as Beneficiaries of Qualified and Other Retirement Plans

---

63

Vol. 27, No. 8, Pg. 63

The Colorado Lawyer
August 1998
Vol. 27, No. 8 [Page 63]

Specialty Law Columns
Estate and Trust Forum
New Proposed Rule: Trusts as Beneficiaries of Qualified and Other Retirement Plans
by Bruce A. Schilken, Mary Jean Kindschuh

Ten years ago, on July 27, 1987, the Internal Revenue Service ("IRS") issued proposed regulations that provide detailed rules governing the required distributions from qualified plans, individual retirement accounts ("IRAs"), and Internal Revenue Code ("Code") § 403(b) annuity contracts (referred to in this article as the "Original Proposed Regulations").1 The provisions of the Original Proposed Regulations make the designation of a beneficiary to receive benefits remaining in these retirement accounts at death a critical question. The beneficiary designation affects not only who will receive any benefits remaining in the retirement accounts at death and how that beneficiary will receive those benefits, but also how the employees/contributors to the retirement accounts (referred to in this article as "contributors") will receive distributions during their lifetimes

The Original Proposed Regulations provide rules governing the treatment of a trust that is named as beneficiary of a retirement account (a "qualifying trust"). The advantage of a qualifying trust is that the beneficiaries of the trust will be treated as "designated beneficiaries" (discussed below). The most important feature of a qualifying trust under the Original Proposed Regulations is that it must become irrevocable on the date the contributor must begin receiving payments from the retirement account. This has made it difficult to name a credit shelter trust as a beneficiary

Ten years later, on December 30, 1997, the IRS published Proposed Regulations that amend the Original Proposed Regulations ("New Proposed Regulations").2 These Regulations modify the requirements for naming a trust as a beneficiary of a retirement account by allowing a qualifying trust to become irrevocable at the settlor's death. To understand the import of these Regulations, it is first necessary to know the basic mechanics for computing payments from retirement accounts

Computing Distributions From Retirement Accounts

Required Beginning Date

Contributors must begin receiving distributions from their retirement accounts starting with the year in which they retire, except that contributors who are more than a 5 percent owner of a business (with respect to its qualified plan) must begin receiving distributions in the year in which they reach age 70½.3 They have until April 1 of the following year to receive the first distribution. This is called the required beginning date ("RBD"). For example, if a contributor turns 70½ during 1997, the first distribution must be made on April 1, 1998, and April 1, 1998, is the RBD.4

Minimum Required Distributions

The minimum required distribution ("MRD") rules provide a method for determining the minimum amount that must be distributed from retirement accounts as of the RBD. If distributions are less than the MRD, contributors will be subject to an excise tax on the difference between the amount they actually received and the amount they should have received under the MRD rules. The tax is 50 percent, so this calculation is critical. Note that if a contributor had made an election in 1987 under § 242(b)(2) of the Tax Equity and Fiscal Responsibility Act of 1982, the MRD rules do not apply.

Life Expectancy

The MRD may be calculated in various ways. The MRD for each year is...