March 2011 Archives

March 7, 2011
Posted by Sanger & Manes, LLP

The Hidden Minimum Required Distribution Rules Dangers in Drafting a See-Through Trust (Part 4)

Granting an income beneficiary a general power of appointment is just one way practitioners can err in drafting a see-through trust. There are no shortage of ways to make a mistake in this highly technical area. What if we determine after the death of the decedent that we do indeed have a faulty see-through trust? Presumably, we now have no choice but to distribute all IRA amounts not later than the end of year of the 5th anniversary of the decedent's death. But what if, now that we've identified the problem, we simply amend the trust. For example, what if we amend the trust to provide that daughter's power of appointment may only be granted in favor of any individual not older than daughter (as described in Part #3). Well, not so fast says the IRS. PLR 201021038 states clearly that the reformation of a trust instrument is not effective to change the tax consequences of a completed transaction. In short, an amendment to the trust document after the death of decedent to reform a defective see-through trust is unlikely to be permitted by the IRS. The lesson here is learn and understand the complex see-through trust rules before you draft the see-through trust document. Without proper drafting, practitioners face unhappy beneficiaries with IRA amounts distributed (and taxed) within five years of the decedent's death (instead of over the lifetime of a designated beneficiary), with likely no remedy available.

March 3, 2011
Posted by Sanger & Manes, LLP

The Hidden Minimum Required Distribution Rules Dangers in Drafting a See-Through Trust (Part 3)

The IRS released several private letter rulings which appear to provide a way around the conundrum of how to draft a see-through trust which provides for income to a beneficiary but which also gives the income beneficiary a general power of appointment over the remainder. For example, in PLR 200235038 an IRA designated as beneficiary a trust for the benefit of child. The trust gave the child the right to income for life, and a general power of appointment over the remainder of his interest in the IRA. However, the trust provided the income beneficiary-child could not exercise the power of appointment in favor of anyone older than himself. The IRS found the trust qualified as a see-through trust because, while the individual designated beneficiary could not be identified by name (the child could appoint the remainder to anyone in the world), the individual designated beneficiary could not be older than the income beneficiary-child.

The lesson of the PLR is clear. If you wish to draft a see-through trust which gives income to an individual beneficiary but also gives the individual the power of appointment over the remainder, draft the trust so that the beneficiary may not appoint the remainder to anyone older than himself. That way, although we cannot clearly identify an individual designated beneficiary, we do know the individual designated beneficiary cannot be older than the income beneficiary. The IRS appears to believe that's close enough and considers this a valid see-through trust. The IRS allows the IRA assets to be distributed ratably over the remaining life expectancy of the income beneficiary.

One final note on amending a defective see-through trust in Part 4.