Between The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and a handful of private letter rulings, 2003 wasn't nearly as good for retirement benefits estate planning as sunny 2002. Many trusts created before 2003 now must be amended. Continuing problems with individual retirement account providers and the proliferation of exotic investment schemes for IRAs, provided drama in the normally humdrum world of estate planning for retirement benefits. Meanwhile, stirrings in Congress and the Internal Revenue Service offer hope for reform in 2004.


Do you remember Lifetime Savings Accounts, and Roth IRAs for everybody? Those were part of President George Bush's generous-to-retirement-savers tax proposals in early 2003. They never came to pass.

The tax law that did pass in 2003, JGTRRA,1 has a negative effect on retirement plan investing. The law lowered marginal rates on all income, thus reducing the incentive to contribute to a retirement plan. It also drastically reduced the taxes on long-term capital gains and most dividends, to a token rate of 15 percent. The new rate will not apply to gains and dividends earned inside a retirement plan, distributions from which are taxed as ordinary income. This fact, coupled with the lower marginal rates now applicable to plan distributions, provides a significant incentive for equity investors to withdraw money from non-Roth retirement plans and buy stocks outside such plans.

The temporary status of JGTRRA's tax reductions (they expire after 20082) cuts two ways. On the one hand, now is the time to take taxable plan distributions if you think tax rates will soon go back up. On the other hand, moving all your investments outside the retirement plan, to take advantage of the 15 percent rate on gains and dividends, won't look smart if that low rate disappears.

Thus, the tried-and-true formula of having some investments inside and some outside retirement plans is probably still best.


But tried-and-true is no longer the best approach when naming trusts as beneficiaries of retirement plans.

Regulations issued in 2002 made required minimum distribution rules simpler and more favorable to taxpayers in every instance but one: when trusts are beneficiaries of retirement plans.3 The final regulations made the “see-through trust rules” less clear and less taxpayer-friendly.

In 2003, a round of adverse PLRs4 made things even worse, holding that beneficiaries who received their interests through a trust could not use the separate accounts rule5 to determine their respective distribution periods, even if the trust terminated immediately upon the participant's death. As these rulings reversed a 2002 PLR on the same subject,6 they came as a shock and have been criticized by industry experts as a triumph of form over substance.7

In view of the significant changes in the minimum distribution trust rules, all practitioners would be well-advised to review any pre-2003 trust that is named as beneficiary of a significant retirement plan benefit. Three common problems with these trusts must be corrected if their creators wish to use the trust beneficiary's life expectancy as its applicable distribution period (the measuring period for required minimum distributions from the retirement plan).

  • Problem 1 — Older and Non-individual Remainder Beneficiaries: Before the final minimum distribution regulations (in 2002) and PLR 2002-28025 were issued, many practitioners believed that a remainder beneficiary could be ignored when applying the minimum distribution trust rules, if the trust terms required distribution of the entire trust corpus to the income beneficiary at an age that was well within that beneficiary's life expectancy. For example, we thought we could safely ignore the contingent remainder beneficiary of a typical minor's trust that would terminate when the minor reached age 25, 30 or 35, with all trust assets then distributed outright to him.

    We now know the IRS does not share this view. If any plan distributions made to the trust during the life of the income beneficiary can be accumulated in the trust for later distribution (as opposed to being immediately passed out to the income beneficiary), the trust's remainder beneficiary must be considered when applying the rules that “all trust beneficiaries must be individuals”8 and “the oldest beneficiary's life expectancy controls.”9

    Thus, if your client wants his retirement benefits to be payable to the trust over the life expectancy of the income beneficiary, you must be sure that the remainder beneficiary of the trust (whether vested or contingent) is younger than the income beneficiary. Alter-natively, you could change the trust terms to require the trustee to immediately pass out all plan distributions to the income beneficiary, which makes the trust a “conduit trust” and enables you to ignore the remainder beneficiaries in applying the rules.10

  • Problem 2 — Separate-Accounts Treat-ment: If separate-accounts treatment is desired for any group of multiple beneficiaries, you must establish their separate interests on the beneficiary designation form, by directly naming them as beneficiaries of their respective fractional shares. Leaving the benefits to a trust that splits up into separate shares will not achieve the desired result. The applicable distribution period for benefits left to a trust is the life expectancy of the oldest trust beneficiary — even if the trust terminates and splits into separate shares for multiple beneficiaries immediately upon the participant's death.

  • Problem 3 — Paying Debts with Trusts: If the participant's estate is a beneficiary of the trust, that trust will flunk the rule that “all beneficiaries must be individuals” because an estate is not an individual. The typical trust provision requiring or permitting the trustee to make payments to the participant's estate to cover debts, expenses or taxes can cause a trust to violate this rule. The easy way to avoid this problem is to specify that retirement benefits cannot be used for this purpose.

A more sophisticated solution to this problem: Specify that the trustee can use retirement plan distributions to pay debts, expenses or taxes before, but not on or after, Sept. 30 of the year after the year of the participant's death. This approach takes advantage of the fact that a beneficiary whose interest in the trust is entirely distributed prior to that “determination date” does not count as a beneficiary for purposes of the minimum distribution rules.11 However, many pre-2002 trusts still use Dec. 31 rather than Sept. 30 as the cutoff date for payments from the trust to the estate. The cutoff date in the proposed minimum distribution regulations was Dec. 31; the final regulations changed that deadline to Sept. 30, so any trust that still specifies Dec. 31 needs to be amended.


Two pieces of pending legislation would, if enacted, favorably impact estate planning for retirement benefits.

One of them, sometimes called the Charity Aid, Relief and Empow-erment Act (CARE),12 would permit some lifetime transfers from a retirement plan to a charity. This Congressional perennial is always a bridesmaid, never a bride. It was pending in Congress at this time last year, but it's still pending, and it's been pending every year. The other pending bill, whose fate is similarly uncertain, is the Portman-Cardin bill,13 which would raise the age for the start of minimum required distributions from 70 to 75. This bill also would allow a nonspouse beneficiary to move (by plan-to-plan transfer) a lump sum payment from an inherited qualified retirement plan to a so-called inherited IRA (such as a new rollover IRA established in the name of the deceased participant).

This reform would ameliorate a common predicament heirs face. Under current law, nonspouse beneficiaries cannot roll over inherited benefits (even to another plan in the name of the same decedent). This inability causes hardship because so many qualified retirement plans do not offer any form of benefit other than a lump sum distribution, thus effectively depriving nonspouse beneficiaries of the life expectancy payout that the Internal Revenue Code allows them.


Estate planners, and the trustees and executors for deceased participants, continue to experience difficulties dealing with IRA providers and Qualified Retirement Plan (QRP) administrators. In most such cases, the IRA or QRP suffers from sloppy procedures, defective legal reasoning or both, to the detriment of customers (or employees) and their families.

Here are some of the problems I heard about more than once from practitioners in 2003:

  • IRA providers lost beneficiary designation forms. “We acquired another company but lost all their records,” was the excuse in one case. The moral of this story is that when you file a beneficiary designation form, you should have the IRA provider acknowledge receipt of the form (by date-stamping and signing a photocopy of it). You should also periodically check back with the IRA provider to make sure they haven't misplaced it.

  • IRA providers refused to allow a terminating trust or estate to distribute the IRA intact to the estate or trust beneficiaries. The solution here is clearcut — just do a custodian-to-custodian transfer of the account to a more sophisticated and cooperative IRA provider.

  • QRP administrators refused to provide information about the decedent's plan benefits to the executor. Their reason: The plan account now belongs to the beneficiaries, so the executor of the deceased employee is a “stranger to the account.” Plan administrators may not be aware of IRC Section 6018(b), which requires the plan administrator to file a federal estate tax return for the benefits if it refuses to provide information to the executor. Do plan administrators really want to get into the business of filing federal estate tax returns? One practitioner solved this problem by serving a probate court subpoena on the plan administrator.

  • IRA providers refused to allow customized beneficiary designation forms. Here I have some sympathy with the providers, especially after reading “Dear Estate Planner” by Andrea L. Wasser of Vanguard Mutual Funds.14 Mass-market IRA providers cannot be expected to review every customer's beneficiary designation form (which inevitably would entail providing estate planning training to their customers' attorneys), nor should they be compelled to carry out whatever provisions customers decide to throw into their designation forms. Neverthe-less, IRA providers need to have some kind of open door for their customers' legitimate estate planning needs.


Last year at this time, I complained that the final regulations made the minimum distribution trust rules less clear and I wished the IRS would fix the problem in 2003. They didn't. In September 2003, however, the Department of the Treasury invited public comments on the final minimum distribution regulations dealing with retirement benefits payable to trusts. Hopefully, this signals that although my plea for clarification went unanswered last year, perhaps relief will come in 2004.

One more prediction: The promotion of exotic tax and investment ideas for IRAs has become a mushrooming industry. Sooner or later the salesmen will clash with the IRS. As with family partnership discounts, split dollar life insurance and other now-threatened species of tax shelters, the concept of saving taxes by putting your medical practice, yak farm or insurance policy inside your IRA is bound to attract negative attention from the Treasury. I predict an IRS attack on grounds of prohibited transactions, unrelated business taxable income, illegal noncash contributions, excess plan contributions, forbidden insurance investment or some combination of those factors. I'm not yet making bets on who will win.


  1. The Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27.
  2. P.L.108-27, Section 303.
  3. Treas. Reg. Section 1.401(a)(9)-1 et seq. See Marcia Chadwick Holt, “Set in Stone,” Trusts & Estates, June 2002, p. 8, for a summary of these regulations.
  4. PLRs 2003-17041, 2003-17043 and 2003-17044.
  5. Treas. Reg. Section 1.401(a)(9)-8, A-2.
  6. PLR 2002-34074; for more on this ruling and its reversal by the IRS in the final regulations (as illustrated by PLRs 2003-17041 et seq.), see Natalie B. Choate, “MRD Rule Reversal,” Trusts & Estates, July 2003, p. 36.
  7. See Alvin J. Golden, “Reductio Ad Absurdum,” Trusts & Estates, September 2003, p. 60.
  8. Treas. Reg. Section 1.401(a)(9)-4, A-3.
  9. Treas. Reg. Section 1.401(a)(9)-5, A-7(a)(1).
  10. Treas. Reg. Section 1.401(a)(9)-5, A-7(c)(3), Example 2.
  11. Treas. Reg. Section 1.401(a)(9)-4, A-4(a).
  12. H.R. 7, S. 252, S. 276.
  13. H.R. 1776.
  14. Trusts & Estates, September 2002, p. 29.

Collectors' Spotlight

Empire mahogany floor regulator clock, 214 cm tall, made by Mouton à Versailles circa 1810, sold at auction in October 2003 by Antiquorum for $35,114.