How to name beneficiaries for qualified accumulation trust for IRA

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ljb
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How to name beneficiaries for qualified accumulation trust for IRA

Post by ljb »

Say I want to establish a accumulation trust to transfer my Roth IRA to a mentally ill son that qualifies under the see through rules. How do I set it up so that he has maximum freedom to choose who gets the money if he dies while funds remain in the trust?  Can the trust say that upon his death the money gets distributed to his estate, even though his estate isn't an individual?

Can the trust say that any funds remaining upon attainment of age X will be distributed to him free of trust, and if he dies before X, then it will be distributed to his estate?  Does this work because now his estate is not a successor bene but a contingent bene?  What if X is 100?

Can the trust say that upon his death, the funds are distributed to his sister, but he has a lifetime power of appointment to choose someone else as long as he chooses a live person and not an entity?  What does a lifetime power of appointment mean -- that while he is alive he can notify the trustee who he wants instead?

Thanks, Lisa
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Lee_WSP
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Re: How to name beneficiaries for qualified accumulation trust for IRA

Post by Lee_WSP »

This is a great question to pose to the elder law attorney who will draft this trust.

With the caveat that doing any of the things you ask may trigger unintended consequences, the answer to your questions are:
Can the trust say that upon his death the money gets distributed to his estate, even though his estate isn't an individual?
Yes. But this is not a great idea, there are better clauses.
Can the trust say that any funds remaining upon attainment of age X will be distributed to him free of trust, and if he dies before X, then it will be distributed to his estate?
Yes, but that is probably going to trigger all sorts of unintended consequences. You need to talk with an elder law attorney about the wisdom of such action.
Does this work because now his estate is not a successor bene but a contingent bene?
An estate is neither. An estate is not a designated beneficiary.
Can the trust say that upon his death, the funds are distributed to his sister, but he has a lifetime power of appointment to choose someone else as long as he chooses a live person and not an entity? What does a lifetime power of appointment mean -- that while he is alive he can notify the trustee who he wants instead?
You may grant him a power of appointment exercisable in life or through his will. You may restrict the class of successor beneficiaries.

It means that while alive, the holder of said power may appoint the new owner. The code defines it as It's fairly complicated, here's some thick reading if you really want to understand the term: http://lewislawoftrusts.lawbooks.cali.o ... ointments/

https://www.law.cornell.edu/cfr/text/26/20.2041-1
bsteiner
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Re: How to name beneficiaries for qualified accumulation trust for IRA

Post by bsteiner »

Lee_WSP wrote: Tue Jun 22, 2021 5:13 pm This is a great question to pose to the elder law attorney who will draft this trust.
...
A trusts and estates lawyer would be better for this.
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Lee_WSP
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Re: How to name beneficiaries for qualified accumulation trust for IRA

Post by Lee_WSP »

bsteiner wrote: Tue Jun 22, 2021 5:21 pm
Lee_WSP wrote: Tue Jun 22, 2021 5:13 pm This is a great question to pose to the elder law attorney who will draft this trust.
...
A trusts and estates lawyer would be better for this.
There aren't Medicaid issues? I suppose OP did not say that there were. Not sure why I came to that assumption.
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Re: How to name beneficiaries for qualified accumulation trust for IRA

Post by bsteiner »

Lee_WSP wrote: Tue Jun 22, 2021 5:26 pm
bsteiner wrote: Tue Jun 22, 2021 5:21 pm
Lee_WSP wrote: Tue Jun 22, 2021 5:13 pm This is a great question to pose to the elder law attorney who will draft this trust.
...
A trusts and estates lawyer would be better for this.
There aren't Medicaid issues? I suppose OP did not say that there were. Not sure why I came to that assumption.
There could be, and if the person is already on Medicaid we would throw in the usual language that, without limiting the trustees' discretion, it's intended to supplement but not supplant government benefits. However, as long as it's fully discretionary and the beneficiary isn't entitled to anything (which is generally the case unless there's a tax reason such as in a QTIP trust, GRAT, etc., to do otherwise) the trust should be protected.

The issue here is whether the beneficiary meets the test for being disabled or chronically ill so that the trust will qualify for the lifetime stretch. We don't have enough information to know whether that's the case.

Trusts that receive IRA benefits are tricky even for many trusts and estates lawyers. To qualify for the stretch (or what's left of the stretch) you have to make sure nothing can ever go to anyone other than an individual. Before the SECURE Act, the oldest beneficiary was the measuring life. The concept of the oldest beneficiary is probably deadwood now though it's still in the regulations. The stakes were higher before the SECURE Act when the life expectancy stretch was generally available, though in this case if the beneficiary qualifies as disabled or chronically ill it would still be available.
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ljb
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Re: How to name beneficiaries for qualified accumulation trust for IRA

Post by ljb »

Lee_WSP wrote: Tue Jun 22, 2021 5:13 pm This is a great question to pose to the elder law attorney who will draft this trust.

With the caveat that doing any of the things you ask may trigger unintended consequences, the answer to your questions are:
Can the trust say that upon his death the money gets distributed to his estate, even though his estate isn't an individual?
Yes. But this is not a great idea, there are better clauses.

Thank you Lee_WSP, for your answers. I will definitely work with an experienced attorney when the time comes to actually get a trust drafted. I'm just trying now to get a feel for what might be possible. I have learned a great deal and feel like I have much more realistic expectations from learning from others on this board.

I was surprised that you said a trust could qualify as a see through trust for IRAs if the trust says that any money remaining in trust on the death of the primary beneficiary gets distributed to the bene's estate. That was something I assumed wouldn't work, so thank you. I did more research and found this good article which goes over this point and cites the relevant PLR: https://www.schiffhardin.com/insights/p ... secure-act . (I'm not presuming to link the article for your benefit, Lee_WSP, because you're already an expert in this area, but for others on the forum who might be confused like I was.)

And you say that there are better clauses, so I will respectfully ask what might they be? For the trust to be a qualified IRA accumulation trust, but give the primary beneficiary maximum freedom to choose who gets the money if he dies untimely? (With the caveat that an estate planning lawyer needs to review my entire specific situation before any serious recommendation can be made -- I understand that.) In my son's case, he almost certainly won't have a taxable estate but he already earns too much to qualify for public benefits, so those concerns aren't big priorities.

Thanks, Lisa
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Re: How to name beneficiaries for qualified accumulation trust for IRA

Post by Lee_WSP »

What are you trying to accomplish?
bsteiner
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Re: How to name beneficiaries for qualified accumulation trust for IRA

Post by bsteiner »

ljb wrote: Wed Jun 23, 2021 6:44 pm ...

And you say that there are better clauses, so I will respectfully ask what might they be? For the trust to be a qualified IRA accumulation trust, but give the primary beneficiary maximum freedom to choose who gets the money if he dies untimely? ...
A power of appointment, which he may exercise regardless of whether his death is timely or untimely.
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ljb
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Re: How to name beneficiaries for qualified accumulation trust for IRA

Post by ljb »

bsteiner wrote: Wed Jun 23, 2021 9:46 pm
ljb wrote: Wed Jun 23, 2021 6:44 pm ...

And you say that there are better clauses, so I will respectfully ask what might they be? For the trust to be a qualified IRA accumulation trust, but give the primary beneficiary maximum freedom to choose who gets the money if he dies untimely? ...
A power of appointment, which he may exercise regardless of whether his death is timely or untimely.
So, does the power of appointment have to be explicitly limited to live individuals? It couldn't be broad enough that he could name a charity and the trust still qualify as a designated beneficiary trust, right?
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Re: How to name beneficiaries for qualified accumulation trust for IRA

Post by bsteiner »

ljb wrote: Thu Jun 24, 2021 7:05 pm
bsteiner wrote: Wed Jun 23, 2021 9:46 pm
ljb wrote: Wed Jun 23, 2021 6:44 pm ...

And you say that there are better clauses, so I will respectfully ask what might they be? For the trust to be a qualified IRA accumulation trust, but give the primary beneficiary maximum freedom to choose who gets the money if he dies untimely? ...
A power of appointment, which he may exercise regardless of whether his death is timely or untimely.
So, does the power of appointment have to be explicitly limited to live individuals? It couldn't be broad enough that he could name a charity and the trust still qualify as a designated beneficiary trust, right?
Basically correct. The class of permissible appointees has to be limited to individuals, though they need not be living as of the initial beneficiary's death. The class of permissible appointees may not include charity.
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ljb
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Re: How to name beneficiaries for qualified accumulation trust for IRA

Post by ljb »

Lee_WSP wrote: Wed Jun 23, 2021 7:21 pm What are you trying to accomplish?
As far as my original question, I think I have enough information now from your answer and bsteiner's. I very much appreciate your willingness to share information on these board's. My dad was a lawyer, now many years deceased, and I know lawyers are constantly asked questions at every cocktail party and every ballgame. I guess you guys must not mind posting here or you wouldn't do it, but it's still generous of you.
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