Articles Posted in Retirement Plan Issues

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On May 27, 2011, the IRS, in four separate private letter rulings, “blessed” four fact patterns where it elected to waive the 60 day rollover requirement. Keep in mind, private letter rulings are directed only to the taxpayer who requested the ruling, and may not be used or cited as precedent (although as a practical matter practitioners use private letter rulings regularly as important guidance).


Under IRC Section 408(d), an individual may rollover (and thereby avoid tax) a distribution from an IRA into an eligible retirement plan for the distributee’s benefit within 60 days after the distribution. The term “eligible retirement plan” includes qualified pension, profit-sharing, stock bonus, and annuity plans, tax-deferred annuities under IRC Section 403(b), and eligible deferred compensation plans maintained by state and local governments and their agencies and instrumentalities. IRC Section 408(d) further gives the IRS the right to waive the 60 day requirement where events occur which are “beyond the reasonable control of the individual”. In Revenue Procedure 2003-16, the IRS stated it will consider all relevant facts and circumstances in deciding when to waive the 60-day rollover requirement, including: (1) errors committed by a financial institution; (2) inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error; (3) the use of the amount distributed (for example, in the case of payment by check, whether the check was cashed); and (4) the time elapsed since the distribution occurred.

Four Separate Private Letter Rulings Allow a Waiver to the 60 Day Requirement

In each scenario described below, although well past the original 60 day rollover deadline, the IRS granted the taxpayer 60 days from the issuance of the ruling to properly contribute the amounts into an eligible retirement plan:

PLR 201121033- Financial advisor disregarded taxpayer instructions and improperly deposited amounts into a non-IRA account.

PLR 201121034- Financial advisor inadvertently set up an IRA for the benefit of the wrong person.

PLR 201121035- Involves a complicated fact pattern where a taxpayer failed to give proper rollover instructions within the 60 day period due to his deteriorating mental condition (he subsequently committed suicide) because of stress brought on by the weakening economy.

PLR 201121036- Financial advisor disregarded taxpayer instructions and improperly deposited amounts into a non-IRA account.

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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.

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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.

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A see-through trust, if drafted properly, may serve as a useful planning vehicle. It allows an IRA to distribute IRA amounts to the trust ratably over the expected remaining life of the designated beneficiary (and still comply with the 401(a)(9) minimum distribution rules). It also allows a trustee to use his or her discretion as to how much of those IRA assets the trust will actually pass on the beneficiaries. This stands in direct opposition to the “conduit trust” which also, under 401(a)(9), allows IRA amounts to be distributed ratably over the expected remaining life of the designated beneficiary, but requires the amounts to flow directly from the IRA to the beneficiary (i.e., no trustee discretion; all amounts directly from IRA to beneficiary).

But drafting a valid see-through trust is not easy. To qualify as a valid see-through trust, the trust must provide for an “identifiable individual designated beneficiary”. For example, what if the IRA provides that the designated beneficiary is a subtrust for daughter. The subtrust provides that the trustee shall distribute income and principal to daughter for her health, education, maintenance and support until she reaches age 35, when daughter may receive income and principal without restrictions. In this case, daughter may qualify as a identifiable individual designated beneficiary, allowing the IRA to distribute the IRA amounts ratably over daughter’s lifetime (a good tax result). But what if the subtrust gives the daughter a general power of appointment should the daughter fail to reach age 35. Who is the designated beneficiary now? The answer is, we cannot identify one. The daughter could appoint anyone in the world, and so we cannot name a specific identifiable individual designated beneficiary and we do not have a valid see-through trust. Under 401(a)(9), the IRA must now distribute all IRA amounts to the trust not later than the end of the fifth anniversary of mother’s death (a bad tax result). Since we botched the see-through trust, the full amount of the IRA is taxable far earlier than if drafted correctly.

But the IRS has approved of a possible way around this mess. More on this to come in Part 3…

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Estate planning practitioners are likely familiar with the See-Through Trust, and its advantages. Let’s say wife dies after husband, and either rolled-over his IRA, or had one of her own. Say further that wife dies leaving all her property (including the IRA) to their two children, in trust. The beneficiary of the IRA is the trust (intended to qualify as a See-Through Trust). The trust says the trustee shall distribute all trust property to the beneficiaries for their health, education, maintenance and support. Question: how frequently must the IRA make distributions to the trust to satisfy the IRC Section 401(a)(9) minimum distribution rules? There exists one of two possible answers: either (a) ratably over the life of the “designated beneficiary”; or (b) not later than the end of the year containing the fifth anniversary of the participant’s (wife’s) death. Since you believe the trust qualifies as a See-Through Trust, you probably think the IRA administrator may distribute the IRA benefits ratably over the lives of the children and still satisfy 401(a)(9)? But can you really? More to come on this….