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"Look Through" Trusts as Plan Beneficiaries




by:
Vedder, Price, Kaufman & Kammholz, P.C. - Office

 
May 6, 2003

With the increasing amount of wealth accumulated in qualified retirement plans, plan sponsors increasingly are focusing on measures allowing participants to take full advantage of estate planning opportunities. One such opportunity is naming a trust as a designated beneficiary under a qualified plan.

Generally, a plan may provide that a trust can be named as a beneficiary of the plan. If the trust is a "look through" trust, the joint lives of the participant and a beneficiary of the trust may be used in determining minimum required distributions. If the trust does not satisfy the look through requirements, a participant is treated as not having a designated beneficiary and the minimum distributions will be made over the participant's life expectancy if the participant dies after his or her required beginning date, or over a five-year period if the participant dies before his or her required beginning date. In other words, the plan benefit may be distributed over a much shorter period of time, a result which the Internal Revenue Service may welcome but which plan participants and their beneficiaries may wish to avoid.

Under proposed IRS regulations, a trust must satisfy four requirements in order to be eligible for look through treatment:

First, the trust must be valid under state law.

Second, the trust must be irrevocable or must, by its terms, become irrevocable upon the death of the participant. By allowing the trust to become irrevocable upon death, the proposed regulations eliminated the confusion which surrounded the issue of whether a grantor trust could satisfy the look through requirements. If the grantor of the trust and the participant are the same person, the trust will become irrevocable at the time of the participant-grantor's death and thus satisfy the requirement of irrevocability.

Third, the beneficiaries of the trust must be identifiable from the trust agreement. Beneficiaries may be members of a class, such as all of the participant's children.

Fourth, on or before the date when distributions are required from the plan, the participant must either (a) provide the plan administrator with a copy of the trust and all amendments; or (b) provide the plan administrator a list of all the beneficiaries under the trust, certify that the list is correct and complete and that the other requirements described above (items 1 through 3) are satisfied, and agree to provide corrected certifications as necessary. Alternative (b) replaces the former absolute requirement that the plan administrator have a copy of the trust.

For plan administrators, understanding the look through rules is essential in complying with the required minimum distribution rules when a trust is named as a beneficiary and in working with participants who want to utilize a look through trust as an estate planning tool.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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