Bulletin Board Notice
December 14, 2006
Dear visitor to the Ataxplan.com web site,
I believe there is a problem with the IRS’s “minimum distribution trust rules” as they apply to trusts for young beneficiaries.
Most people who leave money to a young beneficiary provide that the money will be held in trust for the beneficiary’s benefit until he or she reaches a more mature age, such as 25, 30, 40, or even 45. Under the existing IRS MRD trust rules, such delayed distribution is allowed under a see-through trust that is named as beneficiary of a retirement plan. However, the existing rules require that (unless the trust is a “conduit trust”), whenever there is such a delayed outright distribution, the contingent beneficiary (who will take the benefits if the minor beneficiary dies before reaching age 25, 30, or whatever) must be “counted” as a beneficiary of the trust... even though that contingent beneficiary has almost no chance of ever sharing in the trust!
This current rule has a very harmful effect on standard estate planning trusts for minor children and other young beneficiaries. It means that a nonindividual contingent beneficiary would cause the trust not to qualify as a “see-through.” Or, if the contingent beneficiary is an older individual (such as an elderly relative), the contingent beneficiary will be the “oldest trust beneficiary” and his/her life expectancy will become the Applicable Distribution Period for the trust, instead of the minor child’s life expectancy.
These results are irrational and contrary to Congressional intent, in my opinion, where the contingent beneficiary has less than a five percent (5%) chance, actuarially, of ever receiving a penny from the trust. If you agree, I hope you will join me in sending a comment to that effect to Cathy A. Vohs, the Assistant Branch Chief at the IRS who has the responsibility for this section of the regulations. My letter to her is attached. Feel free to copy it or send your own.
Real-life stories of how this rule has adversely affected a family in your experience would be especially appropriate to send!
Natalie B. Choate
Click here to download Natalie’s letter to the IRS.