Individual Offers Comments on Proposed RMD Regs

May 9, 2022

Comments to Proposed Treasury Regulations for Required Minimum Distributions
(Agency/Docket Number REG-105954-20)

Citation Reference. All citations are to the Federal Register, 87 FR 10504, et. seq. Internal Revenue Service document (REG-105954-20) contains the text of the Proposed Regulations and “Explanation of Provisions.” For convenience the Explanation of Provisions will be referred to as the “Preamble.”

Introduction. My comments focus on trusts as beneficiaries of defined contribution plans, including individual retirement accounts (IRAs). Overall, the Proposed Regulations and Preamble significantly clarify rules in the existing (final treasury regulations) to assess which trust beneficiaries are treated as “designated” (count) in determining the applicable denominator (formerly the applicable distribution period) and those who may be “disregarded” (not counted).

The Proposed Regulations achieve this clarity by creating express classes of beneficiaries who either are treated as designated or disregarded. However, for an accumulation trust whose terms allow retention of a portion of a plan distribution, questions may still exist as to the scope of the contingencies differentiating the various classes.

The text of the Proposed Regulations and corresponding provisions in the Preamble vary in describing the contingencies and may supply fertile ground for private letter ruling requests. The relevant issue concerns contingencies other than death that could transform a disregarded trust beneficiary into a designated one. This issue has two overlapping components:

Discussion. The starting point is the actual text of the Proposed Regulations dealing with “Trust beneficiaries treated as beneficiaries of the employee-.” §1.401(a(9)-4(f)(3) at 87 FR 10530, third column. (Italics in original).

(i) In general. Subject to the rules of paragraphs (f)(3)(ii) and (iii) of this section, the following beneficiaries of a see-through trust are treated as having been designated as beneficiaries of the employee under the plan.¹

Paragraphs (f)(3)(i)(A) and (B) establish the classes “A” and B”, respectively, of trust beneficiaries treated as having been designated. They are summarized as follows:

Class A Trust Beneficiary. A trust beneficiary who could receive trust distributions “representing the trust's interest in the employee's plan that are neither contingent upon nor delayed until, the death of another trust beneficiary who did not predecease (and is not treated as having predeceased) the employee.”

Class B Trust Beneficiary. An accumulation trust beneficiary who could receive trust distributions “representing the employee's interest in the plan that were not distributed” to Class A Trust Beneficiaries.

The Proposed Regulations in paragraph (f)(3)(ii)(A) add a third class of trust beneficiaries who are initially disregarded in the determination analysis.

Class C Trust Beneficiary. Any beneficiary of an accumulation trust who could receive trust distributions representing the employee's interest in the plan solely due to a Class B Trust Beneficiary's death shall not be “treated as having been designated [is disregarded] as a beneficiary of the employee under the plan.” However, the Proposed Regulations create two exceptions to this rule. First, the Class C Trust Beneficiary is treated as designated if a Class B Trust Beneficiary predeceases or is “treated as having predeceased” the employee. Prop. Reg. §1.401(a)-4(f)(3)(ii)(A)(1). Second, if the terms of the trust describe a Class B Trust Beneficiary who also falls into Class A. Prop. Reg.§1.401(a)(9)-4(f)(3)(ii)(A)(2).

The corresponding text in the Preamble tracks the Proposed Regulations' language defining the three classes. However, a material difference may exist when a Class B Trust Beneficiary holds simultaneous standing as a Class A Beneficiary under paragraph (f)(3)(ii)(A)(2).

The Proposed Regulations only state that the disregarded trust beneficiary rule “does not apply” if the Class B Trust Beneficiary also lies within Class A (paragraph (f)(3)(ii)(A)(2)). The Preamble at 87 FR 10511 employs different language in describing when the status of a disregarded Class C Trust Beneficiary changes. For example, a charity, initially a Class C Trust Beneficiary, would be treated as designated if a current Class B Trust Beneficiary-could receive amounts “not subject to any contingencies or contingent upon an event other than the death of the surviving spouse [the Class A beneficiary] (such as the surviving spouse's remarriage).” (Emphasis added).

The bolded language raises a concern about a non-death contingency common to many trusts. The governing instrument authorizes a trustee to make discretionary distributions of principal or income to a beneficiary conditioned on a defined standard. For example, the trustee may distribute trust principal for medical emergencies or more commonly seen, for health, education, maintenance and support. Would this non-death contingency confer a Class B Trust Beneficiary with Class A status and consequently reframe a Class C Trust Beneficiary as designated? A potential distribution may include amounts representing the deceased employee's interest in the plan.

To illustrate, the employee or creator of a defined contribution account establishes a postmortem trust for Beneficiary One (child). This beneficiary receives all the trust's income at least annually. During Beneficiary One's life, the trustee at its sole discretion may distribute principal for health, education, maintenance and support to Beneficiary Two. Beneficiary One's child. At Beneficiary One's death, Beneficiary Two will inherit the remaining trust assets. In the event Beneficiary Two predeceases Beneficiary One, the trust terminates with full distribution to a charity.

Per the Preamble, Beneficiary Two could receive amounts contingent on an event other than Beneficiary One's death. Would Beneficiary Two then gain Class A Trust beneficiary status with the charity promoted to Class B?

The fair and reasonable answer should be “NO” as satisfying the contingency rests solely with the trustee and not with Beneficiary Two. The text of the Preamble and the Proposed Regulations should parallel each other and include one sentence eliminating any inference that the trustee's discretion to distribute amounts to a Class B Trust Beneficiary moves it up to Class A status under Prop. Reg. §1.401(a)(9)-4(f)(3)(ii)(A)(2). Consequently, a Class C trust beneficiary is frozen at this level.

Related Comments

Possible Typographical Error in Example 2 under Prop. Reg. §1.401(a)(9)-4(f)(6)(ii). At 87 FR 10532 (middle column) the paragraph labeled “(C) Analysis,” (italics in original) contains the following text with a possible typographical error in bold:

Pursuant to paragraph (f)(2)(iii)(A) of this section, because Charity Z's entitlement to amounts in the trust is based on the death of a beneficiary described in paragraph (f)(3)(i)(B) of this section, Charity Z is disregarded as a beneficiary of the employee.

Should the correct citation be “(f)(3)(ii)(A)”, the paragraph in the Proposed Regulations that defines a disregarded beneficiary? Moreover, “paragraph “(f)(2)(iii)(A)” does not seem to exist. See 87 FR at 10530 ((f)(2) Trust Requirements.).

Suggestion: Change “Secondary” to “Residual” in Prop. Reg. §1.401(a)(9)-4(f)(3)(ii)((A). Example 2 of the Proposed Regulations uses the phrase “residual beneficiary” to describe a Class B Trust Beneficiary. See Prop. Reg. §1.401(a)(9)-4(f)(6)(ii) at 87 FR 10532. However, the text of the applicable Proposed Regulation, paragraph (f)(3)(ii)(A), employs the phrase “secondary beneficiary” in the heading to this paragraph. For consistency, suggest changing “Secondary” to “Residual.”

For its part, the Preamble uses the phrase “residual interest.” See 87 FR at 10510 (third column, second full paragraph).

Regards,

David S. Sennett, former risk manager at Wells Fargo Bank