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When Is Retirement; 'Dynasty' Trusts

Natalie Choate answers reader questions about retirement date determination for minimum required distributions and establishing a circle trust.

Natalie Choate, 12/09/2011

The reviews are in for the new edition of Natalie Choate's best-selling book Life and Death Planning for Retirement Benefits (7th ed. 2011): "Your book has been a tremendously valuable resource to our firm." "I have found this book extremely helpful." "We have read and used it in many cases already." "I love the 7th edition!" "It's paid for itself already by answering several questions." "I ordered these for our company last week, and everyone loves it!" "GREAT BOOK!" To find out why your colleagues (and competitors) are raving about the new edition of Life and Death Planning for Retirement Benefits, visit www.ataxplan.com.

In my last column, I asked for more questions to be submitted--and I got them! Here are two that came in, one "light" and one "heavy":

Question: My client is a professor at X University. She turned 70½ this year (2011), and her last day of work at XU will be Dec. 31, 2011. She does not have to take minimum required distributions from the XU pension plan until the later of April 1 of the year after the year she turns 70½ (i.e., April 1, 2012) or April 1 of the year after the year she retires. Can we say she is "retiring" in 2012, so as to push her required beginning date back to April 1, 2013? After all, she is working every day right through the end of 2011, so it does seem that the first year she is "retired" is 2012. ... It seems very arbitrary and unfair that she has to take her first required minimum distribution just three months after she retires, whereas if she worked for even one day in January 2012, she wouldn't have to take any distributions until April 2013.

Answer: The usual assumption is that a person who works through 2011 but does not work a single day in 2012 is considered to have retired in 2011. If you want to fight with the IRS and the plan administrator about this, be my guest. And yes it's arbitrary, but any rule based on birth dates and retirement dates will end up having "unfair" results for some people. This has been happening since kindergarten when children born just one day apart might end up in totally different grades because they happened to be born on either side of a cutoff date.

Question: Would the following trust provisions work to establish a "see-through" trust, the beneficiary of which would be the "Designated Beneficiary" for purposes of determining the Applicable Distribution Period for an IRA payable to the trust? I am trying to establish a "circle" trust similar to that discussed in section 6.4.05(B) of the new edition of your book (page 455).

The initial beneficiary would be my daughter Janice. The trust is a lifetime trust for her benefit. The trustee is to use income and principal of the trust as the trustee deems best for Janice's benefit during her lifetime. Though all payments to Janice are discretionary with the independent trustee, there are no other beneficiaries during her lifetime, and the trustee is instructed to consider her health, support, education, and well-being as significant goals of the trust.

Upon Janice's death, whatever is left in the trust will pass to such persons among the class consisting of my progeny as Janice shall appoint by will, provided that she cannot appoint to anyone who is older than she. If she fails to exercise the power, the property will pass to her offspring, or (if she has left no offspring; she has no offspring now living) to my descendants then living who were born after Janice. In either case, the property will be held in life trusts for the individuals on terms similar to the terms of the trust for Janice.

If at any time there is only one descendant of mine living who is either (1) Janice or (2) an individual younger than Janice, the trust will immediately terminate and the trust property will pass outright to such last surviving descendant.

Natalie Choate practices law in Boston, specializing in estate planning for retirement benefits. Her book, Life and Death Planning for Retirement Benefits, is fast becoming the leading resource for professionals in this field.

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.
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