ARTICLE 1 RETIREMENT PLAN PROVISIONS IN LIVING TRUST
[For discussion purposes only. Do not rely upon.]

1.1 Provisions Respecting Retirement Plans.

The provisions of this Section generally override and control any contrary provisions in this instrument, other than those provisions applicable to the marital deduction gift which are necessary to obtain the marital deduction.

1.1(a) Definitions.

As used in this instrument, the following terms, whether or not capitalized, have the following meanings, unless the context very clearly indicates otherwise.

1.1(a)(1) Retirement Plan.

The term “retirement plan” means an annuity, employee pension plan, or a qualified or nonqualified plan of deferred compensation or an IRA (individual retirement plan or individual retirement annuity), or similar arrangement. The term includes a plan or arrangement described in IRC §§401(a), 403, or 408(a), (b) or (k). The term “retirement plan proceeds,” or “retirement plan death benefits,” means proceeds receivable by any beneficiary (including a fiduciary) under a retirement plan upon or following the death of the participant.

1.1(a)(2) Minimum Distribution Rules.

The “minimum distribution rules” or the “minimum required distribution rules” (or MRD Rules) are the rules described in IRC §401(a)(9), §457(d)(2)(A), and §§408(a)(6) or (b)(3) (or anywhere else 401(a)(9) is made applicable by cross-reference), as the case may be. A “minimum required distribution “ (or MRD ) means the distribution required to be made from a retirement plan in order to avoid the excise tax under IRC §4974.

1.1(a)(3) MRD.

A “Minimum Required Distribution” or MRD is the distribution required to be made under the MRD Rules in order to avoid the imposition of an excise tax under IRC §4974

1.1(a)(4) Qualified Retirement Plan.

“Qualified Retirement Plan” or “QRP” is a retirement plan that is subject to the MRD Rules.

1.1(a)(5) Eligible Retirement Plan.

An “eligible retirement plan” has the meaning given under IRC §402 (currently 402(c)(8)(B)), and generally means a qualified plan, IRA, etc., that is eligible to receive a tax-free rollover.

1.1(a)(6) Employee-Participant-IRA Owner.

The term “employee” as used in this Section will include an IRA owner, and an employee's benefit will include benefits under an IRA. The term “participant” with respect to a retirement plan includes the named owner of an IRA, as well as the employee.

1.1(a)(7) Required Beginning Date.

The term “required beginning date” or “RBD” will have the meaning given by IRC §401(a)(9) and the regulations under it. The RBD generally refers to the April 1 following the calendar year in which Maker attains age 70½, except that if Maker is not a 5-percent owner (as defined in IRC §416) the RBD may be the April 1 following the calendar year in which Maker retires, if later.

1.1(a)(8) Administrator.

The term “administrator” as used in this Section means the plan administrator in the case of a retirement plan other than an IRA; or, in the case of an IRA, the trustee or custodian, as the case may be.

1.1(a)(9) Beneficiary Determination Date.

The term “beneficiary determination date” (or BDD) means the date provided for determining the beneficiary for purposes of apply the MRD Rules, as interpreted by the IRS in its applicable published regulations (proposed, temporary, or final, as applicable), Revenue Rulings, Notices, etc. (At the present time, Maker believes that the BDD is September 30 of the year after Maker’s death.)

1.1(a)(10) Designated Beneficiary(ies).[1]

A “Designated Beneficiary” is to be given the meaning used in the Treasury Regulations to IRC §401(a)(9) (proposed, temporary or final, whichever is then in effect). Maker believes that under the final regulations a Designated Beneficiary is an identifiable individual who is entitled to a portion of an employee's benefit, contingent on the employee's death or another specified event. Under the final regulations, the members of a class of beneficiaries capable of expansion or contraction will be treated as being identifiable if it is possible, to identify the class member with the shortest life expectancy. [2]

1.1(a)(11) Beneficiary Determination Date.

The term “beneficiary determination date” (or BDD) means the date provided for determining the beneficiary for purposes of apply the MRD rules, as interpreted by the IRS in its published regulations (proposed, temporary, or final, as applicable), Revenue Rulings, Notices, etc. (At the present time, Maker believes that the BDD is December 31 of the year after Maker’s death.)

1.1(a)(12) Minimum Distribution Rules.

The “minimum distribution rules” or “minimum required distribution rules” (or MRD rules) are the rules described in IRC §401(a)(9) and §§408(a)(6) or (b)(3) (or anywhere else 401(a)(9) is made applicable by cross-reference), as the case may be.

1.1(a)(13) MRD.

A “Minimum Required Distribution” or MRD is the distribution required to be made under the MRD rules in order to avoid the imposition of an excise tax under IRC §4974

1.1(a)(14) Contingent Beneficiary(ies). [3]

A “Contingent Beneficiary,” for purposes of this Section only, is a Designated Beneficiary. However, a Successor Beneficiary is not a Contingent Beneficiary for this purpose.

1.1(a)(15) Successor Beneficiary.[4]

Maker understands that under the final regulations, a person will not be considered a Designated Beneficiary if the person could become the successor (a “Successor Beneficiary”) to the interest of a Designated Beneficiary after that beneficiary's death. However, the preceding sentence does not apply to a person who has any right (including a contingent right) to an employee's benefit beyond being a mere potential successor to the interest of one of the employee's beneficiaries upon that beneficiary's death.

1.1(a)(16) Separate Account.

A “Separate Account,” for purposes of this Section and for purposes of the MRD Rules is to be given the meaning used in the Treasury Regulations to IRC §401(a)(9) (proposed, temporary or final, whichever is then in effect). Maker believes that the regulations provide that for purposes of section 401(a)(9), Separate Accounts in an employee's account are separate portions of an employee's benefit reflecting the separate interests of the employee's beneficiaries under the plan as of the date of the employee's death for which separate accounting is maintained. The separate accounting must allocate all post-death investment gains and losses, contributions, and forfeitures, for the period prior to the establishment of the Separate Accounts on a pro rata basis in a reasonable and consistent manner among the Separate Accounts. However, once the Separate Accounts are actually established, the separate accounting can provide for separate investments for each Separate Account under which gains and losses from the investment of the account are only allocated to that account, or investment gain or losses can continue to be allocated among the Separate Accounts on a pro rata basis. A separate accounting must allocate any post-death distribution to the Separate Account of the beneficiary receiving that distribution.

1.1(b) Method of Distribution Under Retirement Plans.

To the extent any fiduciary has an interest in a retirement plan, the fiduciary (or the fiduciary's successor in interest) will have the power to determine the form and manner of distribution from the retirement plan, provided, however, that the trustee of The Marital Deduction Trust must elect a form, time and manner of payment that assures that the Surviving Spouse will have a qualifying income interest for life in The Marital Deduction Trust and the retirement plan with respect to such interest. [5]

1.1(c) More Than One Beneficiar / Division Into Separate Accounts.

If there is more than one present beneficiary of a single QRP, the fiduciary, to the extent feasible, will maintain the QRP as Separte Accounts, and will physically divide the QRP into individual Separate Accounts by September 30 of the year following the year of Maker's death.

1.1(d) Trustee May Be Named As Death Beneficiary of Retirement Plan.

A fiduciary, as such, may be named as the beneficiary of retirement plan death benefits. If so, the fiduciary will be treated as owning the right to receive distributions from the retirement plan, as fully as any other person or individual who was named as beneficiary, except that such ownership will be in a fiduciary capacity, of course. Such interest (i.e., the right to receive distributions from the retirement plan) will be treated as an asset of the trust, and will be subject generally to the same provisions applicable to other trust assets.[6] The death of a beneficiary of the trust will not terminate the interest that the trust has in a retirement plan. A beneficiary who receives the interest as a distribution will be entitled to receive the death benefits to the same extent as the fiduciary. (A beneficiary who succeeds to the fiduciary's right to the proceeds as a trust distribution that is not treated as purchase for income tax purposes should be treated by the administrator as a mere successor in interest to the fiduciary.)

1.1(e) Trustee May Direct Administrator Regarding Disposition of QRP Proceeds.

The trustee, acting in a fiduciary capacity, and in accordance with the terms of the trust, (or the trustee's successor in interest) may direct the administrator regarding the disposition of QRP proceeds of which the trustee is the beneficiary, including the establishment of separate QRPs in the name of the deceased QRP participant

1.1(f) Rollovers and Transfers.

The fiduciary will have the unrestricted power to transfer (or rollover, if permitted by law) any interest in a retirement plan to any other eligible retirement plan or plans, in order to effectuate the requirements of this Section, or as the fiduciary may otherwise determine to be in the best interest of the beneficiaries under the terms of the trust, provided that in such case the fiduciary will continue as the holder of the interest, to the same extent as before.

1.1(g) Coordination With Minimum Distribution Rules.

(a) If the trustee is named as the beneficiary of retirement plan death benefits that are subject to the minimum required distribution rules, (b) and if, under the circumstances existing on the BDD, the retirement plan death benefits or the right to receive the retirement plan death benefits are or may be payable to a trustee, then (c) if the beneficiary(ies) of the trust are or were apparently intended by Maker to be “Designated Beneficiary(ies)” under the minimum required distribution rules, for which a payout method using the life expectancy of the Designated Beneficiary(ies) would be available, then (and then only), the following rules under this Subsection apply. Further, notwithstanding the foregoing, the following rules under this Subsection do not apply if (a) Maker’s spouse is a Designated Beneficiary, (b) Maker’s death is after Maker’s RBD, and (c) Maker’s Spouse is less than four years younger than Maker. [7]

1.1(g)(1) Retirement Plan Benefits And Their Proceeds To Be Held In Dedicated Subtrusts.

Retirement plan benefits and their proceeds will be held in dedicated earmarked Subtrusts and will not be commingled with other property. Except as otherwise provided in this Section, each such dedicated Subtrust will have the same terms and provisions that would otherwise have applied to it, determined as if the preceding sentence did not apply. [8]

1.1(g)(2) Separate Subtrust Accounts.

The fiduciary will maintain all QRP death benefits as Separate Accounts to the extent such benefits are amenable to such treatment, using Subtrusts if necessary.[9]

1.1(g)(3) Special Distribution Requirements.

The fiduciary will see to it that QRP death benefits are only distributed to Designated Beneficiaries, as long as a Designated Beneficiary is alive.[10] Further, to the extent physically possible, the fiduciary will actually distribute those benefits to those beneficiaries within such time as is required under applicable tax law, or under regulations (whether proposed, temporary or final) in order to carry out Maker’s paramount intent expressed below. [11]

1.1(g)(4) Application of Rules to Subtrusts.

Maker realizes that a Subtrust may be the beneficiary of retirement plan benefits. In that case, the rules of this Section are to be applied within the particular Subtrust involved, and are not meant to give the beneficiaries of other Subtrusts an interest they would not otherwise have had.

1.1(g)(5) Definition of Conduit Trusts.

A “Conduit Trust” is a trust under which all amounts distributed from a QRP to the trustee while a Designated Beneficiary is alive will be paid directly to the Designated Beneficiary upon receipt by the trustee.[12] See Treas. Reg. §1.401(a)(9)-5, Q3(c)(3) Ex. 2 for an example of a Conduit Trust.

1.1(g)(6) Conduit Trust Treatment for Certain GSTT Property. [13]

Notwithstanding anything else herein to the contrary, if any retirement plan proceeds that are distributed to a Nonexempt Protected Trust would be “GSTT Property” [14] if the Primary Beneficiary of that trust should die on the date received by the trust, then the trustee of the Nonexempt Protected Trust[15] will treat the trust as a Conduit Trust. The primary beneficiary of such a Conduit Trust will have a general testamentary power of appointment over such trust.[16] (If and to the extent the power is not exercised, the property subject to the power will pass as elsewhere herein provided where there has been a default in the exercise of a power of appointment.) [17]

1.1(g)(7) Retirement Benefits to be Used Exclusively For Individual Designated Beneficiaries Living on the BDD.[18]

Except in the case of a Conduit Trust following the death of the Designated Beneficiary, and except as otherwise specifically provided to the contrary in the Paragraph immediately below, but notwithstanding anything else herein to the contrary, retirement plan death benefits will be used entirely and exclusively for the benefit of the “Designated Beneficiary(ies)” who are living at the BDD.

1.1(g)(8) Unborn Beneficiaries.

Except in the case of a Conduit Trust, and to the extent physically possible, when all of the primary Designated Beneficiaries of a particular Subtrust who were living at the BDD have died, trust distributions (which, after all, must be distributed to someone) may only be made to Designated Beneficiaries who would otherwise benefit under the Subtrust, and then only in the manner and to the extent (and only if) consistent with my paramount and manifest intent set forth below in this Subsection. [19]

1.1(g)(9) Distribution Instructions in the Absence of Clear Law/ Trustee Required to Distribute During Life Expectancy of Beneficiary.

Except in the case of a Conduit Trust, and unless the law applicable to minimum required distributions from QRPs, interpreted in accordance with Maker’s paramount intent, clearly allows for a less rapid distribution from the trust —in which case the benefits need not be distributed sooner than the clear law requires in order to comply with Maker’s paramount intent expressed below—,[20] all retirement plan benefits received by the trust must be distributed to one or more Designated Beneficiaries of the trust before the expiration of the life expectancy of the youngest Designated Beneficiary of the trust to which this rule is applied, taking into account only beneficiaries alive at the applicable time. [21]

1.1(g)(10) No Power of Appointment Over Retirement Plan Benefits.

Except in the case of a Conduit Trust, but notwithstanding anything else to the contrary, no one (other than Maker with respect to Maker’s share of the trust) will have any power of appointment over any retirement plan death benefits of which the trust has been named as death beneficiary, [22] except that Maker’s Surviving Spouse will have all such demand rights over income that are otherwise provided herein, in cases where the Spouse has a qualifying income interest for life in the trust or in the retirement plan.[23] Except as otherwise limited in this Section, any power of appointment that would otherwise have been applicable, but for this paragraph, will be treated as if it existed but was unexercised.

1.1(g)(11) Retirement Benefits Cannot be Used to Pay Debts or Expenses. [24]

So long as an individual Designated Beneficiary of the applicable Subtrust is living, and notwithstanding the rules otherwise applicable to apportionment, abatement and the payment of debts and expenses, retirement plan death benefits will not be used to pay debts or expenses.

1.1(g)(12) Retirement Benefits Generally Cannot Be Used to Pay Taxes.

1.1(g)(12)(A) General Rule.

Notwithstanding anything else outside of this subsection to the contrary, the rules otherwise applicable to apportionment and abatement of death taxes are hereby expressly limited to provide that the retirement plan benefits themselves will not be used to pay any death taxes. [25] However, in that case, the death taxes attributable and proportionate to such retirement plan death benefits, to the extent otherwise apportionable under this instrument, will be charged against other property or trust distributions receivable by the beneficiary as a result of Maker’s death[26] (provided that such other property is not otherwise eligible for the marital deduction[27]).

1.1(g)(12)(B) Special Rule.

Notwithstanding the immediately preceding Subparagraph, if it is clear under the statutes, rulings, regulations, and other circumstances existing at date of death (or under a private letter ruling obtained by the fiduciary regarding this issue), that the beneficiary may be charged with, or that retirement plan death benefits may be used to pay, death taxes that are directly attributable and proportionate to the estate tax value of such retirement plan death benefits, without causing a beneficiary of the trust interest who would otherwise be a Designated Beneficiary to be treated as other than a Designated Beneficiary, then, in that case, the beneficiary may be charged with or retirement plan death benefits may be used to pay death taxes that are directly attributable and proportionate to the estate tax value of such retirement plan death benefits, to the extent such taxes are otherwise apportionable to such property under otherwise applicable law and this instrument. [28]

1.1(g)(13) Allocations to be Made before the BDD.

The trustee is directed to make all allocations of retirement plan death benefits before the BDD, if at all feasible.

1.1(g)(14) Paramount and Manifest Intent.

It is Maker’s paramount and manifest intent, and it is the sole purpose of the foregoing rules to insure, that the beneficiaries of the trusts who are considered under the MRD Rules be identifiable individuals be treated as “Designated Beneficiaries” under the minimum distribution rules, and that the life expectancy method may be used to calculate the minimum distributions required by the IRC; and this subsection will be interpreted with this manifest intent being paramount to any other direction in it, because that is the intent of the Maker.

1.1(g)(15) Trustee Lacks Discretion to Allocate Retirement Plan Death Benefits.

If the trust estate of a trust that is the beneficiary of retirement plan death benefits is itself to be divided into Subtrusts, the trustee will have no discretion to allocate retirement plan death benefits that are payable to the trustee. Instead, retirement plan death benefits must be allocated as provided below in this Paragraph.~~[29]~~

1.1(g)(15)(A) Allocation Order.

~~Retirement plan death benefits must be allocated in strict accordance with the following rules, and in the priority listed (the lower the number the higher the priority).~~[30]~~~~

~~1. Allocation to Nonpecuniary Trusts.~~ ~~Retirement plan death benefits will first be allocated to trusts that are not pecuniary in nature before being allocated to pecuniary trusts.~~[31]~~~~

~~2. Allocation to GSTT Nonexempt Trusts Next.~~ ~~Retirement plan death benefits will be allocated to GSTT Nonexempt trusts before allocating to GSTT Exempt Trusts.~~[32]~~~~

~~3. Allocation Among Exempt Marital Deduction Trusts.~~ Allocations will be made to the Qualified~~[33]~~ Nonexempt~~[34]~~ Marital Deduction Trust before allocating to the Nonqualified Nonexempt Marital Deduction Trust, and allocations will in turn be made to the Qualified Exempt Marital Deduction Trust before allocating to the Nonqualified~~[35]~~ Exempt Marital Deduction Trust.

1.1(g)(15)(B) Proportionate Division of Fractional Interests.

If, after application of the priority scheme described above, or otherwise, the trust estate of a trust that is the beneficiary of retirement plan death benefits is itself to be further divided, the interests of the trustee (and the beneficiaries) of such trust in such retirement plan death benefits will be likewise further divided, proportionately (i.e., no “pick and choose” power in the fiduciary).~~[36]~~

1.1(h) Incorporation By Reference of Terms of Beneficiary Designation.

If the terms of any beneficiary designation signed by Maker would otherwise fail because such terms are not a part of Maker’s Will (or Trust), Maker incorporates such terms, as a part of Maker’s Will (and Trust), by reference, as if fully set out in this document, and vice-versa.

1.1(i) Special Provisions Regarding the Allocation of Community Property.

Notwithstanding the foregoing, Maker’s surviving spouse will have the right prior to the BDD, but not afterwards, in a fiduciary capacity, to direct and compel the allocation of any property in the trust or in Maker's probate estate, in which Maker’s surviving spouse has a community property interest, directly to him or herself, as part of an equal nonprorata division of the community property estate (see PLRs 199912040 and 199925033). Maker’s surviving spouse has the right to receive outright and free of trust (and presumably to rollover) all retirement benefits so allocated.

1.1(j) Distribution Taxes On First Decedent’s Interest in Surviving Spouse’s Plan When Nonparticipant Spouse Dies First.[37]

If, at or after the First Decedent’s death, any income taxes, or premature distribution taxes under IRC §72(t), are incurred by the First Decedent’s Surviving Spouse (or the Surviving Spouse’s estate) with respect to a distribution to someone other than the Surviving Spouse of the First Decedent’s community property interest in a retirement plan with respect to which the Surviving Spouse is the employee, named owner, or participant, then the recipient will be obligated to pay or reimburse the Surviving Spouse (or the Surviving Spouse’s estate) for such taxes (in advance of the due date of the taxes) as a condition of receiving gifts under this instrument. This Subsection only applies to benefits, and their proceeds, in a retirement plan with respect to which the First Decedent (the spouse who died first) was not the named owner or participant, but that were includible in the First Decedent’s gross estate for federal estate tax purposes by reason of the community property laws or otherwise, and which passed in accordance with the First Decedent’s explicit directions, either because they are probate assets with respect to the First Decedent or because of a beneficiary designation the First Decedent signed. This Paragraph is included because the law on the subject is unclear. It is not meant to imply that some or all of the taxes referred to will in fact be incurred by the First Decedent’s Surviving Spouse. This Paragraph does not apply with respect to distributions to the Marital Deduction Trust.[38]

1.1(k) Provisions Respecting the Marital Deduction.

Notwithstanding the following or anything else in this instrument to the contrary, a trust in which the Surviving Spouse has a qualifying income interest for life may not be funded with property that does not constitute Eligible Marital Deduction Property if there is any other alternative available to the fiduciary. Subject to this rule, Maker recognizes that there may be situations in which a Surviving Spouse has a “qualifying income interest for life in a retirement plan,” or in which The Marital Deduction Trust estate has an interest in a retirement plan. For example, the trust may own the right to receive distributions from a retirement plan that constitutes Eligible Marital Deduction Property. In such event, the interest will be held, invested, reinvested and maintained, and income attributable to the interest will be determined, in a manner that guarantees that the Surviving Spouse has a qualifying income interest for life with respect to such interest. The rule that the Surviving Spouse is guaranteed a qualifying income interest for life in such cases is overriding and will govern in case of conflict with the following rules, which Maker nevertheless believes to be consistent with it.

1.1(k)(1) Determination of Fiduciary Accounting Income.

Subject to the overriding rule that the Surviving Spouse is guaranteed a qualifying income interest for life in any retirement plan in which the trust has an interest, income from an interest in a retirement plan will be determined by reference to state statutory law, if any, or if none, by applying general equitable principles, having due regard for the interest of the income beneficiary and the remaindermen.

Further, in the case of any retirement plan in which the trust has an interest, fiduciary accounting income, if greater,[39] will be determined and distributed in the same manner as if the retirement plan in which the trust has an interest was itself “qualified terminable interest property” within the meaning of IRC §2056.

Income is an accounting notion representing a value, and not representing particular assets. Therefore, whether or not all of the income from a retirement plan (in which The Marital Deduction Trust has an interest) is distributed by the plan in a given year, an amount representing the income will nevertheless be credited to the income account and will be distributable by the trust, in the manner otherwise provided under the terms of the trust. If the other assets available for distribution in The Marital Deduction Trust are insufficient for that purpose, then the trustee will compel a distribution from the retirement plan of such an amount as is necessary to satisfy the obligation to the spouse.

1.1(k)(2) Additional Demand Rights Granted to Surviving Spouse.

In addition to the above, and notwithstanding anything else herein to the contrary, the Surviving Spouse, at any and all times, will have the unfettered and non-lapsing right to demand an immediate distribution from each retirement plan, in which the trustee of The Marital Deduction Trust has an interest, of all (or any part of) the income from such plan (determined as if the plan were itself a trust in which the Spouse had a qualifying income interest for life), and the trustee will facilitate and comply with such demand and take whatever steps are needed to insure that the income is received by the Surviving Spouse.[40] (Any distribution under this Paragraph will be credited against any rights the spouse would otherwise have had to an amount representing such income, of course.) This right will survive and continue with respect to any assets, including their proceeds, distributed from the retirement plan to the trustee of The Marital Deduction Trust, so that there will be no question but that the Surviving Spouse at all times has a non-lapsing qualifying income interest for life in such retirement plan (and its proceeds) that will continue under all events and contingencies.[41]

1.1(k)(3) Explicit Provisions Regarding Distributions and Acceleration of Installment Distributions.

For so long as The Marital Deduction Trust has any interest in a retirement plan, the trustee will take whatever steps are required to assure that such interest, to the extent not previously distributed, is (and will at all times remain) immediately distributable on demand to the trust. Accordingly, the trustee will retain the unrestricted power to accelerate any installment distributions elected under the minimum distribution rules or otherwise. If the right to accelerate cannot be assured, the trustee will not make an installment distribution election.

If The Marital Deduction Trust has an interest in a retirement plan, no distribution of all or any part of such interest may be made to anyone other than the Surviving Spouse (or to the trustee, as such) during the Surviving Spouse’s lifetime, and no distribution of all or any part of such interest may be made directly out of the retirement plan to anyone else (other than the trustee, as such), following the Surviving Spouse’s lifetime.

1.1(k)(4) Unproductive Property In Retirement Plan.

If the assets of a retirement plan in which the Surviving Spouse has (or is treated as having) a qualifying income interest for life, or in which The Marital Deduction Trust has an interest, ever include unproductive or under productive property, then the Surviving Spouse (or the Surviving Spouse’s guardian or other legal representative) is specifically permitted to require the trustee of The Marital Deduction Trust and the trustee or custodian of the retirement plan to either make the property productive or convert it within a reasonable time. This right will include the power, to the extent necessary, to cause the retirement plan interest to be distributed directly to the trustee or transferred to another eligible retirement plan, where, in either case, the property can be made productive.

1.2 Income in Respect of a Decedent.[42]

Unless this instrument specifically provides otherwise elsewhere, if a pecuniary or a residuary gift to charity is made under this instrument, the principal amount of the gift will be satisfied, as a matter of right, first out of any income in respect of a decedent (691 items) otherwise available for that purpose, before any other properties are allocated, and second, if need be, out of other net income of the residuary estate. If there is more than one such gift, the 691 items and other income will be pro rated between them (691 items first, other income, if need be, second). If the 691 items exceed the value of the charitable gift, the charity(ies) will be entitled to a fractional share of the 691 items and no other income. Notwithstanding anything else herein to the contrary, the fractional share will be a true fraction, with no “pick and choose” power in the fiduciary. The allocation of income under this Section (if needed to satisfy the principal amount of a gift to charity) will not, however, have the effect of reducing the value of any other gift or right to income in a beneficiary. Thus, if the allocation of income under this Section would have that effect (but for this sentence), then Maker’s fiduciary will make whatever equitable adjustment is necessary to make the beneficiary (including the charity itself) whole.

[1] Treas. Reg. §1.401(a)(9)-4, Q&A- 1 provides:

Q-1. Who is a designated beneficiary under section 401(a)(9)(E)?

A-1. A designated beneficiary is an individual who is designated as a beneficiary under the plan. [N.B. Individual means “human being.” So, using IRS diction, if the beneficiary you designate is an estate, for example, the beneficiary you designated is not a designated beneficiary (even if not capitalized). This odd use of nomenclature (and this is not the first time, the observant will have noted) can be confusing, to say the least.] An individual may be designated as a beneficiary under the plan either by the terms of the plan or, if the plan so provides, by an affirmative election by the employee (or the employee's surviving spouse) specifying the beneficiary. [Query: Does this mean that the surviving spouse can be given the power under the plan to designate the participant’s beneficiary? Although that is what the reg suggests, I am pretty sure that the parenthetical reference is to the case described by 401(a)(9)(B)(iv) which provides that “if the surviving spouse dies before the distributions to such spouse begin, this subparagraph shall be applied as if the surviving spouse were the employee.”] A beneficiary designated as such under the plan is an individual who is entitled to a portion of an employee's benefit, contingent on the employee's death or another specified event. [N.B To sum up so far, a “designated beneficiary” is a human being designated (a) by the plan document, (b) the participant, or (c) by the participant’s surviving spouse, and who is entitled to the participant’s benefit “contingent on the employee's death or another specified event.” Query, what event, other than the death of the employee, does the reg writer have in mind here? The only type of situation that I can readily think of that might apply would be where the beneficiary designation says something like to A for life, and on A’s death anything remaining to B. That is not a common form of beneficiary designation in a beneficiary designation form, but it would be common inside a trust. To what extent does 1.401(a)(9)-4, Q&A-1, apply to trusts? ] For example, if a distribution is in the form of a joint and survivor annuity over the life of the employee and another individual, the plan does not satisfy section 401(a)(9) unless such other individual is a designated beneficiary under the plan. [What am I missing? What would be a common example of a plan making a distribution in the form of a joint and survivor annuity on the life of the participant and another human being where the other human being was not designated beneficiary under the plan? Darned if I have the slightest idea.] A designated beneficiary need not be specified by name in the plan or by the employee to the plan in order to be a designated beneficiary so long as the individual who is to be the beneficiary is identifiable under the plan. [N.B. Presumably, the individual must be identifiable prior to the participant’s death, and without reference to some discretionary determination lodged in a third party after death. ] The members of a class of beneficiaries capable of expansion or contraction will be treated as being identifiable if it is possible, to identify the class member with the shortest life expectancy. [N.B. This is very, very important, in the past. The rule was part of the 1987 and 2001 proposed regulations. Nevertheless, if you believe what the IRS personnel have said at ALI-ABA seminars, the rule does not apply to dynasty trusts (long term trusts designed to last for the rule against perpetuities and usually having a value equal to the available exclusion from the generation skipping transfer tax (GSTT). Why? No one knows. Not only does no one know the rationale, no one heretofore has known exactly how to apply the rule. Do the new regulations solve the problem? I don’t think so, not unless this regulation means what it says. It did not used to mean what it says. I know that much.] The fact that an employee's interest under the plan passes to a certain individual under a will or otherwise under applicable state law does not make that individual a designated beneficiary unless the individual is designated as a beneficiary under the plan. [When this sentence is read in conjunction with the preceding sentence, I think that the position of the Service on this issue is fairly clear. ] See A-6 of §1.401(a)(9)-8 for rules which apply to qualified domestic relation orders. [Emphasis and notes to reader added.]

[2] See the third sentence of Treas. Reg. §1.401(a)(9)-4, Q&A-1, quoted immediately above. Next note the special rule found in Treas. Reg. §1.401(a)(9)-5, A-7(b):

(b) Except as provided in paragraph (c)(1) of this A-7, if a beneficiary's entitlement to an employee's benefit after the employee's death is a contingent right, such contingent beneficiary is nevertheless considered to be a beneficiary for purposes of determining whether a person other than an individual is designated as a beneficiary (resulting in the employee being treated as having no designated beneficiary under the rules of A-3 of §1.401(a)(9)-4) and which designated beneficiary has the shortest life expectancy under paragraph (a) of this A-7. [Emphasis added.]

The introductory subordinate clause that begins the dash 5, A-7(b) reg. quoted above which reads “Except as provided in paragraph (c)(1) of this A-7,” is saying that contingent beneficiaries are considered in determining who has the shortest life. However, the cross-reference to (c)(1) provides that if a subsequent beneficiary is entitled to the benefit only if the first beneficiary survives the participant but dies before the entire benefit to which that first beneficiary is entitled has been distributed, then in that case the subsequent beneficiary will not be considered a beneficiary.

(1) If a beneficiary (subsequent beneficiary) is entitled to any portion of an employee's benefit only if another beneficiary dies before the entire benefit to which that other beneficiary is entitled has been distributed by the plan, the subsequent beneficiary will not be considered a beneficiary for purposes of determining who is the designated beneficiary with the shortest life expectancy under paragraph (a) of this A-7 or whether a beneficiary who is not an individual is a beneficiary. This rule does not apply if the other beneficiary dies prior to the applicable date for determining the designated beneficiary. [Emphasis added.] Prop. Treas. Reg. §1.401(a)(9)-5, A-7(c)(1) Death Contingency (Proposed 1/17/2001).

So, contingent beneficiaries can be designated beneficiaries, but not all contingent designated beneficiaries are counted in determining who has the shortest life expectancy or is an individual beneficiary.

[3] Note the distinction between and overlap among (1) designated beneficiaries, (2) contingent and non-contingent beneficiaries, and (3) identifiable beneficiaries, and successor beneficiaries: a designated beneficiary may be either contingent or not; all designated beneficiaries must be identifiable; but not all identifiable beneficiaries are designated beneficiaries, etc.

[4] Treas. Reg. §1.401(a)(9)-5 Q&A (7)(c) provides:

Successor Beneficiary.

A person will not be considered a beneficiary for purposes of determining who is the beneficiary with the shortest life expectancy under paragraph (a) of this A-7, or whether a person who is not an individual is a beneficiary, merely because the person could become the successor to the interest of one of the employee's beneficiaries after that beneficiary's death. [N.B. I have been told that, like modern theologians, and post-modern deconstructionists, the IRS does not take this sentence literally, which is too bad, because in the trust context it would be very helpful to the Humpty-Dumpty rule not to apply.] However, the preceding sentence does not apply to a person who has any right (including a contingent right) to an employee's benefit beyond being a mere potential successor to the interest of one of the employee's beneficiaries upon that beneficiary's death. Thus, for example, if the first beneficiary has a right to all income with respect to an employee's individual account during that beneficiary's life and a second beneficiary has a right to the principal but only after the death of the first income beneficiary (any portion of the principal distributed during the life of the first income beneficiary to be held in trust until that first beneficiary's death), both beneficiaries must be taken into account in determining the beneficiary with the shortest life expectancy and whether only individuals are beneficiaries.

This is new. Just what the hell it means is anybody’s guess. It is an utterly incoherent sentence standing alone, because it could mean anything. I am not even going to make the effort to look up “mere potential successor” in ALR or Black’s Law Dictionary because I am quite sure that the term is not one with any real established legal meaning.

If the remainderperson is guaranteed an interest contingent only upon survival, as would be the case if there were an income only beneficiary for life, with no possibility of a principal distribution, then I can tell that the remainderperson would be counted. Beyond that, it is impossible to say what this regulation is supposed to mean.

I take it that if a person’s interest is a mere expectancy or less, that person doesn’t count. An example would be that of an heir at law during the lifetime of the person from whom the heir at law would inherit died without a will. In the trust context, it would be anyone who was a potential beneficiary of the exercise of a power of appointment, which might be everyone in the world. The state, under the escheat laws, would always seem to fit this definition of a person we don’t have to consider. Who else?

If principal and income are distributable to a person on the basis of need until the person reaches age 25, and the then the trust is to be distributed to that person if living, may we ignore the contingent beneficiaries. Are they “mere potential successors.” What if instead of age 25, we used age 250? Assuming the latter won’t work and that the former will, we could say that there is a life expectancy test involved here, as we were told the IRS intended under the proposed regulations (without having actually ever said so). Well, that might be the rule here too; but as under the proposed regs, the principle, if it exists, still has not been stated.

Worst of all, PLR 20028025 gives us reason to believe that even age 25 will not work. That is truly frightening, because it means nothing will work, other than a Conduit Trust or a demand trust, and if that is the case, why use a trust. See the discussion below.

* * * *

If we had to look at the universe of all potential takers of the interest accumulated in the trust, then we could never pass the test because we could never assure that an individual, much less an individual below a certain age, would take under all contingencies. The rule as I read it does not go that far. It allows us to exclude anyone whose mere interest is that of a “successor to the interest of one of the employee’s beneficiaries after that beneficiary's death” unless the person has a “has any right (including a contingent right) to an employee's benefit beyond being a mere potential successor.”

I really liked the formulation that Natalie Choate and Virginia Coleman were at one time proposing to be the rule, which was an actuarial test of sorts, requiring a payout before the expiration of the life expectancies of the beneficiaries. I still like this formulation. It is workable and in most cases would allow the trust to go for a very long time. I could easily live with it. The problem was that the formulation was not found in any written IRS document, and certainly not in the regulations, formerly proposed, now final. I did not feel confident about the rule before, and I certainly am not confident now because (a) the final regs still do not support it and because (b) I know of PLR 20028025 which rejected implicitly the actuarially based rule suggested.

It may be that we can divide the beneficiaries into those whose interest is “vested” in some sense of that very plastic word, and that we can exclude anyone whose interest is a mere expectancy or less. I could live with that as well, if I knew it to be the rule, and if I knew (which would be asking a lot) whom the IRS considered vested. However, I cannot live comfortably with a rule requiring a Conduit Trust or a trust in which the beneficiary has the unbridled right to terminate and withdraw, nor can I believe that is what the IRS is intending, assuming it has an intent, which is itself highly doubtful.

The question to which I keep returning is whether we need to count beneficiaries who will take only in the event of death of another beneficiary, and the final regulations under Dash 5, A-7(c)(1) regarding successor beneficiaries, are, unfortunately, ambiguous on this point. Again, this regulation reads:

(1) A person will not be considered a beneficiary for purposes of determining who is the beneficiary with the shortest life expectancy under paragraph (a) of this A-7, or whether a person who is not an individual is a beneficiary, merely because the person could become the successor to the interest of one of the employee's beneficiaries after that beneficiary’s death. However, the preceding sentence does not apply to a person who has any right (including a contingent right) to an employee's benefit beyond being a mere potential successor to the interest of one of the employee’s beneficiaries upon that beneficiary's death. Thus, for example, if the first beneficiary has a right to all income with respect to an employee’s individual account during that beneficiary's life and a second beneficiary has a right to the principal but only after the death of the first income beneficiary (any portion of the principal distributed during the life of the first income beneficiary to be held in trust until that first beneficiary’s death), both beneficiaries must be taken into account in determining the beneficiary with the shortest life expectancy and whether only individuals are beneficiaries.

It is clear that some beneficiaries can be ignored if the interest is merely that of a successor, but it is equally clear that they cannot be ignored if the interest is beyond that. What is not clear is what it is meant by having a contingent right beyond being a mere potential successor to the interest. That is the issue in a nutshell, and we must address it with precision and care, because much hangs on it. I personally do not believe that the trust has to be a conduit to be able to ignore remote beneficiaries.

By the way, I have no idea whatsoever what is meant by the parenthetical “(any portion of the principal distributed during the life of the first income beneficiary to be held in trust until that first beneficiary's death).”

This regulation is insulting. The one example given is clear enough, if principle cannot be distributed. But beyond that, the rule, whatever it may be, is so uncertain that extrapolating from the example is mere speculation. After all of these years, we still do not have a clue about the IRS’ real position. For instance, take a typical trust for children to last a period of years, remainder to grandchildren. Unlike the example, principal and income distributions can be made for support —again, a typical term—; not all of the income and not all of the principal, unless necessary. Do we consider the grandchildren? If you are alert, you will realize we could not care less about that question since they are younger than the children.

The only real issue is what to do if everyone in the descending line dies out! That is always a problem, and always potentially the case! I am tempted to comment further here, as I have done in the past, but the issue is so obvious that by now I think it superfluous. The final regs, like the proposed regulations, are inexplicable on this point. Unless you have the ear of the reg writers, you will not have a clue about how to interpret this rule, and even the reg writers’ personal opinions on this matter have been unreliable of late, since not everyone in the Service shares the opinion, even if it were a matter of public record, which it is not.

I will hazard a guess that the IRS has no fixed idea about how to handle the trust situation. Since they don’t know what the rule is they want, they write a regulation like Treas. Reg. §1.401(a)(9)-5, A-7(c), which is guaranteed not to commit the Service to anything other than the fact that an income only QTIP trust for a spouse, remainder to a great aunt, will have a more rapid payout than would have otherwise been expected.

PLR 20028025. In PLR 20028025 a support trust for two minor children was established by a settlor who died before her RBD. The trust was the beneficiary of the settlor’s IRA. The trust was to terminate when a beneficiary reached age 30. The good news was that the Service ruled that five-year rule did not apply. The bad news was that the life expectancy for a 67 year old remote beneficiary had to be used, because if the minor died without issue, before age 30, the 67 year old would be the beneficiary. There were two beneficiaries, ages 5 and 6 I believe. If one of the children died before age 30, the child’s share went to the child’s issue. If there were none, it went to the other child. If both children died before age 30 without issue, the trust passed to a 67 year old great-uncle.

The PLR did not recite that the if the child died prior to age 30 that the child’s children, if any, would have been beneficiaries in that event, but it did recite that the trust would go to the other beneficiary before going to the great-uncle. Apparently the IRS thought that all that was relevant was that the great-uncle might take if both children died before age 30 without issue. This is absurd, of course, because the service failed to consider that if the great-uncle failed to survive both children and their issue, that for all we know the trust would have passed to the great-uncle’s great-uncle, who, for all we know, might be celebrating his 110th birthday as you read this. Escheat to the state was possible too, one presumes. The ruling was issued after the final MRD (minimum required distribution) regulations were issued, and the author of the ruling was well aware of their content.

The ruling is interesting because this was not a “conduit” trust. It was a trust for health, maintenance and support, which terminated when the child reached age 30. This pretty standard plain vanilla: No powers of appointment, no dynasty provisions, etc.; just your basic support trust that terminates at a young age.

There has been some speculation that only Conduit Trusts will qualify for use of the beneficiary life expectancy method under the final regulations. This is, of course, wrong, because Treas. Reg. §1.401(a)(9)-5, Q3(c)(3) Ex. 1 is not a Conduit Trust and it qualified for use of the life expectancy method.

Example 1.

(i) Employer M maintains a defined contribution plan, Plan X. Employee A, an employee of M, died in 2005 at the age of 55, survived by spouse, B, who was 50 years old. Prior to A's death, M had established an account balance for A in Plan X. A's account balance is invested only in productive assets. A named a testamentary trust (Trust P) established under A's will as the beneficiary of all amounts payable from A's account in Plan X after A's death. A copy of the Trust P and a list of the trust beneficiaries were provided to the plan administrator of Plan X by October 31 of the calendar year following the calendar year of A's death. As of the date of A's death, the Trust P was irrevocable and was a valid trust under the laws of the state of A's domicile. A's account balance in Plan X was includible in A's gross estate under §2039.

(ii) Under the terms of Trust P, all trust income is payable annually to B, and no one has the power to appoint Trust P principal to any person other than B. A's children, who are all younger than B, are the sole remainder beneficiaries of the Trust P. No other person has a beneficial interest in Trust P. [N.B. That turns out to be a question begging statement of crucial importance. How do you ever assure that no other person will have a beneficiary interest in a trust unless you can pay the benefit to the estate of a predeceasing beneficiary, and most people think that is impermissible because anything with the word “estate” in it violates, by analogy, the rule that an estate is not a permissible beneficiary, though in my opinion it ought to pose no problem once the individual beneficiary is deceased.] Under the terms of the Trust P, B has the power, exercisable annually, to compel the trustee to withdraw from A's account balance in Plan X an amount equal to the income earned on the assets held in A's account in Plan X during the calendar year and to distribute that amount through Trust P to B. Plan X contains no prohibition on withdrawal from A's account of amounts in excess of the annual required minimum distributions under section 401(a)(9). In accordance with the terms of Plan X, the trustee of Trust P elects, in order to satisfy section 401(a)(9), to receive annual required minimum distributions using the life expectancy rule in section 401(a)(9)(B)(iii) for distributions over a distribution period equal to B's life expectancy. If B exercises the withdrawal power, the trustee must withdraw from A's account under Plan X the greater of the amount of income earned in the account during the calendar year or the required minimum distribution. However, under the terms of Trust P, and applicable state law, only the portion of the Plan X distribution received by the trustee equal to the income earned by A's account in Plan X is required to be distributed to B (along with any other trust income.)

(iii) Because some amounts distributed from A's account in Plan X to Trust P may be accumulated in Trust P during B's lifetime for the benefit of A's children, as remaindermen beneficiaries of Trust P, even though access to those amounts are delayed until after B's death, A's children are beneficiaries of A's account in Plan X in addition to B and B is not the sole designated beneficiary of A's account. [N.B. Ordinarily, I would say “So what?”. The children are younger, so we don’t care. In this case, however, the example is also being used to illustrate that we cannot look-through the trust to treat the spouse as the sole beneficiary for purposes of the rule that would otherwise allow us to recalculate the spouse’s life expectancy each year. Still, that is a small price to pay] Thus the designated beneficiary used to determine the distribution period from A's account in Plan X is the beneficiary with the shortest life expectancy. B's life expectancy is the shortest of all the potential beneficiaries of the testamentary trust's interest in A's account in Plan X (including remainder beneficiaries). Thus, the distribution period for purposes of section 401(a)(9)(B)(iii) is B's life expectancy. Because B is not the sole designated beneficiary of the testamentary trust's interest in A's account in Plan X, the special rule in 401(a)(9)(B)(iv) is not available and the annual required minimum distributions from the account to Trust M must begin no later than the end of the calendar year immediately following the calendar year of A's death.

Returning to the facts in PLR 20028025, the good news was that the 5-year rule did not apply! Of course, Ex. 1, just quoted, should have assured us of that.

The bad news was that the life expectancy of the 67 year old great-uncle was used as the measuring life, since there was an extremely remote possibility that he might inherit trust accumulations. Why, I ask, was a similar concern not expressed in example 1. Were A’s children for some reason thought to be less mortal than the children in PLR 20028025? After all, they could die without issue too, in which case the accumulations would have to go somewhere, very likely to someone older than B, if not escheating to the state.

I imagine that the likelihood of the uncle in PLR 20028025 benefiting from the trust was less than 5%. Perhaps some of you who have NumberCruncher™ can tell me. This PLR clearly shows that there is no such a thing as a “hidden life expectancy” rule —hidden because not found in any version of the regulations. Or if there is such a rule, you only get the benefit of it if you (a) ask for a ruling, and (b) happen to be lucky enough to draw someone at the IRS who thinks this rule ought to be the law. Good luck.

If I could rely on Example 1, I would be delighted. The fact that I must use B as the measuring life bothers me not a whit if B’s descendants are the contingent beneficiaries. What I care about is whether some reckless IRS agent is going to say, “Well the facts in Example 1 are fine, because there A’s children were the sole remainder beneficiaries; but in your case, there may be others who take if all of A’s children die.” Thus, only if A’s children are immortal can we rely on the example? Again I ask, how is PLR 20028025 different from Ex. 1? Is it because the draftsperson was so reckless as to address the issue?

Query what the result of PLR 20028025 would have been if no mention had been made of the great-uncle? If there mere mention of the great-uncle made a difference, then the absurdity of the situation should be apparent to anyone with an ounce of intelligence. If the great-uncle was not mentioned, the trust would still have to go somewhere in the extremely unlikely event that both the 5 and the 6 year old died before age 30 without issue.

What is most absurd is that if the trust had failed to mention the great-uncle, then we would have had the exact same fact pattern as described in subparagraph (ii) in Example 1 of Treas. Reg. §1.401(a)(9)-5, Q3(c)(3), quoted above: “A's children, who are all younger than B, are the sole remainder beneficiaries of the Trust P. No other person has a beneficial interest in Trust P.”

First of all, it might occur to you to wonder how A’s children can be the sole remainder beneficiaries if they all died without issue. But putting aside the obvious, surely you don’t commit a grievous drafting error by specifying what will happen in that extremely unlikely event. Surely, the situation in the PLR would not have been improved by simply failing to name the great-uncle, with the result being improved by the fact that no one would have the slightest idea where the trust would end up?

This is not complicated. The issue is simply “when can we stop looking for potential beneficiaries?” If we have to look at what will happen if a 5 and 6 year old each die before 30 without issue, then we might as well wonder what the rule would be if we said that instead of the great-uncle, the trust will pass to the first person in the Dallas phone directory who is under age 21, and that would probably fail the “ascertainable beneficiary” test. So how can we ever win? Other than using only Conduit Trusts, I haven’t a clue. Perhaps it is a laugh test. If so, I would have crossed that threshold under facts far less ridiculous than PLR 20028025, and the IRS’s, as we know, is not known for its good natured jocularity in this area. What it would take to draw a smile from those folks would apparently have to be pretty far-out.

Perhaps the only reasonable approach would be to take Ex. 1 at its word. Leave everyone to guess where the property will go if all the descendants die, and consider PLR 20028025 to be an aberration written by someone entirely lacking the capacity to reason logically. I am now done fulminating.

[5] Marital deduction insurance. This is designed to dispel the notion, wrongly implied in some of the PLRs, that the trustee is somehow limited to taking the MRDs and could not accelerate distributions, in order, for example, to satisfy the all income requirement of a marital deduction trust. See TAM 9220007.

[6] This is how I think the matter ought to be treated in law. The IRS, on the other hand, has a more muddled view of things, under which an IRA is at once treated as a stand alone trust, and so is the trust; necessitating, for example, double QTIP elections where the trust is a QTIP trust.

[7] If the participant’s spouse is a beneficiary of the trust, and if the spouse is close to the same age as the participant, and if death is after the RBD, then the worst that can happen is that the MRD rules will be applied on the basis of the participant’s life expectancy, as first determined (recalculated) in the year of death. The best that could happen under the trust look-through rules would be to use the spouse’s life expectancy. Since qualifying for look-through treatment carries so much baggage, I will forego it unless it buys me more than a few years of additional deferral.

[8] I may have gone overboard here. This clause requires that I segregate retirement plan benefits in special dedicated trusts. My thinking is that this may prove helpful at some point, but it adds some complexity. If the trustee overlooked this clause, would it be the end of the world?

[9] This should help; but is it always possible to insure that this will happen?

[10] What this last clause actually means is anybody’s guess, but I think it is required to be the rule if the trust is to qualify for look-through treatment.

[11] This should help; but is it always possible to insure that this will happen?

[12] Query is a distribution to a UTTMA custodian a distribution “directly to the Designated Beneficiary.”

[13] What in the world are we going to do with GSTT nonexempt trusts if there are MRD problems associated with (a) paying the remainder interest to the “estate” of anyone and (b) powers of appointment. Which of the two is the lesser evil? The concern, of course, is that without giving the beneficiary a GTPOA, or some other that puts the trust proceeds in the beneficiary’s estate, a GSTT will be attracted. I think that a GTPOA is okay if the trust is a Conduit Trust, for reasons explained elsewhere. Accordingly, I give the beneficiary of a Conduit Trust a GTPOA.

Here is an approach inspired by my partner, David Tracy, who has more faith than I that powers of appointment may still be viable if narrowly circumscribed. The issue I have is whether the power of appointment problem is a problem with the range of beneficiaries or with their identifiability. Arguably, all we need to know is that they are all individuals and the age of the oldest member of the class.

Notwithstanding the above, the Primary Beneficiary for whom a Nonexempt Protected Trust has been created (the “powerholder”) will have a Testamentary Power of Appointment over any “GSTT Property in such trust, if such trust, immediately prior to the beneficiary’s death, has an inclusion ratio for Federal Generation Skipping Transfer Tax purposes that is greater than three-fourths. This Power, however, may only be exercised in favor of the class of beneficiaries consisting of individuals who are creditors of the beneficiary, and who are the same age or younger than the person who would be serving as the measuring life under the MRD rules but for this Paragraph.

Another approach which ought to work would be to simply make GSTT property subject to the beneficiary’s creditors (who, incidentally, might not be individuals or identifiable). After all, in the absence of spendthrift language, that would be the result. That would also be the case if there were no trust. However, until the IRS articulates the rules, I am reluctant to try to apply them.

[14] GSTT Property is defined elsewhere as follows:

The term “GSTT Property” means property remaining in a trust at the date of death of the Primary Beneficiary of the trust, if, under the facts fixed and existing at such date, a “generation skipping transfer” (within the meaning of IRC §2611 or Chapter 13 of the IRC) would have occurred (at and as a result of the beneficiary’s death) with respect to such property —under the provisions of Part II identifying the takers in default of the exercise of a power of appointment— if the beneficiary had not been granted a General Testamentary Power of Appointment over such property, but instead had died holding only an unexercised Nongeneral Testamentary Power of Appointment over the property.

[15] The term “Nonexempt Protected Trust” is defined elsewhere.

[16] The IRS has strongly indicated that a Conduit Trust is basically judged by the rules that apply when there is no trust. I interpret this as meaning that what happens after the death of the beneficiary is of no moment, which should mean that I can safely give the beneficiary a GTPOA, as we know I can safely do if no trust is involved.

[17] The existence of this subsection reflects the extent of my paranoia. Note, however, how limited this provision is. It will not apply to the Credit Shelter Trust, because I am almost certainly going to allocate the GSTT exemption to it (making it an Exempt Protected Trust), nor will it apply to the exempt marital share. In fact, the only reason I really care about being able to use a dynasty trust is to preserve the GSTT exemption, and perhaps for creditor protection; so if the exemption is not available, I must see to it that the property is subject to estate tax, unless I am prepared to pay a GSTT. It is no real hardship to provide for a distribution earlier than otherwise demanded by the rule against perpetuities, unless of course, the beneficiary is a minor, or unless there are creditor protection issues, either of which, admittedly, could pose a big problem. However, until the IRS makes its position for or against orphans clear, I am inclined to use the conduit approach in the case of a non GSTT exempt trust, depending on how safe I want to play it. Note that an UTTMA distribution ought still to be available until age 21 If I were really paranoid, I would use Conduit Trusts for all QRP proceeds held in trust, but I am not quite there yet.

Note further how this is likely to operate in real life. If a minor child is a beneficiary, it is probable that a distribution on that child’s death would pass, in default of the exercise of the (nonexistent) power of appointment —which is the scheme provided under the preceding paragraph—, to the child’s siblings, and thus would not be GSTT property. If the child has children, then presumably (but unfortunately not necessarily) the child will at least be an adult.

There is absolutely no sound reason why I could not simply provide that on the death of the beneficiary all GSTT property will be paid to the beneficiary’s estate. After all, if a trust were not involved, that would be fine. I am hoping ultimately to modify the subject clause accordingly, but for now I am awaiting further clarification from the IRS.

Note that even if the trust is to terminate during the life expectancy of the nonspouse beneficiary, as this one does and as the IRS would like, I still haven’t solved my GSTT problem, unless a GTPOA can safely be granted, which I think is the case, but of which I am not so certain as to bet the ranch.

[18] This and the next paragraph are two of the most important paragraphs in these materials. I admit that I am not absolutely sure how this clause with operate under all circumstances, which is why I will welcome final regulations clarifying what ever the rule is.

[19] If this is not permissible, what is?

[20] Big time waffling.

[21] This is actually close to what I think the IRS unwritten rule was supposed by many to be, but the truth is that no one, least of all the IRS (apparently) knows what the rule is (assuming that there is one). If all else fails . . . Note that I have not limited the class to contingent or non-contingent beneficiaries. If a beneficiary is a “mere successor,” it may be that I can ignore the beneficiary for purposes of determining who has the shortest life expectancy under the MRD rules. Contingent beneficiaries who not “mere successors” probably have to be identifiable, however, which is where the real problem lies.

[22] I think that I can provide for an unrestricted power of appointment that is exercisable on the death of a beneficiary who fails to reach life expectancy. Alternatively, I could provide that the power be exercised only on behalf of individuals listed in the Dallas phone directory who are no older than the oldest otherwise designated beneficiary; but since this does not pass the laugh test, I cannot bring myself to do it. Whatever the rule is or turns out to be, it is certainly not to be found in a reasonable reading of the proposed regulations, and yet we know that the IRS has a vague, and to date an unarticulated (and possibly unarticulable), objection to powers of appointment in this context; so, for once, I am being conservative, perhaps unduly so. Without powers of appointment as a means of escaping the GSTT, we will have to be very careful. This is one place where the use of separate trusts could mitigate things, allowing for a distributions during life out of a nonexempt trust first, to avoid or lessen the impact of the GSTT at death.

Note that without resorting to a carefully drafted specially limited nongeneral power, it cannot be assured that the benefits will ultimately be consumed by an individual who is younger than the measuring life, which is why it would be nice to know precisely how the contingent beneficiary rule operates in a trust context. So which is it to be, a narrowly drafted SPOA where the members of the class are only globally identifiable, or no SPOA, where the members of the class could include older collaterals or the state under an escheat law? Scylla and Charybdis are brought to mind.

[23] IRS is thinking “almost gotcha.”

[24] This is one of the most important paragraphs in these materials.

[25] This is an important provision. We just do not know for sure whether or not we can charge death taxes against the benefit, even where the taxes are proportionate and other otherwise apportioned in accordance with state law.

[26] Well, if I am checked in one place, maybe I can make up for it elsewhere, so why not.

[27] On the lookout as always for the marital deduction gotcha zinger.

[28]I like to leave a back door. My judgment is that this sentence, if applicable, is specific and narrow enough not to violate public policy.

[29] This subparagraph may not be necessary. I am more concerned than most about the prospect of being able to identify on the applicable date just where the benefit proceeds are going. It seems to me that if this is a matter of fiduciary discretion that there is a risk that the beneficiaries are not ascertainable. Arguably, if a parent trust will be divided into two or more (sub)trusts (e.g., a bypass and a marital trust, or a GSTT exempt and nonexempt trust), then, if the beneficiaries are the same, it should make no difference that the fiduciary has the power to allocate retirement benefits among them; or, if the beneficiaries are different, the oldest beneficiary of any of the trusts should be the measuring life, and all of the beneficiaries should nevertheless be considered designated, even though we do not know who is getting what proportion of the benefits. Arguable or not, this is one case where I preferred a specified mandatory division, even if it limits flexibility. In fact, my own preference was to establish several IRAs, and dedicate each to a specific trust (e.g., the bypass or the marital), assuming the risk that the funding may not be perfect.

In light of a number of PLRs where the fiduciary had the power to allocate among various trusts (bypass, marital, survivor’s share, etc.) with no untoward tax effect, I am beginning to rethink my intransigence on this issue, and may in the future broaden considerably the discretion of the fiduciary to allocate among trusts. I am particularly tempted to do this in light of the opportunity afforded under PLRs 199912040 and 199925033, recognizing that those rulings (discussed in a later footnote) dealt favorably with income tax recognition, and did not address MRD issues, arising in nonprorata funding among trusts and the surviving spouse.

[30] Consider what happens when a revocable living trust is named as beneficiary of an IRA. If, as I think, it is desirable to specify in advance a strict determinable allocation order, what is the preferred order?

Again, I am considering eliminating this clause, and granting discretion to the fiduciary instead.

[31] This is to avoid acceleration of the IRD upon allocation. You know the problem. See Kenan v. Commissioner, 114 F.2d 217 (2nd Cir. 1940); Suisman v. Eaton, 15 F. Supp. 113 (D. C. Conn. 1935), aff'd per cur., 83 F.2d 1019 (2nd Cir. 1936); Rev. Rul. 55-117, 1955-1 C.B. 233; Rev. Rul. 60-87, 1960-1 C.B. 286; Rev. Rul. 56-270, 1956-1 C.B. 325; Rev. Rul. 66-207, 1966-2 C.B. 243; Rev. Rul. 82-4, 1982-1 C.B. 99. Cf. Rev. Rul. 67-74, 1967-1 C.B. 194; Rev. Rul. 72-295, 1972-1 C.B. 197; Rev. Rul. 90-3, 1990-1 C.B. 174. Treas. Reg. §1.661(a)-2(f)(1).

Treas. Reg. §1.661(a)-2(f)(1) provides: “(1) No gain or loss is realized by the trust or estate (or the other beneficiaries) by reason of the distribution, unless the distribution is in satisfaction of a right to receive a distribution in a specific dollar amount or in specific property other than that distributed.”

However, the latest thinking on the subject is that the IRS believes that §§402 and 408 trump §691 here, and so perhaps we have been over-concerned with this issue. See PLRs 199912040 and 199925033, discussed at length in a later footnote. These rulings send a very strong signal that the IRS is not predisposed to invoke §691 income tax recognition when the right to receive IRA or qualified plan distributions is subject to discretionary apportionment, even though the ultimate recipient is not entitled to the proceeds as a “matter or right.” Most estate planners have been brought up to recognize and fear sale or exchange treatment in the funding of pecuniary bequests, particularly where zero basis IRD is involved. Should we “get over it”?

[32] Hmmmm . . . I think that if I am going to have to take a (say) 40% income tax haircut on receipt, then perhaps I would rather not allocate 40% my GSTT exemption to the Commissioner.

[33] Qualified under 2056(b)(7).

[34] Not exempt for GSTT purposes.

[35] My thinking is that since the nonqualified trust will bypass estate taxes in the survivor’s estate, I would prefer that it not be reduced by the potential income taxes. However, this subject is very complicated and I can think of a number or offsetting considerations that could tilt this whole subparagraph in a different direction. Since it may be a coin-toss in any event, the more important point is that the allocation be specified one way or the other.

[36] Just in case I have missed something. Treas. Reg. 1.1014-4(a)(3), last sentence. Rev. Rul. 55-117, 1955-1 C.B. 233, tells me that this will avoid gain recognition.

Although Rev. Rul. 69-486, 1969-2 C.B. 159 gives us a pass on gain recognition where the fiduciary is authorized to pick-and-choose for the purpose of funding ordinary residuary assets (as confirmed by PLRs 8119040 and 8029054), I worry that 691 could cause acceleration of income tax whenever there is an allocation of IRD that is not a “matter of right.” So, whatever the rule is with other assets, I fear that IRD may be a special case, by virtue of §691(a)(2).

Note, however, that PLR 199912040 addressed a variation of this issue favorably to the taxpayer, and clearly held that there would be no recognition of IRD as a result of a nonprorata division of an IRA into several trusts under authority granted the trustee. To similar effect see PLR 199925033. Whether, in light of these rulings, I am being paranoid is a matter you can judge for yourself. A lot is at stake here. Of course these rulings address income tax issues only, and do not address the MRD issues at all.

[37] This subsection applies to the nonparticipant spouse’s (NPS) community property interest in the participant’s plan or IRA, when the NPS dies first. This is a clause that you may well want to omit, especially where all of the children are of the same marriage. In that case, your client might actually prefer to pay the taxes on the nonparticipant’s interest, if it can be done transfer tax free.

[38] Query, to what extent are the beneficiaries of the nonparticipant spouse treated as beneficiaries for MRD purposes? It seems to me reasonable for the participant’s beneficiary designation to track state law, so that when the participant dies, the plan proceeds will pass in accordance with the designation, and not just partially in accordance with it. The IRS has not remotely begun to contemplate this issue, but I think we should.

If the spouse is not the participant’s designated beneficiary after the RBD, and someone other than the surviving spouse is entitled to the decedent’s community interest (e.g., the “estate,” worst case), then, on the participant’s death, who is treated as the “participant’s” beneficiary for MRD purposes. Is it time to trot out §408(g)?

[39] Clearly the spouse is getting a larger income interest under this clause than the law may actually demand be given.

[40] See Rev. Rul. 2000-2.

[41] If there are still marital deduction problems with the right to income, because of some jot or tittle I failed to cover, I give up.

[42] I only use this clause if there is a gift to charity under the will. I include it here since retirement proceeds are an excellent source for a gift to charity, in part because retirement plan proceeds usually are IRD. However, since a charity is not a designated beneficiary, the use of this clause, though it may achieve certain income tax benefits, could cause the loss of the right to defer QRP proceeds payable to individuals. Of course, this clause is predicated on the instrument not otherwise overriding it, and Maker’s paramount and manifest intent was previously stated in favor of the use of the life expectancy payout. Nevertheless, the clause is in this form for discussion purposes, and would not ordinarily be used without further modification.

ARTICLE 1 RETIREMENT PLAN PROVISIONS IN LIVING TRUST [For discussion purposes only. Do not rely upon.]