|ACTEC Request Re: Successor Beneficiaries of Trusts (Reg § 1.401(a)(9)-5, A-7(b) and (c)); Spousal Rollovers When an Estate or Trust is Designated (IRC §§ 402(c) and 408(d))
An Adobe PDF version of this document is available here
Karen M. Moore
Bricker & Eckler LLP
100 S. Third Street
Columbus, OR 43215
July 1, 2011
Via Electronic Delivery (firstname.lastname@example.org)
George Bostick, Esq.
Benefits Tax Counsel
Office of Tax Policy at the Department of Treasury
1500 Pennsylvania Av, NW Room 3044
Washington, DC 20220
Re: Successor Beneficiaries of Trusts (Reg § 1.401(a)(9)-5, A-7(b) and (c)) Spousal Rollovers When an Estate or Trust is Designated (IRC §§ 402(c) and 408(d))
Dear Mr. Bostick:
I am writing on behalf of The American College of Trust and Estate Counsel ("ACTEC"), a professional association of more than 2,500 lawyers skilled and experienced in estate planning and administration and dedicated to the improvement of the laws in these areas. Members of ACTEC are elected by their peers on the basis of professional reputation and ability in the field of trusts and estates and on the basis of having made substantial contributions to these fields through lecturing, writing, teaching, and bar activities. Fellows of ACTEC have extensive experience in rendering advice to taxpayers on matter of federal taxes, with a focus and estate and gift tax planning and compliance. ACTEC offers technical comments about the law and its effective administration, but does not take positions on matters of policy or political objectives.
We request that the Treasury identify as priorities for guidance two important areas relating to employee benefits, as follows:
1. Authority that provides guidance as to when a beneficiary is disregarded as a "successor beneficiary" in determining the measuring life of a "see-through trust" under the minimum distribution rules (Reg. § 1.401(a)(9)-5, A-7(b) and (c)
2. Authority that confirms the result of numerous private letter rulings that allow a spousal rollover when a revocable trust or estate is the named beneficiary and that clarifies the circumstances in which spousal rollover will be permitted (IRC §§ 402(c)
Successor Beneficiaries of Trusts
. Reg. § 1.401(a)(9)-4, A-5
provides that if a trust is named as beneficiary and certain threshold requirements are satisfied, the beneficiaries of the trust (and not the trust itself) will be treated as having been designated for purposes of determining the distribution period under IRC § 401(a)(9)
Reg. § 1.401(a)(9)-5, A-7
provides that "contingent beneficiaries" of such a trust must be counted among the trust's beneficiaries for purposes of determining the distribution period, but "successor beneficiaries" will be disregarded. The distinction between the two is not articulated in the Regulations apart from two examples. From one example (Reg. § 1.401(a)(9)-5, A-7, Ex. 2
), one may extrapolate that remaindermen of a so-called conduit trust lasting for the lifetime of the conduit beneficiary will be treated as successor beneficiaries.
The second example, (Reg. § 1.401(a)(9)-5, A-7, Ex. 1
) deals with a non-conduit trust but is of limited utility since it describes a trust which in the real world would not exist.
Non-conduit trusts are widely used as estate planning vehicles for time-honored reasons having nothing to do with income tax planning. The lack of guidance on the contingent beneficiary and successor beneficiary concepts since 2002, when the Regulations were issued, has complicated standard planning for millions of plan participants and IRA owners and introduced unnecessary uncertainty. These issues continue after the death of the participant or IRA owner who has named a trust as beneficiary, when a decision needs to be made as to the applicable payout period. The ad hoc process of private letter rulings is an expensive and, for most taxpayers, unfeasible way of obtaining certainty.
We previously requested guidance on this issue in a letter to the Internal Revenue Service on March 27, 2003, a copy of which is attached
. No response was received. Our letter included six examples of common fact patterns and suggested results for each. From the private letter rulings issued since 2003 it appears that the Service is applying what we call in the letter the "snapshot approach" to the fact patterns described in Examples 1 through 3. We are entirely comfortable with this result, but believe that it needs to be stated in a published ruling upon which taxpayers can rely.
Private letter rulings issued since 2003 also indicate that the Service is not applying the rule that we suggest in the case of a non-conduit minor's trust such as described in Example 4. Instead the Service is treating as a contingent beneficiary the person or persons who will take the trust property if the minor dies prior to attaining the age at which the trust will terminate in favor of the minor. We continue to be concerned that this position gives rise to arbitrary and unwarranted results for the reasons stated in the March 27, 2003 letter. However, whatever the position of the Service may be with respect to a minor's trust, we believe that it should be stated in a published ruling since the minor's trust is one of the most frequently used trusts.
Spousal Rollovers When Estate or Trust is Named
. Spousal rollovers of qualified retirement plans and IRAs are allowed under IRe §§ 402(c)
. Probably hundreds of private letter rulings have been issued going back to the late 1980s which allow a spousal rollover when an estate or trust is named as beneficiary. In the vast majority of these rulings, the spouse as executor, trustee and/or beneficiary may unilaterally effect the rollover, and this appears to be key to the result reached. The preamble to the final Regulations, however, suggests a broader approach.
The basic fact pattern found in the private letter rulings arises frequently. Therefore, we believe that a published ruling is needed. As things now stand, after the death of a plan participant or IRA owner, the spouse will frequently be forced by the plan administrator or IRA sponsor to obtain his or her own ruling, or will simply feel compelled to do so because private letter rulings may not be relied on, in either case at considerable cost and inconvenience.
We requested a published ruling on this issue as well in a letter to the Internal Revenue Service dated April 15, 2009, a copy of which is attached
. The letter addresses the issue in greater detail and also requests clarification in a published ruling of the circumstances in which a spousal rollover will be permitted: in particular, whether unilateral control by the spouse is required.
Proposed Resolution. We respectfully request that a published Revenue Ruling or similar pronouncement be issued in each of these two areas. Millions of individual taxpayers, plan administrators and IRA sponsors would benefit from such guidance, as would the Service itself in the resulting reduction in private letter ruling requests. Our Employee Benefits Committee has devoted considerable study to these issues, and would be pleased to work with you in any way that you felt was helpful.
Principal responsibility for preparation of this letter was exercised by Kathleen R. Sherby of Bryan Cave LLP, 211 N. Broadway, St. Louis, Missouri (314) 259-2000;krsherby@BryanCave.com
), Secretary of ACTEC and the chair of ACTEC's Employee Benefits in Estate Planning Committee; and Virginia F. Coleman of Ropes & Gray LLP, One International Place, Boston, Massachusetts 02110-2624 (617) 951- 7213; Virginia.Coleman@ropesgray.com
) whom you should feel free to contact at any time.
We appreciate your attention to this request.