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.