Individual Offers Critiques, Suggestions for Proposed RMD Regs

These comments are submitted to the Internal Revenue Service for its consideration with respect to proposed revised minimum distribution regulations published February 22, 2022, REG-105954-20.

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CONTENTS

I. Allow “separate accounts” treatment for any retirement account left to a trust that meets the requirements set forth in Internal Revenue Code (IRC) § 401(a)(9)(H)(iv)(I), even a trust that does not have any beneficiary who is disabled or chronically ill

II. Clarify the extent to which Prop. Reg. § 1.401(a)(9)-4(f)(5)(iii) reverses the Treasury's prior positions with respect to post-death modifications made solely for tax considerations.

III. Apply the “greater of” RMD rule to all types of designated beneficiaries; allow EDBs to elect the 10-year rule, in cases of employee's death after the RBD

IV. Technical corrections needed

Appendix A: PLR 201021038

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About the submitter: My current primary occupation is as a writer and lecturer on the subject of estate and distribution planning for IRAs and other tax favored retirement benefits. I have worked as an estate planning lawyer concentrating in tax and ERISA work since 1974. My practice now is limited to consulting with estate planning lawyers regarding retirement benefits and providing (mostly free) answers to other professionals regarding their clients' IRA and qualified plan benefits. My book for professionals in the tax and investment fields, Life and Death Planning for Retirement Benefits, now in its 8^th edition, has sold over 80,000 copies. I have lectured to lawyers, accountants, financial planners and institutions, and other professionals on this topic 100s of times and in all 50 states. As a taxpayer and U.S. citizen, I care deeply about having a tax system that is fair and sensible especially with respect to the focus of my career, retirement accounts. My goal in submitting these comments is to clarify certain aspects of the proposed regulations and to suggest changes to avoid making our retirement plan tax system an object of cynicism and ridicule.

— Natalie B. Choate, Esq., Wellesley, Mass.

TERMINOLOGY AND ABBREVIATIONS

§	A section of the Code, unless otherwise indicated.
AMBT	Applicable Multi-Beneficiary Trust
Code	The Internal Revenue Code of 1986, as amended through April 30, 2022
DB	Designated beneficiary; especially one who is not an EDB
D/CI	Disabled or chronically ill within the meaning of § 401(a)(9)(E)(ii)(III), (IV).
EDB	Eligible designated beneficiary.
IRA	Individual retirement account under § 408 or § 408A.
IRC	See “Code”
IRS	Internal Revenue Service
NDB	A beneficiary who is not a designated beneficiary.
PLR	IRS private letter ruling.
Prop. Reg.	Proposed Treasury regulation.
Reg.	Treasury regulation.
RMD	Required minimum distribution; distribution required (under § 401(a)(9)) to be taken from an IRA or qualified retirement plan.
SECURE, or the “SECURE ACT.” The “SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT” Act; § 401 in TITLE V — REVENUE PROVISIONS of “DIVISION O” of the “Further Consolidated Appropriations Act, 2020.”

THE COMMENTS

I. Allow “separate accounts” treatment for any retirement account left to a trust that meets the requirements set forth in Internal Revenue Code (IRC) § 401(a)(9)(H)(iv)(I), even a trust that does not have any beneficiary who is disabled or chronically ill.

Under the Proposed Regulations, an arbitrary and capricious distinction is made, with respect to recognizing “separate accounts” treatment for certain trust beneficiaries, between a trust that has one or more disabled and chronically ill beneficiaries and a trust that has no such beneficiary.

The disallowance of separate accounts treatment for beneficiaries of a single trust was added to the regulations without notice in 2003; is not required by the Code; creates hardship for employees and IRA owners; and will foster cynicism regarding (and contempt for) the tax system. Eliminating the distinction would have no cost or harm to anyone involved, other than possibly some inconvenience for plan administrators. This distinction should be eliminated.

In connection with this aspect of the Proposed Regulations, see also “Technical Corrections: Modify or define misleading term 'separate trusts for each beneficiary,'” later in this Outline (section IV(D)).

A. The issue: Meaning of “separate accounts” treatment

In general, under both existing and proposed regulations, multiple individual beneficiaries who inherit a single retirement account are entitled to have their different interests treated as “separate accounts” (i.e., separate inherited IRAs, for example — as if the individuals had inherited separate IRAs rather than jointly inheriting a single IRA) for purposes of determining RMDs and complying with the minimum distribution requirements, if they divide the single inherited account into separate inherited accounts and certain accounting rules are complied with. Reg. § 1.401(a)(9)-8, A-2(a)(2); Prop. Reg. § 1.401(a)(9)-8(a)(1)(i). There is one limitation on such separate-accounts treatment: separate-accounts treatment will be respected for purposes of determining the “applicable denominator”only if such division occurs by the end of the year after the year of the employee's or account owner's death. Prop. Reg. § 1.401(a)(9)-8(a)(1)(ii).

However, under current regulations, beneficiaries who inherit an account through a trust are not allowed to have separate accounts treatment for their respective interests for purposes of determining the applicable distribution period unless such beneficiaries were named separately in the beneficiary designation form. If the single trust under which such beneficiaries received their interests was named as beneficiary, then § 401(a)(9) is applied to the trust as a single account with multiple beneficiaries. Reg. § 1.401(a)(9)-4, A-5(c) (the “A-5(c) rule”).

This single-account treatment applies even if, under the terms of the trust, the division of the inherited retirement account into separate shares for multiple individual beneficiaries and/or subtrusts is mandatory and immediate upon the account owner's death. The only way the multiple beneficiaries can avoid this result and obtain separate accounts treatment, under existing regulations, is if the deceased account owner had named the individual beneficiaries or subtrusts directly in the beneficiary designation form rather than naming the single “funding” trust.

The Proposed Regulations would continue this treatment, but with a new exception. The new exception is mandated by SECURE with respect to trusts for disabled and chronically ill beneficiaries, though not forbidden by SECURE for other beneficiaries. The Proposed Regulations limit application of this exception to the cases where it is required by the Code.

B. Background of Reg. § 1.401(a)(9)-4, A-5(c)

Existing regulations provide that “However, the separate account rules under A-2 of §1.401(a)(9)-8 are not available to beneficiaries of a trust with respect to the trust's interest in the employee's benefit.” Reg. § 1.401(a)(9)-4, A-5(c), last sentence.

The above rule applicable to defined contribution plans that are “qualified” under § 401(a) is made applicable to individual retirement arrangements (IRAs and Roth IRAs) under § 408 and § 408A by Regs. § 1.408-8, A-1, and § 1.408A-6, A-14.

The last sentence of Reg. § 1.401(a)(9)-4, A-5(c), barring separate accounts treatment for beneficiaries of a trust “with respect to the trust's interest in the employee's benefit,” was added to the final regulations adopted effective January 1, 2003. It was not included in the “Comprehensive proposed regulations under section 401(a)(9) . . . previously published in the Federal Register on January 17, 2001 (REG-130477-00/REG-130481-00; 66 FR 3928) and July 27, 1987 (EE-113-82; 52 FR 28070).” See T.D. 8987. § 1.401(a)(9)-1 of the “1987” proposed regulations, Q&A H-2, provided a separate accounts rule for multiple beneficiaries of an inherited account, but did not contain an exception for beneficiaries who inherited through a trust.

Since this A-5(c) rule was not included in any prior proposed regulations under § 401(a)(9) it appears there was never any opportunity for public comment on this rule. The public had no reason to anticipate that such a rule would be adopted since the prior policy of Treasury had been to permit separate accounts treatment for multiple beneficiaries of a single trust. For example, in PLR 200234074, a Roth IRA owned by Taxpayer B was payable to the account owner's trust, “Trust W,” under which Subtrusts X (a marital deduction trust) and Y were created. The Roth IRA had to be recharacterized to a traditional IRA to correct a defective Roth conversion (Taxpayer B's gross income for the applicable year having exceeded the then-applicable $100,000 limit for a legal Roth conversion). The trust instrument required allocation of the decedent's Roth IRA (including the traditional IRA into which it was recharacterized) to Subtrust Y. Under the terms of Subtrust Y, and in view of a qualified disclaimer by Taxpayer B's surviving spouse of her interest in Subtrust Y, the trust instrument required that the “trustee . . . shall divide the entire Subtrust Y estate into shares equal in value to [sic] each then living child of Taxpayer A. Each share shall be distributed outright to the appropriate then living child.”

The Treasury ruled in PLR 200234074 that “Under this fact pattern, each beneficiary's share of Roth IRA V (and the recharacterized traditional IRA) may be treated, for purposes of Code section 401(a)(9), as an account separate from the accounts of the remaining beneficiaries. . . . Furthermore, each beneficiary of Subtrust Y may be treated as the designated beneficiary, as that term is used for purposes of Code section 401(a)(9), of the share of Roth IRA V and the transferee traditional IRA allocated to Subtrust Y and subsequently separately allocated to him or her. Thus, each beneficiary of Subtrust Y may have distributions from his or her separate share of Roth IRA V (and the transferee traditional IRA) computed using his or her life expectancy without regard to the life expectancies of the other beneficiaries.” Emphasis added.

C. The change made by SECURE and why it was made

SECURE preserved the “life expectancy payout” system for inherited retirement accounts for five classes of beneficiaries, called “eligible designated beneficiaries” (EDBs). Two of the classes were disabled individuals and chronically ill individuals. In this memo, “disabled” includes the class of “chronically ill” individuals, both sometimes collectively referred to a “D/CI individuals.”

It is widely understood that, when SECURE was enacted, Congress was lobbied by professionals and interest groups on behalf of disabled people and their benefactors, with the goal of preserving the “life expectancy payout” not only for disabled beneficiaries as individuals but also for “supplemental needs trusts” established by parents and other benefactors of the disabled individual for the purpose of supplementing the disabled beneficiary's government-provided means-tested disability benefits (such as health insurance, housing, etc.) without causing the disabled beneficiary to lose eligibility for these benefits. This lobbying effort paid off in that Congress, sympathetic to this goal, included two special provisions that could be used in a trust for a disabled or chronically ill individual and still retain the EDB's right to a life expectancy payout. These special provisions for trusts for the benefit of D/CI individuals are not made applicable, under the Code, to other classes of EDBs.

Congress gave the name “applicable multi beneficiary trust” (AMBT) to a qualifying “designated beneficiary” trust that has at least one beneficiary who is D/CI, and provided (in § 401(a)(9)(H)(iv), (v)) two special “tax breaks” for such trusts:

It is understood that those lobbying on behalf of D/CI individuals requested these special breaks for two specific goals that would facilitate using inherited retirement accounts to provide for disabled and chronically ill beneficiaries without causing such beneficiaries to lose their qualification for means tested government benefits:

Break 1: A supplemental needs trust for a D/CI individual cannot fulfill its function of providing only for the “supplemental needs” of the D/CI individual if it is required to make distributions to the D/CI individual for other purposes and/or without regard to whether the distribution is required for supplemental needs. If a trust provides for mandatory payouts to the D/CI individual (such as “all income” or “all required minimum distributions” or “income and principal as needed for health, education, maintenance and support”), those payouts would be considered countable income to or assets of the individual for purposes of the individual's means-tested government benefits. The payouts would disqualify the beneficiary for all or part of such government benefits. For a trust to be disregarded as an asset of (or income-generator for) the disabled beneficiary, it is essential that the trust make distributions to or for the benefit of such beneficiary only on a totally discretionary basis or only for needs supplemental to those supplied by the government benefits (actual standards vary by state). Accordingly, the lobbying groups sought the provision that a trust for a D/CI beneficiary would qualify for EDB treatment so long as no person other than the D/CI beneficiary could receive any of the retirement benefits during the life of such D/CI individual — regardless of what amounts, if any, were actually distributed to or for the benefit of the disabled individual him or herself.

Break 2: Those lobbying Congress on behalf of the disabled/chronically ill community were well aware of Reg. § 1.401(a)(9)-4, A-5(c), and its potentially harmful effect on the supplemental needs trusts they sought to protect. If a decedent's retirement account were left to a single trust as beneficiary, and the trust divided into separate shares or subtrusts upon the decedent's death, and one of such shares or subtrusts (but not all of such shares or subtrusts) was a supplemental needs trust for the sole life benefit of a D/CI individual, that separate share or subtrust could not qualify for EDB treatment because of Reg. § 1.401(a)(9)-4, A-5(c). Thus, the advocates for the D/CI community with single minded determination succeeded in convincing Congress to permit separate-accounts treatment for a separate trust or share for a D/CI individual regardless of whether such “subtrust” was named directly as beneficiary on the beneficiary designation form or was formed under the terms of a single “funding” trust that was so named. These advocates for the disabled did not seek to bar other beneficiaries from this favorable treatment, merely to assure that (whatever might happen to ther rest of the world) their “clients” would not be harmed by the “A-5(c) rule.”

There was no lobbying group (apparently) representing surviving spouses, minor children, or “not more than 10 years younger” individuals when SECURE was enacted. Thus, the specific statutory advantages with respect to trusts for disabled or chronically ill beneficiaries were not also applied to trusts for these other types of EDBs. The Internal Revenue Service, in its proposed regulations, must determine the extent to which the advantage of separate accounts treatment for subtrusts should be applied generally for EDBs or should be restricted only to disabled and chronically ill beneficiaries.

D. Gap left by the Code: Is separate account treatment only for the disabled/chronically ill beneficiary's share? Or does it apply to all separate shares or subtrusts so created?

Suppose an IRA owner dies and names a trust (“funding trust”) as beneficiary of the IRA. Suppose the funding trust named as beneficiary is to be immediately divided upon the participant's death into “separate trusts for each beneficiary,” and one of such beneficiaries is disabled but the beneficiaries of the other subtrusts are not disabled. It's clear that the separate trust for the D/CI beneficiary will be entitled to life expectancy payout if it meets the requirement that no one else has any right to the benefits payable to such share for the entire life of the D/CI beneficiary, because its separate account status is mandated by the Code.

But what about the OTHER subtrusts that were created along with the trust that benefits the D/CI beneficiary? Are these other shares still treated “collectively” under the rule of existing Reg. §1.401(a)(9)-4, A-5(c)? Or do they also get “separate accounts” treatment because at least one beneficiary of the funding trust is disabled or chronically ill?

The Proposed Regulations answer this question in the following way. First, they define this type of trust as a “type I applicable multi-beneficiary trust” (“Type I AMBT”). Then they provide that the Reg. § 1.401(a)(9)-4, A-5(c), rule (now appearing in Prop. Reg. § 1.401(a)(9)-8(a)(1)(iii)(A)) will not apply to any of the subtrusts created under a Type I AMBT. Thus, for example, if one of the subtrusts is a conduit trust for the surviving spouse, it will get EDB treatment, even if other subtrusts so created under the single trust have beneficiaries who are not EDBs. All subtrusts created under a Type I AMBT are entitled to separate accounts treatment. Prop. Reg. § 1.401(a)(9)-8(a)(1)(iii)(B).

E. Why separate accounts treatment can and should apply to any trust that meets requirements similar to the Type I AMBT requirements, whether or not the trust has a disabled or chronically ill beneficiary.

The Code specifically “overrules” the old A-5(c) rule only with respect to trusts for the benefit of one or more disabled or chronically ill individuals. The proposed regulations, similarly, do NOT extend this rule to all trusts that are subdivided into separate subtrusts. . . . only trusts that have at least one countable beneficiary who is a D/CI individual.

Comment: The Treasury should abolish the “A-5(c) rule” and make the “Type I AMBT” treatment applicable to all trusts.

Existing rule causes hardship to individuals. The unfortunate distinction between trusts that do have a D/CI beneficiary and trusts that do not will cause hardship for account owners whose trusts do not have a disabled or chronically ill beneficiary. It is well known that individuals take care in planning their estates and that often the retirement account is a significant asset for the individual, as intended by Congress when it encouraged retirement savings through these tax-favored accounts. Leaving assets to a trust is a very common estate planning practice, and it is similarly very common for a trust that receives assets upon the client's death to be divided, by its terms, into separate shares or subtrusts for the client's beneficiaries (for example a “marital trust” and a “family trust,” or a separate trust for each of the client's children to be distributed to them gradually at specified ages). When retirement benefits are left to such a “funding” trust, it will be common that the multiple beneficiaries (if each were named directly as beneficiary) would qualify for different treatment under the minimum distribution rules. For example the surviving spouse, minor children, and not-more-than10-years-younger individuals could qualify for EDB treatment, while other beneficiaries (such as an adult nondisabled child of the decedent) would be subject to the 10-year rule. To achieve for each beneficiary the best RMD treatment possible under the Code and the Proposed Regulations, the individual would have to name these beneficiaries or subtrusts separately as beneficiaries on the beneficiary designation form. Many plan administrators and IRA providers either do not permit, do not facilitate, or discourage naming multiple beneficiaries on the beneficiary designation form. Many account owners and employees will find it difficult to name multiple trust beneficiaries directly without moving their account to a different financial institution.

Wealthy IRA owners are usually able to negotiate for personal treatment with respect to beneficiary designation forms because they tend to work with (for example) IRA providers that cater to high net worth individuals and large accounts. However, the average IRA owner or employee generally must simply accept the rules or preferences laid down by the plan administrator or IRA provider and cannot negotiate such luxuries as “for beneficiary designation see attached form.” As a result, most IRA owners and employees will be completely unaware of the need to name separate subtrusts separately on the beneficiary designation form or (even if aware) will not be able to do so.

The decedent's error in not naming separate subtrusts directly as beneficiaries of the IRA or plan account cannot be corrected, after the individual's death, by using the generous provisions of Prop. Reg. § 1.401(a)(9)-4(f)(5) regarding post-mortem “modifications” of a trust, because this correction would not be to a trust, it would be to the beneficiary designation form. Post-death modification of a beneficiary designation form would be an unusual and difficult (or in most cases probably impossible) undertaking.

The harsh effects of the current rule will impact those whose perfectly normal and typical estate plans fail to include the necessity of naming separate subtrusts as beneficiaries in the beneficiary designation form — a requirement that most individuals will not even know about and many individuals will not be able to fulfill due to policies of the applicable plan administrator or IRA provider.

Absurd results will cause cynicism regarding, and invite ridicule for, our tax system. The distinction between allowing separate accounts treatment for Type I AMBTs and disallowing it for all other trusts will produce absurd results, where identical trusts receive hugely different treatment under § 401(a)(9) merely because of the chance existence (or lack) of a disabled beneficiary.

Example: Don and Ron. Don and Ron are twin brothers. Both die in a tragic accident. Each brother leaves a surviving spouse, two adult children, and the brothers' older sister. Each brother leaves all his assets including his IRA to a trust, titled respectively the “Don Living Trust” and the “Ron Living Trust.” Each brother's trust provides for the trust to be divided, upon his death, into four separate subtrusts: A conduit trust for the surviving spouse; a trust for each of the adult children, providing for outright distribution to the child at age 45 (with remainder to the other child in case of death prior to age 45); and a conduit trust for their older sister.

There is only one difference between the brothers' situations. One of Don's two children is disabled; none of the other beneficiaries of either trust is disabled or chronically ill. Assume both trusts qualify as see-through trusts. Here is how these two identical trusts would be treated for RMD purposes under the Proposed Regulations:

Don's trust: Because one of Don's beneficiaries is disabled, Don's trust qualifies as a Type I AMBT. Accordingly, each “subtrust” is entitled to separate accounts treatment under the minimum distribution rules. The conduit trusts for the spouse and older sister both qualify for the “EDB” treatment applicable to that particular type of EDB (e.g., for the spouse, recalculation of life expectancy annually). The subtrust for the disabled child qualifies for EDB treatment because the disabled child-beneficiary is sole beneficiary during his/her lifetime (Type II AMBT). The subtrust for the other adult child qualifies for the 10-year rule.

Ron's trust: None of Ron's beneficiaries is disabled. Accordingly his trust is not a Type I AMBT. The four subtrusts will be regarding as a single account, and the four beneficiaries will be regarded as beneficiaries of a single account. The trust (treated as a single account) does not qualify for EDB status or EDB treatment because not all countable beneficiaries are EDBs (only two are — the spouse and the older sister) and because there is no minor child of the account owner or disabled beneficiary in the mix. The trust will be subject to the 10-year rule, even though the separate subtrusts of two of the beneficiaries, if they had been named directly as beneficiaries, would have qualified for EDB treatment.

There is no government policy supporting this different treatment. The statutory mandating of separate accounts-treatment only for the “Type I AMBT” was (according to all available evidence) due solely to the focus of a lobbying group trying to protect its particular constituents. There is no known or presumed apparent intent to discriminate against other trust beneficiaries similarly situated. Neither the government nor the disabled/chronically ill community is harmed by extending separate accounts treatment to all trusts that meet the requirements of Prop. Reg. § 1.401(a)(9)-4(g)(2) (other than the requirement that at least one beneficiary is disabled or chronically ill). Imposing a pointless distinction, with harmful effects for the unwary and those whose retirement plans do not permit naming multiple beneficiaries directly, achieves no benefit for any person or organization and would appear to be the opposite of the proper goal for a system for taxing retirement benefits.

Effect of this requested change on plan administrators. One presumes that plan administrators and IRA providers may have originally lobbied for the “A-5(c) rule” that was included in the 2002 final regulations. Presumably the plan administrator community prefers not to have to wrestle with separate accounts under any circumstances, so any rule prohibiting separate accounts treatment would find favor with this interest group. The reasons stated above for extending separate accounts treatment to all trusts that meet the Prop. Reg. § 1.401(a)(9)-4(g)(2) test should outweigh that consideration, and win the approval of IRA providers who should applaud the existence of improved estate planning options for their clients. The need to have this treatment extended to all trusts is partly due to the difficulty of naming multiple subtrusts on one beneficiary designation form, so the administrator community has partly itself to blame for the movement to extend separate accounts treatment to all similar trusts.

Statute does not prohibit extending separate accounts treatment to other trusts. Although the Code mandates separate accounts treatment only for qualifying trusts that have a disabled or chronically ill beneficiary, the Code does not forbid applying separate accounts treatment to similar trusts that divide into separate shares or subtrusts but do not have a disabled or chronically ill beneficiary. Such an extension would be within the authority of the IRA to create a workable system from the framework provided by the statute “in accordance with regulations.”

Such separate accounts treatment was permitted under the proposed regulations prior to 2003, then forbidden for all trusts by the 2002 final regulations, without any mention whatsoever of this subject in the Code, so past “separate accounts within trusts” rules cannot be pinned on any Code provision. In fact the entire system of “separate accounts” for defined contribution plans for purposes of required minimum distributions was a creation of the regulations; the concept did not appear in §401(a)(9) at all until SECURE added its special provision to protect supplemental needs trusts for the disabled. There is no basis for concluding that Congress intended (by enacting SECURE) to displace the Treasury's rule-making authority with regard to the subject of separate accounts established under a single trust; the more likely interpretation is that Congress inserted one provision on the subject to deal with a particular constituency.

II. Clarify the extent to which Prop. Reg. § 1.401(a)(9)-4(f)(5)(iii) reverses the Treasury's prior positions with respect to post-death modifications made solely for tax considerations.

An entirely new addition to the Treasury's “minimum distribution trust rules” is the inclusion of rules dealing with how powers of appointment and the potential for post-death trust death reformations or decanting affect the determination of whether the employee's beneficiary is “identifiable.” In a welcome clarification, the Proposed Regulations specify, for example, that the mere existence of a power in a beneficiary to appoint trust assets to (for example) a nonindividual does not affect the identifiability (or the identity) of the employee's beneficiary; and that unless and until such power is exercised, the takers in default under the power will be the “countable” beneficiaries for the purpose of testing the trust's qualification as a designated beneficiary trust. Prop. Reg. § 1.401(a)(9)-4(f)(5)(ii). Further, the Proposed Regulations specify that a trust will not be considered to have nonidentifiable beneficiaries (i.e., will not be automatically deemed to “flunk” the “third trust rule” in Prop. Reg. § 1.401(a)(9)-4(f)(2)(iii)) merely because there is an applicable “state law that permits the trust terms to be modified after the death of the employee (such as through a court reformation or a permitted decanting).” Prop. Reg. § 1.401(a)(9)-4(f)(5)(iii)(A).

The Proposed Regulation then goes on to state that trust beneficiaries may be added or removed after the employee's death pursuant to “a modification of trust terms (such as through a court reformation or a permitted decanting)” and provide the effect such modifications would have on determination of the employee's beneficiary. Prop. Reg. § 1.401(a)(9)-4(f)(5)(iii)(B), (C), (iv).

It may not be clear to practitioners or trustees to what extent this change in the regulations would reverse prior Treasury positions regarding post-death reformations undertaken solely for tax purposes. See “A.” Similarly, it might be helpful to remind practitioners and trustees via a Preamble or otherwise regarding the Treasury's overriding authority with respect to interpretation of “state law” under Bosch. See “B.” Finally, it could be helpful to remind taxpayers that the Proposed Regulations' provisions regarding the effects of post-death trust modifications with respect to §401(a)(9) do not apply with respect to other retirement-benefit related tax issues such as the spousal rollover or fiduciary charitable deduction; see “C.”

A. Clarify the Treasury's position regarding whether a post-death trust reformation undertaken solely for tax considerations will be respected.

It is anticipated that the trustee of a trust named as beneficiary might seek a trust reformation for the purpose of improving the trust's expected tax treatment under § 401(a)(9). For example, if the trust has a secondary beneficiary that is a charity (nonindividual beneficiary), the trustee might seek a reformation of the trust to pay off the charity at the death of the employee rather than after the death of the trust's primary beneficiary; for example, such a reformation was carried out with the consent of all affected parties in PLR 201021038 with the goal of enabling the trust to qualify as a designated beneficiary and thereby qualify for a life expectancy payout. Or the trustee might seek to reform a trust that called for the trust to be divided into separate trusts for each beneficiary three years after the employee's death, to provide instead that such division would occur immediately upon the employee's death rather than three years later (the goal of such reformation being to enable the trust to qualify as a type 1 applicable multi-beneficiary trust).

Prior to 2010, the Treasury in letter rulings had approved post-death trust reformations undertaken for the apparent sole purpose of allowing the trust to qualify for designated beneficiary status with respect to § 401(a)(9). See, e.g., PLRs 200218039, 2006080332, and 200620026. Treasury reversed this position in 2010, stating (in PLR 2010-21038) that “[A]bsent specific authority in the Code or Regulations, the [post-death] modification of . . . [a trust] will not be recognized for federal tax purposes.” Since then, the Treasury (in rulings) has approved post-death changes in the identity of the beneficiary only when the applicable reformation was based on traditional “reformation” grounds such as undue influence or scrivener's error.

The Proposed Regulations, if adopted, would constitute “specific authority” in the Regulations for the types of modifications specified therein, namely, adding or removing a beneficiary via a reformation or decanting permitted by state law. It would be helpful if, as a further clarification, the Treasury would explicitly confirm that these actions (if otherwise complying with the Regulation) would be effective even if undertaken solely for “tax considerations,” namely, the goal of modifying the trust's treatment under § 401(a)(9). Since Treasury's prior statements to the contrary have been quite forceful (see excerpt from PLR 202021038 attached to this memo as Appendix A), this clarification is needed to assure taxpayers that (with respect to the modifications specified in the regulations) the motive or tax goal of the reformation or decanting is not relevant to whether it will be given effect for purposes of § 401(a)(9).

B. Confirm the Treasury's position regarding determination of “state law” with respect to post-death reformations and decanting

The Proposed Regulation appropriately references “state law” with respect to the ability of the trustee of a trust named as the employee's beneficiary to arrange for the trust to be reformed or decanted, thereby causing one or more beneficiaries to be added to or removed from the trust for purposes of determining the trust's designated beneficiary status. The Proposed Regulations, perhaps intentionally, do not specify who will be the final determiner of whether applicable state law permits the reformation or decanting in question.

It is anticipated that such post-death reformations or decanting as do occur will arise either through a probate court proceeding affirming an agreement among the trustee and beneficiaries or through an action by the trustee or a “trust protector” without court involvement based on either specific trust terms authorizing the change in question or a state law generally authorizing such change. In any of these circumstances, trustees might rely on an opinion of counsel regarding whether the reformation or decanting complies with the trust's terms and/or applicable state law.

In order that trustees and their advisors may not be misled by the generous but vague language of the Proposed Regulation, it might be advisable to remind the public, via language in a Preamble or otherwise, that, with regard to questions of state law, state probate court judgments and rulings are not binding on the Treasury. The only state court whose judgment the IRS must defer to on such questions is the highest court in the state. Estate of Bosch, 387 U.S. 456 (1967). And of course an opinion of counsel is not binding on the Treasury.

It could be helpful if Treasury would remind the public that (absent a ruling of the highest court of the applicable state) Treasury would be entitled to make its own determination regarding the extent to which a post-death reformation or decanting is valid under applicable state law.

C. Remind taxpayers that the Proposed Regulations do not authorize post-death trust modifications for other tax purposes related to retirement benefits

There are retirement-benefit-related tax goals other than improving the trust's minimum distribution treatment under § 401(a)(9) for which a trustee may seek post-death reformation of a trust. For example, the trustee might seek reformation for the purpose of allowing benefits payable to or for the benefit of the employee's surviving spouse to qualify for the spousal rollover; in PLR 200944059, the Treasury refused to accept a state court order reforming a trust for that purpose and did not allow the spousal rollover. Or the trustee might seek to reform the trust in order to have retirement benefits payable to the trust qualify for the fiduciary income tax charitable deduction under § 642(c). In PLR 201438014, the taxpayer had obtained a state court order approving reformation of the trust for that purpose, but the Treasury ruled, citing numerous authorities, that the trust did not achieve this tax result because the state court's actions was not for the purpose of resolving a conflict; rather “The purpose of the court order was to obtain the tax benefits . . .” and Treasury was not bound by the state court order.

It could be helpful to remind the public via a Preamble or otherwise that the types of post-death trust modifications permitted by the Proposed Regulations that will be recognized for purposes of § 401(a)(9) do not alter (or give permission for post-death reformations to satisfy) the requirements for other tax rules applicable to retirement accounts such as the spousal rollover or the fiduciary income tax charitable deduction.

III. Apply the “greater of” rule for RMDs to all types of designated beneficiaries, and allow EDBs to elect the 10-year rule, in cases of employee's death after the required beginning date.

The Proposed Regulations create a situation where, if the employee dies after his required beginning date, a non-designated beneficiary can receive a longer payout period for an inherited plan than is granted to a designated beneficiary (DB) or even to an eligible designated beneficiary (EDB) who is older than the deceased employee, or where a DB who is not an EDB can obtain a longer payout period than an EDB. These results will foster cynicism about the RMD rules and create an incitement for the absurd result of designated beneficiaries and certain EDBs striving to achieve a “lower beneficiary status” in order to achieve more deferral of distribution of inherited retirement accounts. Congress could not have intended to make EDBs and DBs worse off than a non-designated beneficiary or to make EDBs worse off than DBs; the opposite intent is apparent in SECURE.

The first such contradictory situation arises if the account owner dies after the required beginning date and before approximately age 80. If the beneficiary is not a designated beneficiary, the applicable denominator in this case is the “employee's remaining life expectancy.” Prop. Reg. §1.401(a)(9)-5(d)(1)(iii). Under the Single Life Table, a person's remaining life expectancy is 16.4 years at age 73, declining to 11.2 years at age 80, not dropping below 10 years until age 82. Thus the non-designated beneficiary will have a payout period of 11 to 15 years in cases of employee death during that age span. But a DB who is not an EDB will have only 10 years. And an EDB who is older than age 82 will have less than 10 years to withdraw the entire account because, under the Proposed Regulations, the final distribution year for such EDB in this case is the final year of his/her life expectancy, which will by definition be less than 10 years if he/she is older than age 82. Prop. Reg. §1.401(a)(9)-5(e)(5). This anomaly, as applicable to older EDBs, could be corrected, in cases of employee death after the required beginning date, by applying the “greater of” rule to all required distributions after the employee's death (as in Prop. Reg. § 1.401(a)(9)-5(d)(1)(ii)) without requiring a distribution of the employee's entire interest in the final year of the beneficiary's life expectancy as is currently required by Prop. Reg. § 1.401(a)(9)-5(e)(5).

The same anomaly applies to the designated beneficiary who is not an EDB, and who is accordingly subject to the 10-year rule. The 10-year rule provides this DB with a shorter distribution period than would apply if the employee had left no designated beneficiary at all in cases of employee death after the RBD and before approximately age 81. As I write these comments, estate planning lawyers are working on “toggles” to include in their trust instruments that will enable the trustee to cause the trust to “flunk” the minimum distribution trust rules so the trust can get “non-DB” status if the decedent dies during a certain age range!

Rather than by regulation encouraging DBs to try to somehow lose their DB status to qualify as a nondesignated beneficiary and merit non-DB treatment, the Proposed Regulations could allow a “greater of” rule to a DB — the payout period would be the longer of 10 years or the employee's remaining life expectancy. SECURE specifies that the 10-year rule is to apply to designated beneficiaries in cases of death both before and after the required beginning date, but Congress has allowed the Treasury broad regulatory authority to create a workable, fair, and sensible system around SECURE's framework. The statute should not be read as prohibiting the IRS from adjusting the rules as needed to avoid absurd results.

The second contradictory situation again applies to any EDB who is older than age 82 (so has a life expectancy of less than 10 years) and who inherits from an employee who died after the required beginning date. The Proposed Regulations permit an EDB to elect the “10-year rule” if and only if the employee died before the required beginning date. Prop. Reg. § 1.401(a)(9)-3(c)(5)(iii). That election was presumably included in the proposed regulations to avoid the absurd result of a DB getting a longer payout than an EDB — the EDB is allowed elect the payout period allowed to a “lower status” beneficiary. But the Proposed Regulations do not permit this election in cases of death after the RBD. Thus, for example, if an IRA owner dies at age 87 leaving one IRA to her 85-year old sister (who is an EDB, being not more than 10 years younger) and another IRA to her 60-year-old son, the son (who is not an EDB) will get a longer payout period (10 years) than the sister (who is an EDB) who gets only her own life expectancy (about 8 years). To eliminate this absurd result the regulations should allow the EDB to elect the 10-year rule regardless of whether the employee died before or after the required beginning date.

IV. Technical Corrections

These apparent inconsistencies or gaps in the Proposed Regulations should be corrected in the final version.

A. Inconsistent statements in the Preamble Regarding Post-Death Modifications

The Preamble to the Proposed Regulations contains inconsistent statements with respect to the ability to “add” or “remove” beneficiaries after the employee's death. The inconsistency should be corrected in any Preamble to final regulations.

The definition of the employee's beneficiary in the existing regulations states that a person (or entity) is a beneficiary if he, she, or it is a beneficiary as of the employee's date of death and remains a beneficiary as of September 30 of the year after the employee's death (herein the “Beneficiary Finalization Date” or BFD). Reg. § 1.401(a)(9)-4, A-4(a). The existing regulations provide two examples of how a beneficiary could be “removed” as a beneficiary by the BFD (qualified disclaimer, distribution of the beneficiary's interest in full), but do not state that such examples are the exclusive means by which a beneficiary may be “removed.”

The Preamble to the Proposed Regulations states (at p. 40) that the Proposed Regulations “largely retain” the existing system above described, then mentions a change: The Proposed Regulations (at p. 41) specify that the list in the Proposed Regulations of means of “removing” a beneficiary is an exclusive list: “. . . these proposed regulations provide an exclusive list of events that permit a beneficiary to be disregarded. Specifically, the proposed regulations provide that if any of the following events occurs by September 30 of the calendar year following the calendar year in which the employee dies with respect to a person who was a beneficiary as of the employee's date of death, then that person will be disregarded in identifying the beneficiaries of the employee for purposes of section 401(a)(9): “(1) The individual predeceases the employee; (2) the individual is treated as having predeceased the employee pursuant to a simultaneous death provision or pursuant to a qualified disclaimer that satisfies section 2518 and applies to the entire interest to which the beneficiary is entitled; or (3) the person receives the entire benefit to which the person is entitled.”

The Preamble then provides examples of actions that do or do not result in disregarding a beneficiary, consistent with the preceding summary: qualified disclaimer (beneficiary disregarded) vs. nonqualified disclaimer (beneficiary is still considered a beneficiary — not disregarded); and, a trust named as beneficiary that is liable for liabilities to the decedent's estate (thereby causing the estate — a nonindividual — to be considered a beneficiary of the trust), where this liability is fully satisfied and paid prior to the BFD (i.e., by means of a “distribution” to the estate, so the estate is disregarded).

The basic current rules are indeed retained; see Prop. Reg. 1.401(a)(9)-4(c). However, in addition to the two exceptions previously discussed (disclaimer, distribution), further modifications in the identity of the employee's beneficiary are permitted if the employee's benefits are left to a trust. The provisions of Prop. Reg. 1.401(a)(9)-4(d) and (f) allow other means (besides qualified disclaimer and distribution prior to the BFD) for removing — and even adding — beneficiaries, via post-death trust reformations and decanting: “A trust will not fail to satisfy the identifiability requirements. . . . merely because the trust is subject to state law that permits the trust terms to be modified after the death of the employee (such as through a court reformation or a permitted decanting) and thus, permits changing the beneficiaries of the trust.” A trust beneficiary may be added or removed through a modification of trust terms “(such as through a court reformation or a permitted decanting).” Prop. Reg. § 1.401(a)(9)-4(f)(5)(iii)(A), (B), and (C).

The portion of the Preamble discussing distribution and disclaimer as the “exclusive” means of post-death change in the identity of the employee's beneficiary should clarify that where benefits are left to a trust further changes (including adding a beneficiary) are permitted by other means.

B. Regulations need to specify how surviving spouse's life expectancy is calculated after the surviving spouse's death (for purposes of computing distributions to the surviving spouse's successor beneficiary).

Under the Code and regulations, the life expectancy of the surviving spouse (if he or she is the designated beneficiary) is recalculated annually. Upon the death of the surviving spouse, obviously, such recalculation cannot continue, yet required distributions to the successor beneficiary must be calculated somehow. According to the Preamble to the Proposed Regulations (p. 45), recalculation of surviving spouse's life expectancy ends with year of the surviving spouse's death, and thereafter RMDs to the successor beneficiary continue based on that year-of-death remaining life expectancy minus one each year. I have not found that rule in the Proposed Regulations, only in the Preamble.

C. Apparent duplication/repetition in Prop. Regs. § 1.401(a)(9)-3(c)(4) and § 1.401(a)(9)-5(a)(2)(iii) should be explained or eliminated.

These two sections of the Proposed Regulations appear to say the same thing, except that one of them is limited to employee's death before the required beginning date. If this is an error it should be corrected. If it is intentional, the reason for the repetition should be explained somewhere:

Prop. Reg. § 1.401(a)(9)-3(c)(4): Life expectancy payments. Distributions satisfy this paragraph (c)(4) if distributions that satisfy the requirements of § 1.401(a)(9)-5 commence on or before the end of the calendar year following the calendar year in which the employee died, except as provided in paragraph (d) of this section (permitting a surviving spouse to delay the commencement of distributions).

Prop. Reg. § 1.401(a)(9)-5(a)(2)(iii): First distribution calendar year for beneficiary. In the case of an employee who dies before the required beginning date, if the life expectancy rule in § 1.401(a)(9)-3(c)(4) applies, then the first distribution calendar year for the designated beneficiary is the calendar year after the calendar year in which the employee died (or, if applicable, the calendar year described in § 1.401(a)(9)-3(d)). See § 1.401(a)(9)-3(c)(5) to determine whether the life expectancy rule in § 1.401(a)(9)-3(c)(4) applies.

D. Modify or define misleading term “separate trusts for each beneficiary” in Prop. Reg. 1.401(a)(9)-4(g)(2).

In its special rules for “Applicable Multi-Beneficiary Trusts” (see Part I above), SECURE speaks of “separate trusts for each beneficiary.” This can be read to mean that if any of the separate trusts so created has MULTIPLE beneficiaries, the special rules for AMBTs will not apply. Since a trust by definition has more than one beneficiary unless it is a conduit trust for one person, does this mean that AMBT treatment for multiple subtrusts will not apply if any of the multiple subtrusts is an accumulation trust or is a conduit trust for more than one beneficiary? This point is left unclear in the Code.

The Proposed Regulations initially retain the ambiguity of SECURE: “Type I” is an AMBT that “is to be divided immediately upon the death of the employee into separate trusts for each beneficiary.” Prop Reg. § 1.401(a)(9)-4(g)(2) (emphasis added).

This terminology is ambiguous in two respects. First, it appears that the only way to have a separate trust for each beneficiary is if each countable beneficiary has a conduit trust solely for his/her life benefit; an accumulation trust would by definition have more than one beneficiary (as would a conduit trust for multiple beneficiaries). Second, sometimes the “funding” trust that is named as beneficiary is divided into separate shares immediately upon the donor's death and some of the shares are not left in trust at all. For example, “Upon my death, the trustee shall divide the trust assets into equal shares for my four children. The share for my child Chris [who is disabled] shall be paid into the Supplemental Needs Trust established under Article XV of this trust instrument. The other shares shall be distributed to my other children outright.” Would this be considered a Type I AMBT even though three of the four shares are distributable outright, not divided into “separate trusts?”

However, these ambiguities are resolved later in the Proposed Regulations as follows. The use of the words “each beneficiary” is not intended to limit the “subtrusts” to only conduit trusts, as proven by the following: The Proposed Regulation specifies that one of the separate subtrusts so created can be a “Type II AMBT,” meaning it has multiple beneficiaries of whom at least one is a disabled or chronically ill individual, but such trust specifies that nothing shall be paid to any beneficiary during the D/CI beneficiary's life other than the D/CI beneficiary him/herself. If the trust so provides then “the beneficiaries of that separate trust who are not disabled or chronically ill are disregarded as beneficiaries of the employee . . .” Preamble, p. 37-38. In other words, despite the words (in both statute and Proposed Regulation) that the trust must divide into “separate trusts for each beneficiary,” it is clear the Treasury interprets this to mean “separate trusts for different beneficiaries” or “for various beneficiaries or groups of beneficiaries.”

As further proof of that conclusion, if the separate trust so created for the D/CI individual were a conduit trust, it could not possibly be used as a supplemental needs trust, since passing out all RMDs to the disabled beneficiary would defeat the purpose of a supplemental needs trust. . . . and it would be entirely unnecessary to say nothing could be distributed to anyone other than the D/CI beneficiary because that is what a conduit trust already says.

However, rather than leaving it to practitioners to deduce this conclusion from clues in other sections of the Proposed Regulation, it might be preferable not to use the Code's term “separate trusts for each beneficiary” but rather use an expanded version of it such as “separate trusts (or shares paid outright) for each beneficiary or group of beneficiaries (as the case may be).”

E. Inappropriate reference to 5-year rule in Prop. Reg. § 1.401(a)(9)-5(d)(i)

Prop. Reg. § 1.401(a)(9)-5(d)(i), dealing with required distributions in cases of the employee's death after the required beginning date, contains a reference to the “5-year rule,” which applies only to death prior to the required beginning date. This reference should be eliminated or explained.

Prop. Reg. § 1.401(a)(9)-5(d) is entitled “Applicable denominator after employee's death.” Subsection (d)(i) is entitled “Death on or after the employee's required beginning date” and reads in relevant as follows (emphasis added):

“(i) In general. If an employee dies after distribution has begun as determined under § 1.401(a)(9)-2(a)(3) (generally, on or after the employee's required beginning date), distributions must satisfy section 401(a)(9)(B)(i). In order to satisfy this requirement, the applicable denominator after the employee's death is determined under the rules of this paragraph (d)(1). The requirement to take an annual distribution in accordance with the preceding sentence applies for distribution calendar years up to and including the calendar year that includes the beneficiary's date of death. Thus, a required minimum distribution is due for the calendar year of the beneficiary's death, and that amount must be distributed during that calendar year to a beneficiary of the deceased beneficiary to the extent it has not already been distributed to the deceased beneficiary. The distributions also must satisfy section 401(a)(9)(B)(ii) (or, if applicable, section 401(a)(9)(B)(iii), taking into account sections 401(a)(9)(E)(iii), and 401(a)(9)(H)(ii) and (iii)). . . .”

§401(a)(9)(B)(ii) imposes the “5-year rule” when an employee dies before the required beginning date with no designated beneficiary. Here is § 401(a)(9)(B)(ii) in relevant part (emphasis added): “A trust shall not constitute a qualified trust under this section unless the plan provides that, if an employee dies before the distribution of the employee's interest has begun in accordance with subparagraph (A)(ii), the entire interest of the employee will be distributed within 5 years after the death of such employee. . . .” This reference to a rule that applies only in cases of death before the required beginning date appears anomalous in a section of the regulation that deals only with death after the required beginning date.

To avoid the appearance of error in the regulation, either the reference therein to §401(a)(9)(B)(ii) should be eliminated, or the regulation should be expanded to explain its presence. However any such explanation would have to expose the apparent error in the Internal Revenue Code which (following the path created by the Treasury in its earlier versions of these regulations) clearly expects the “life expectancy payout” for eligible designated beneficiaries to apply regardless of whether the employee's death was before or after the required beginning date, even though the Code itself refers to that form of payout only as an exception to the 5-year rule. See § 401(a)(9)(H)(ii) of the Code, and the Joint Committee on Taxation report of July 28, 2021, “Present Law and Background Relating to Retirement Plans,” p. 47. Both the cited Code section and that report:

• Pointedly refer to whether the employee's death is before or after the required beginning date in reference to payout rules for both non-designated beneficiaries (for whom payout rules are different depending on whether death is before or after the required beginning date) and

• . . . for designated beneficiaries who are not eligible designated beneficiaries (for whom the 10-year rule “shall apply whether or not distributions of the employee's interests have begun”), but

• . . . recite the life expectancy payout (referred to as “subparagraph (B)(iii)”) as being applicable to “eligible designated beneficiaries” without any differentiation between (or even mention of) whether death is before or after distributions had begun to the deceased employee.

The life expectancy payout for eligible designated beneficiaries in cases of the employee's death after the required beginning date has hitched a ride into the Code on the back of a Code section that started out as solely an exception to the 5-year rule. This awkward ancestry should either not be mentioned in the Proposed Regulations (as the Code itself does not mention it) or should be fully explained to avoid the appearance of error in referring to the 5-year rule in a section dealing with distributions in cases of death after the required beginning date.

F. Correct misleading statement, and an omission, in final-distribution-year provisions of Prop. Reg. § 1.401(a)(9)-5(e)(1)

Prop. Reg. § 1.401(a)(9)-5(e)(1) provides that “Except as provided in paragraph (f) of this section, if an employee's accrued benefit is in the form of an individual account under a defined contribution plan, then the entire interest of the employee must be distributed by the end of the earliest of the calendar years described in paragraph (e)(2), (3), (4), or (5) of this section. . . .”

Two corrections are needed. First, as commented by others, this opening sentence incorrectly states that regardless of who the beneficiary is, he, she, or it must withdraw by the earliest date specified in any of the subparagraphs. What is actually meant is that each class of beneficiary must withdraw by the outer limit date set in the subparagraph applicable to that class, and the regulation needs to be revised accordingly.

Second, Paragraphs (2), (3), (4), and (5) of Prop. Reg. § 1.401(a)(9)-5(e) provide an overriding final distribution year for, respectively: (2) a designated beneficiary who is not an eligible designation beneficiary (EDB); (3) a successor beneficiary to a deceased EDB; (4) an EDB who was a minor child of the employee; and (5) certain EDBs where the employee died after the required beginning date.

None of these paragraphs (2)–(5) provides a “final distribution year” for benefits payable to a beneficiary who is not a designated beneficiary. Benefits payable to a non-designated-beneficiary must be distributed under the 5-year rule if the employee died before his required beginning date, otherwise over the employee's remaining life expectancy. It is understood that these limits are not subject to any overriding limit similar to those listed in Prop. Reg. § 1.401(a)(9)-5(e)(1). However, Prop. Reg. § 1.401(a)(9)-5(e)(1) states that all benefits must be fully distributed by the year specified in paragraphs (e)(2)–(e)(5) unless otherwise specified in subparagraph (f) (which deals only with multiple beneficiaries and is not relevant to this point) and does not exclude non-designated beneficiaries from this blanket statement.

Prop. Reg. § 1.401(a)(9)-5(e)(1) accordingly needs to be revised to clarify that it applies only to benefits payable to a designated beneficiary, or else to add a subparagraph confirming the final distribution years applicable to benefits payable to a non-designated beneficiary. Without such modification, Prop. Reg. § 1.401(a)(9)-5(e)(1) either is simply erroneous and/or it can lead the public to believe that in some fashion a “10 year rule” overrides the “employee's life expectancy” payout period applicable to a non-designated beneficiary when the employee dies after the required beginning date.

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Appendix A: PLR 201021038

The following excerpts from private letter ruling 201021038 are included for the purpose of illustrating Treasury's prior position with respect to post-death reformation of a trust undertaken solely for the intended purpose of changing the federal tax treatment of the decedent's retirement plan benefits payable to the trust:

“Generally, the reformation of a trust instrument is not effective to change the tax consequences of a completed transaction. For example, in Estate of La Meres v. Commissioner, 98 T.C. 294 (1992), the trustees retroactively reformed a governing instrument solely for the purposes of qualifying the bequest for the estate tax charitable deduction. The Tax Court held that the retroactive reformation, undertaken solely for tax considerations, was not effective for federal tax purposes. In Estate of La Meres, the Tax Court stated: “This and other courts have generally disregarded the retroactive effect of State court decrees for Federal tax purposes. See Van Den Wymelenberg v. United States, 397 F.2d 443, 445 [22 AFTR 2d 6008] (7th Cir. 1968); Straight Trust v. Commissioner, 245 F.2d 327, 329-330 [51 AFTR 552] (8th Cir. 1957), affg. 24 T.C. 69 (1955); Estate of Nicholson v. Commissioner, 94 T.C. 666, 673 (1990); Fono v. Commissioner, 79 T.C. 680, 695 (1982), affd. without published opinion 749 F.2d 37 (9th Cir. 1984); American Nurseryman Publishing Co. v. Commissioner, 75 T.C. 271, 275 (1980), affd. without published opinion 673 F.2d 1333 (7th Cir. 1981).

“While we will look to local law in order to determine the nature of the interests provided under a trust document, we are not bound to give effect to a local court order which modifies the dispositive provisions of the document after respondent has acquired rights to tax revenues under its terms. As the Court of Appeals explained in Van Den Wymelenberg v. United States, supra at 445:

“Were the law otherwise there would exist considerable opportunity for “collusive” state court actions having the sole purpose of reducing federal tax liabilities. Furthermore, federal tax liabilities would remain unsettled for years after their assessment if state courts and private persons were empowered to retroactively affect the tax consequences of completed transactions and completed tax years. Estate of La Meres v. Commissioner, 98 T.C. at 311-312.

“Generally, the Service will treat a state court order as controlling with respect to a reformation if the reformation is specifically authorized by the Internal Revenue Code, such as under section 2055(e)(3), which allows the parties to reform a split interest charitable trust in order that the charitable interest will qualify for the charitable deduction as authorized under that statute. There is no applicable federal statute which authorizes Taxpayer C's or Taxpayer D's retroactive reformation of Trust T (or the later Restated Trust). Accordingly, absent specific authority in the Code or Regulations, the modification of the Restated Trust will not be recognized for federal tax purposes.

“In this instance, the efforts undertaken to modify the terms of the Restated Trust will not be given retroactive effect for federal tax purposes and the designated beneficiary of IRA X must be determined under the terms of the Restated Trust as it existed at the time of Taxpayer B's death.

“The Bypass Trust created under the terms of the Restated Trust was named as the Beneficiary of Taxpayer B's IRA X. Provided said trust meets the requirements set forth in section 1.401(a)(9)-4 of the Regulations, Q&A-5, it is permissible to “lookthrough” the trust in order to determine who, if anyone, is the designated beneficiary.

“In the situation described above, there was no identifiable designated beneficiary of IRA X at the time of Taxpayer B's death. The relevant terms of the Restated Trust, specifically the terms of the Bypass and related trusts, do not require or authorize either Taxpayer C or Taxpayer D to receive all amounts that are distributed from IRA X. The terms of the Restated Trust authorize only income and principal subject to a standard to be paid to or for the benefit of either Taxpayer C or Taxpayer D. The relevant Restated Trust terms also do not require that amounts distributed from IRA X, based on the life expectancy of Taxpayer C, be paid either to Taxpayer C, Taxpayer D, or any other natural person (human being). Relevant Restated Trust terms permit either Taxpayer C or Taxpayer D to appoint income or principal to descendants or charities. Because the terms of the Restated Trust allow for the accumulation of amounts distributed from IRA X, the remainder beneficiaries must be considered beneficiaries of IRA X for purposes of determining who, if anyone, was/is the designated beneficiary of IRA X. Charitable organizations are clearly authorized to be potential/contingent beneficiaries under relevant provisions of the Restated Trust instrument. However, only individuals may be designated beneficiaries for purposes of satisfying the requirements of Code section 401(a)(9) and related Income Tax Regulations. As a result, Taxpayer B is treated as having designated no beneficiary of his IRA X for purposes of section 401(a)(9) of the Code.

“Potential beneficiaries may be eliminated after the date of death of a taxpayer and prior to September 30 of the calendar year following the calendar year of death of a taxpayer for purposes of determining who is the designated beneficiary of a plan/IRA for purposes of Code section 401(a)(9). However, beneficiaries may not be added during this same period. Furthermore, a “”designated beneficiary” must be in existence as of an IRA holder's date of death. A designated beneficiary cannot be created after the date of death by means of a State Court Order even if said order is valid under State law.

“In this case, due to the language of relevant terms of the controlling Restated Trust document there is no designated beneficiary for purposes of a section 401(a)(9) analysis. Subsequent efforts to obtain a post-mortem judicial modification had the effect of creating a designated beneficiary after the death of the taxpayer. Said efforts will not be given effect for purposes of Code section 401(a)(9).”

[End of quotes from PLR 201021038]