Hello,
I’ve reviewed the matter of having a conduit or discretionary trust as beneficiary of a client’s IRAs (in aggregate they exceed $1.2 million, inclusive of an Inherited IRA – and the contingent beneficiary of each is a newborn).

In the client’s revocable living trust, there had been language therein in 2 different provisions as follows:

“The Trustees may, in their sole and absolute discretion, pay to or on behalf of my estate, such amounts as may be needed for the payment of my funeral expenses, debts, and expenses of administering my estate.”

A separate clause toward the end of the trust specified how any type of Beneficiary Trust created would qualify as a conduit trust; one of the sentences reads, “My intent is for such trust to qualify as a designed beneficiary to preserve to the extent possible and practical a stretch payout of retirement benefits for income tax purposes, and the Trustees shall have the power to take the appropriate steps necessary to effectuate that intent.”

The attorney stated that the conduit trust would not be created until the actual demise of the client (if applicable) – and would act as a subtrust under the revocable living trust. He said we could create a stand-alone conduit trust now; however, he did not feel the language regarding the payment of debts/taxes would cause the estate to be considered a contingent beneficiary of the IRA’s.

Having reviewed Ed Slott’s newsletter and the book provided at his April 23 – 24, 2012 2 day seminar in Jersey City, pages 326 – 328 address IRA Trust Rulings which allow the estate to be removed as a trust beneficiary. Since the word ‘may’ has been used and the estate can be removed by Sept. 30th of the year following death, there presumably would not be a problem – as the estate would not be considered a designated beneficiary. However, I am trying to confirm whether or not the language contained above would result in any conduit trust which gets created needing to include the estate as a beneficiary – as this is not the intent.

Additionally:

1. Is it necessary for a stand-alone conduit or discretionary trust to be created now – or is it acceptable for such trust to be referenced in the Rev. Living Trust (or Last Will), and only created at the applicable time?
2. How would the custodian typically require the contingent beneficiary to be titled – especially if a stand-alone trust is not created but, rather, there is a reference in the Rev. Living Trust to the creation of a conduit trust being established?
3. In a separate client’s Last Will, there was a clause within the Article dealing with retirement plans which specifically stated that, “No portion of such Retirement Plan benefit shall be used or applied for the payment of my debts, estate, administration expenses or other claims against my estate on or after September 30 of the calendar year following the calendar year of my death.” A separate clause within this Article describes the creation of a see-through trust and notes that, “Trustees may deduct expenses and taxes chargeable to or payable by Trustees with respect to the amounts received from a Stretch Retirement Benefit payable to a Trust created hereunder to the extent Trustees may do so without jeopradizing the treatment of the Primary Trust Beneficiary as the sole designed beneficiary or beneficiaries of the Stretch Retirement Benefit for purposes of determining the designated beneficiary under Section 401(a)(9) of the IRC or any other section of the IRC having similar requirements, so that the Trust constitutes what is commonly known as a ‘see-through’ trust…” I thought that these clauses were very clear and concise with regards to the goal being to preserve the stretchout ability and not having the estate be considered a qualified beneficiary. What are your thoughts?

I’m just trying to make certain that, whether a conduit or discretionary trust is established, this gets done appropriately to preserve the stretchout ability – and no language contained in the Revocable Living Trust potentially jeopardizes this.

Thank you!