Estate planning with pensions.

• Author: Lamse, Eileen

This item illustrates how a well-meaning client created a potential problem for his heirs, and proposes a way to solve the problem after the damage is done.

Good estate planning often calls for the use of a revocable trust that becomes irrevocable at death. However, in most cases, the planner recommends that the trust not be named as a beneficiary of either the decedent's share of a pension plan or IRA accounts; unless the trust qualifies as a "look-through" trust, the heirs will be required to receive and be taxed on the entire pension benefits within a five-year timeframe; see Sec. 401(a)(9)(B)(ii) and (iii).

In this case, the decedent was attempting to apportion his estate among his second wife, his two natural children and a stepchild. The estate's major asset was a defined-benefit pension plan. The decedent died within six months of the time he changed the beneficiary designations on his pension accounts, without realizing the complications these changes would later cause.

Facts

The decedent, age 62, was not receiving benefits from his pension plan or IRA accounts prior to his death on Dec. 31, 2003. He named Iris revocable trust as the primary beneficiary of the plan and accounts in June 2003. The secondary beneficiary was listed as "none." His spouse consented to a waiver on the same date. The decedent's revocable trust permitted the trustee (his spouse) to use trust assets to pay funeral and administrative expenses of the estate, as well as inheritance and similar taxes. The decedent's trust became irrevocable at his death. The trust beneficiaries were his spouse (55%), daughter (15%), son (15%) and stepdaughter (15%).

Issues

The issues were as follows:

1. Will the trust meet the definition for determining a designated beneficiary of a qualifying trust (specifically, a look-through trust), under Regs. Sec. 1.401(a)(9)-4, Q&A-5 and, thus, qualify to make distributions to all beneficiaries over the life of the eldest beneficiary (i.e., the surviving spouse)?

2. If the trust is a qualifying trust, can separate accounts be set up fur each of the beneficiaries and their own lives used to calculate the required distributions, rather than the spouse's life?

3. Do the trust and pension plan need to take any action?

   Discussion

   The trust appeared to meet the strict definition of a qualifying trust, specified in Regs. Sec. 1.401(a)(9)-4, Q&A-5; thus, distributions could be made based on the spouse's life. However, there was a problem.

   The fact...