Kimmer W. Callahan Estate Planning Law Blog on Lawyers.com

The Retirement Asset
Beneficiary Trust

By: Kimmer W. Callahan, JD, LL.M.

A Retirement Asset Beneficiary Trust (hereafter RABT)
is a custom-written trust agreement and beneficiary designation.  Retirement accounts often make up one
of the largest components of a person's estate.  However, the designation of the beneficiary usually receives
the least amount of planning, in comparison to the time spent planning a will
or a Living Trust.  More often than
not, the beneficiary designation is the result of a 15 second choice on a
"check-the-box" form.  A
RABT allows the account owner to establish a detailed distribution plan for the
intended beneficiaries beyond what is generally available on the IRA standard
beneficiary form.

Why should someone consider using a RABT?  The following discusses several
situations or issues that illustrate the benefits of using a RABT.

1.   
Disinheriting
Grandchildren.  Under most IRA
custodial agreements, if a named beneficiary fails to survive the owner, the
share designated for the deceased beneficiary is added to the shares of the
surviving named beneficiaries.  The
named beneficiary's children would not receive anything from the IRA.  For example, you name your three
children as beneficiaries of your IRA. 
Each of your children have two children.  If child A predeceased you, at your death, your IRA would be
split 50/50 with child B and child C. 
Child A's children would be disinherited from the IRA.  This result is easily avoided with a
RABT.

2.   
Unintended
beneficiary:  If you name your
child as the beneficiary of your IRA and your child and child's spouse are
killed in a common accident, your child's spouse's estate may inherit your IRA
rather than your grandchildren. 
Under most custodial IRA account agreements, if the named primary
beneficiary survives the account owner, the named beneficiary becomes the new
account owner and has the absolute right to determine who will inherit the IRA
at the primary beneficiary's death. 
If the named primary beneficiary has not yet named a new beneficiary, the
primary beneficiary's estate will be the default beneficiary.  Presumably, the spouse would be the
beneficiary of your child's estate, resulting in your child's spouse's estate
determining what will happen to your IRA. 
With a RABT you can avoid this result by determining in advance who will
receive the account benefits upon the death of the primary beneficiary.

3.   
Your Estate as default
beneficiary.  If you name your
child as the primary beneficiary, with no contingent beneficiary, and you and
your child are killed in a common accident, either your estate or your child's
estate will end up as the beneficiary, depending upon who is deemed to have
survived the other.  The result is
the loss of the ability to pay the benefits out over the beneficiary's life expectancy.  A RABT can designate who the beneficiary
is in this type of situation to avoid having an estate as the beneficiary.

4.   
Court appointed Guardian
of minor beneficiary.  If a child
or grandchild is a beneficiary and a minor at the time of your death, it may be
necessary for a court appointed guardian and conservator be appointed to accept
and manage the minor child's interest in the IRA.  With a RABT, you can designate in advance when and how
distributions will be made to a minor, removing the need for a court-appointed
guardian. 

5.   
Lump Sum Distributions.  One of the distribution options that is
almost always available to a beneficiary is the option to liquidate the
beneficiary's entire interest in the account immediately.  The national average is that a
beneficiary will consume their entire inheritance within four months.  With a RABT you can restrict a
beneficiary's withdrawal rights. 
You can limit the distribution to the required annual distribution
amount, or you can allow additional distributions set on a specific
standard. 

6.   
Transferability.  Under a standard beneficiary
designation, the beneficiary becomes the new account owner and has the right to
move the account to any investment firm of their choice.  A RABT can restrict or limit this right
to prevent a child from moving the account to a "discount" broker
which offers no advice or to a self-directed IRA where the child makes the
investment decisions. 

7.   
Successor
Beneficiary.  A RABT can be set up
to allow a child-beneficiary to appoint their interest in your IRA to a new
beneficiary upon the child's death. 

8.   
Trust as
Beneficiary.  Most of the
above-identified benefits can be accomplished by naming a Trust Agreement
(Living Trust or Family Trust) as the beneficiary.  However, naming such a trust as a beneficiary can result in
complications and difficulties which do not arise when using a RABT. 

o    
Trust Accounting vs.
Income Tax Accounting: The rules that regulate how a trust calculates income
for distribution purposes are very different from the rules that determine a
trust's taxable income.  Generally
speaking, distributions made to a trust from a retirement account are
considered principal, rather than income, for trust accounting purposes, but
would be taxable income to the trust for income tax purposes.  For example, a Family By-Pass trust is
the named beneficiary of an IRA, and states that all income is to be
distributed to the surviving spouse with the principal retained for the benefit
of the children at the surviving spouse's death.  If the IRA distributes $50,000 to the By-Pass trust, the
trust will have taxable income of $50,000.  However, the trustee would not be able to distribute the
$50,000 to the spouse because it is considered principal for trust accounting
purposes.  This could result in the
spouse having higher income taxes of $15,000 (assuming a 30% tax bracket) with
no access to the distribution to pay the tax.

o    
Qualified "See
Through Trust":  If the trust
is not a qualified see-through trust, the payout options are very limited.  The IRA will be treated as if there is
no "designated beneficiary." 
In order for a trust to be considered a see-through trust, the trust
must meet very specific rules.  On
their face, the rules appear simple to meet, but the IRS regulations leave
several issues unresolved in regards to the rules.  Even if the trust qualifies as a see through trust, the
payout options are not as generous as when there is an individual
beneficiary.  For example, your
spouse would not be able to roll the IRA over to a new account in the spouse's
name, and the account could not be split among multiple beneficiaries to take
advantage of each beneficiary's age. 
The oldest beneficiary's age would be used to calculate the Required
Minimum Distribution for all beneficiaries. 

o    
Trust Tax Brackets:  The tax brackets for a trust are very
condensed.  Trust income in excess
of about $12,000 is taxed at the maximum income tax bracket. 

A RABT avoids these trust issues because it is
specifically drafted to hold only retirement beneficiary interests.  It will hold no other assets. 

Call now for your free,
no-obligation consultation – 208.664.9228.

Callahan & Associates, Chtd.

By Kimmer W. Callahan

Attorney at Law

www.IdahoEstateLaw.com

Provided as an
educational service of Callahan & Associates, Chtd.