Chevron Trust as Beneficiary of Traditional IRA or Retirement Plan

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As Chevron employees consider estate planning, they should understand the strategic benefit of designating a trust as beneficiary,' says Tyson Mavar, 'a financial advisor with the Retirement Group at Wealth Enhancement Group. This gives you possible tax advantages and a controlled environment for managing and dispersing assets as you wish,' he said.

Wesley Boudreaux, of the Retirement Group at Wealth Enhancement Group, tells Chevron employees to consider naming a trust as a beneficiary so you can control how your retirement assets are distributed and ensure your legacy reaches those you want.

In this article, we will discuss:

1. Benefits and Limits of Using Trusts as Beneficiaries. See how naming a trust as beneficiary for IRA or Chevron retirement plans offers tax advantages and creditor protection but also creates complications and potential restrictions - particularly regarding Required Minimum Distributions (RMDs).

2. Qualifications & Requirements for Trust Beneficiaries: Explore the exact IRS criteria that a trust must satisfy to be considered a designated beneficiary so its beneficiaries can take advantage of post-mortem distribution strategies.

3. Strategic Considerations & Tax Impacts: Understanding strategic estate planning considerations when creating a trust includes tax implications of recent tax reforms and the requirement that non-spouse beneficiaries withdraw assets within 10 years.

What Is It?

A trust can hold property for one or more people (the trust beneficiaries). One or more trustees administer the trust property and distribute trust income and/or principal to trust beneficiaries in accordance with the trust agreement. The trustee can be a person or a business such as a bank. Different types of trusts can accomplish different goals.

If your IRA custodian or plan administrator allows it, you may be able to name a trust beneficiary of your IRA or Chevron-sponsored retirement plan. If the trust meets certain requirements, its beneficiaries are treated as the designated beneficiaries of the IRA or retirement plan for purposes of computing required post-death distributions. You get additional tax deferral as a designated beneficiary.

Caution:

That discussion is not applicable to Roth IRAs. Exceptions include Roth IRA beneficiary designations.

Caution:

In some Chevron-sponsored qualified plans, your spouse must be the beneficiary unless you sign a waiver allowing you to name someone else. Naming a Trust as Beneficiary Usually Will Not Affect Required Minimum Distributions during Your Life.

Note:

For 2020 defined contribution plans (except Section 457 plans for tax-exempt organizations) and individual retirement accounts are exempt from required minimum distributions.

You must begin taking annual required minimum distributions (RMDs) from your traditional IRA and most Chevron-sponsored retirement plans (401(k), 403(b), 457(b), SEPs and SIMPLE plans by April 1 of the calendar year following the calendar year in which you turn 70½ (age 72 if you turn 70½ after 2019) (your 'required beginning date').

You can delay your first distribution from Chevron-sponsored retirement plans through April 1 of the calendar year following the calendar year you retire if you meet the following requirements: 1) you die after 70½ (or age 72 if you turn 70½ after 2019), 2) you still participate in Chevron's plan and 3) you own less than 5 percent of Chevron. Selection of a beneficiary typically has no impact on your RMDs calculation during your lifetime.

Essential exception:

your spouse is the only beneficiary you designate for the entire distribution year and is at least 10 years younger than you. That exception applies even if you name a trust as your solitary beneficiary and your spouse is more than 10 years younger than you is the trust's sole beneficiary.

When you name a trust as the beneficiary, its beneficiaries may be treated as IRA or plan beneficiaries for the purpose of required post-death distributions. That generally means the trust beneficiaries will use the life expectancy method to compute distributions after your death based on the life expectancy of the oldest trust beneficiary. See below for clarification.

Caution:

If a trust is a beneficiary, all trust beneficiaries are taken into account when determining the trust's eldest beneficiary. A beneficiary whose benefit is contingent on the death of another beneficiary before full distribution of the IRA or plan balance is the only exception.

Caution:

RMD calculation is complicated - as are tax and estate planning issues. Ask a tax professional for more details.

What Rules Must a Trust Beneficiary Follow to Qualify as a Designated Beneficiary?

A trust's underlying beneficiary must meet certain requirements to become a designated beneficiary of an IRA or retirement plan. The new IRS distribution rules allow beneficiaries of a trust to be designated beneficiaries only if four conditions are met timely:

Those beneficiaries must be identified as beneficiaries of the trust (via the trust deed) as of September 30 of the year following your death.

Caution:

The final IRS regulations forbid trust beneficiaries from using the 'separate account' rules under which each beneficiary would otherwise use his or her own life expectancy to calculate required post-death distributions. This might require separate trusts for each beneficiary.

Estate planning:

Consult a counsel.The trust must conform to state law. Unless there is a trust 'corpus' or principal not present, a trust which would be valid under state law is admissible.

That the trust must be irrevocable or (according to its clauses) become irrevocable upon the death of the IRA owner or Chevron plan participant is required.

The trust document, all amendments and a list of trust beneficiaries - contingent and remainder beneficiaries included - must be submitted by October 31 of the year following your death to the IRA custodian or Chevron plan administrator.

Caution:

There is an exception to the above deadline if your spouse is your only beneficiary of the trust and you wish to calculate lifetime RMDs based on your joint and survivor life expectancy. In this situation, trust documentation must be supplied prior to the start of life RMDs.

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Other than those two exceptions, no surviving spouse is considered the sole beneficiary of a trust if the trust can accumulate IRA or plan funds for the benefit of remainder beneficiaries during the surviving spouse's lifetime.

Caution:

Seek advice from an estate planning attorney on the above requirements as making an error may cost you dearly.

Benefits for Naming a Trust as Beneficiary.

The Beneficiary of a Trust Can Be thought of as the IRA or Chevron Retirement Plan Beneficiary.

Previously mentioned, once you name a trust as the beneficiary of your IRA or plan and meet certain other requirements, the beneficiaries of that trust can be treated as the beneficiaries of the IRA or plan. This is important because it lets you give the individual trust beneficiaries the same post-death options as if you named them directly as IRA or plan beneficiaries. They will generally calculate post-death distributions using the life expectancy method if the IRA custodian or plan administrator allows it, and may extend distributions over years.

An extended post-death payout period lowers beneficiaries' income tax liability and extends tax-deferred growth of the IRA or plan. A trust designation as the IRA or plan beneficiary will limit postmortem distribution only if you want to provide for your surviving spouse. This is where directly naming your spouse as IRA or plan beneficiary is generally better for income tax planning (but not necessarily death tax planning) than naming a trust in which your spouse is the beneficiary.

Caution:

If life expectancy is used, post-death distributions must begin no later than December 31 of the year following your death and must be based on the single life expectancy of the trust's oldest beneficiary (the beneficiary with the shortest life expectancy).

Caution:

In some cases, you could be treated as if you died without a beneficiary because the trust you named as the beneficiary of your IRA or plan is not properly structured. This would often shorten the payout period for post-death distributions.

For decedents dying after 2019, the life expectancy method may only be used if the designated beneficiary is eligible. A designated beneficiary is the spouse or minor child of the IRA owner or plan participant, a disabled or chronically ill individual, or any other individual no older than ten years older than the IRA owner or plan participant (such as a sibling). For some trusts for disabled or chronically ailing beneficiaries, special rules apply.

Naming a Trust May Let You Keep Control After Your Death.

You can usually let the person or persons you designate as direct beneficiaries of your IRA or Chevron retirement plan spend the inherited funds as you see fit after your death. This could include taking all the money out at once and paying a huge income tax bill. You can still control some of the money after your death by establishing a trust for your beneficiaries and then making that trust the direct beneficiary of your IRA or plan. You still pay your beneficiaries back the IRA or plan money when you die, but in accordance with the terms of the trust document. This typically lets you control when and how much distributions occur so your children or other trust beneficiaries do not waste the money.

Caution:

The trade-off to getting tax benefits might be following IRS rules on distributions rather than writing your own distribution provisions for your trust. Also, income kept in a trust and not distributed to beneficiaries may be heavily taxed.

Assets in a Trust Might Be Safe from Creditors.

IRA or Chevron retirement plan assets given to a properly drafted trust for your intended beneficiaries may be protected against their creditors - at least during the life of the trust. In fact, leaving retirement assets to your beneficiaries via trust typically provides greater creditor protection than leaving retirement assets directly to your beneficiaries. If any of your beneficiaries has large unsecured obligations, this can be a huge benefit. Seek advice from an estate planning lawyer and determine which type of trust provides the greatest creditor protection. A QTIP Trust for Your Spouse May Be Useful

The term QTIP is an acronym for Qualified Terminable Interest Property and this is a type of marital trust that allows you to provide for your surviving spouse during his or her lifetime, to defer estate tax at your death, and to determine final distribution of the assets. If you select this kind of trust as the beneficiary of some or all of your retirement assets, your spouse will receive distributions during his or her lifetime and the balance may be left to your children and/or other beneficiaries if the account is not depleted. The Chevron retirement plan assets left to this form of trust will not be taxed as estate tax at your death; however, the remaining assets will be included in your spouse’s taxable estate at the time of his or her death. Please consult with an estate planning attorney for more information.

Caution:

Your spouse must be a U.S. citizen to use a QTIP. If your spouse is not a citizen of the United States, a qualified domestic trust (QDOT) may be appropriate. Unlike a QTIP, in a QDOT, all trust income is distributed to your surviving spouse during his or her lifetime. However, unlike a QTIP, where the remaining trust assets are included in the surviving spouse’s estate at his or her death and are subject to estate tax at his or her death, the assets will be taxed in the first spouse’s estate at the time of the death of the surviving spouse or at the time of withdrawal of principal. Please consult with an estate planning attorney for further information.

A Credit Shelter Trust May Be Beneficial

There are several types of trusts and, in some cases, you may wish to specify a particular type of trust for the distribution of some or all of your IRA or Chevron retirement plan assets. This type of trust is also called a “credit shelter trust,” a “B trust,” a “bypass trust,” and an “exemption trust.” Normally the size of the trust is tied to the applicable exclusion amount. The typical objective of this type of trust is to allow your spouse (or other trust beneficiaries) to enjoy the benefits of the assets placed in the trust, yet have those assets out of the estate for estate tax purposes at your death and also at the death of your surviving spouse. Please consult with an estate planning attorney for further information.

Caution:

If too much or all of your estate is put into this kind of trust as the applicable exclusion amount increases, your surviving spouse may not be adequately provided for unless you include certain provisions in the trust instrument.

Caution:

Because this form of trust may be exempt from estate tax forever, you may not want to fund it with retirement assets that are subject to income tax. If possible, other assets may be more suitable for funding the trust.

Caution:

This may not be the right approach for all married couples. A 2001 tax law replaced the state death credit with a deduction starting in 2005. Therefore, several of the jurisdictions that used to impose death tax equal to the credit decoupled their tax systems and levied another death tax. Many of these jurisdictions have a lower exemption than the federal exemption. This may put some couples at risk of higher state death taxes. Please consult with your financial advisor for more information.

In 2011 and later years, a deceased spouse’s baseline exclusion amount is transferrable to the surviving spouse. The exemption of the exclusion can help protect against the exclusion's loss of the first spouse to die and may avoid or circumvent the need for a credit shelter trust.

Disadvantages of Naming a Trust as Beneficiary

Naming a Trust for The Benefit of Your Spouse May Limit Post-Death Options

If you wish to provide for your spouse after your death, you can set up a trust for your spouse and then select that trust as the direct beneficiary of your IRA or Chevron retirement plan. Your spouse could then be considered a designated beneficiary of the IRA or the plan assuming all of the aforementioned conditions are met. However, before choosing this beneficiary, there is one thing you should do – think about it and talk to a professional. However, the use of a trust may limit or eliminate certain post-death options that would otherwise be available to your spouse if he or she were the named beneficiary of the IRA or plan.

For example, under the minimum required distribution rules, your spouse would lose the ability to stretch out an inherited IRA as his or her own account (even if your spouse was the sole beneficiary of the trust). If you want your spouse to ultimately receive your IRA or plan assets, the best way to do this is to explicitly nominate your spouse as the beneficiary of these assets (unless there is a certain reason to use a trust instead). In terms of post-death distribution planning, selecting your spouse as the primary beneficiary affords the most choices and flexibility.

A non-spouse beneficiary cannot roll over inherited funds into his or her own IRA or plan, but a non-spouse beneficiary may be able to receive certain death benefits from an Chevron-sponsored retirement plan and roll those into a traditional or Roth inherited IRA.

Trusts Can Be Complicated and Costly to Set Up

Establishing a trust can be costly, and maintaining it annually can be time-consuming and complicated. Therefore, against the background of the assumed benefits of using a trust as the beneficiary of an IRA or an Chevron retirement plan, the cost of establishing and effectively administering the trust must be taken into consideration. Furthermore, if the trust is not properly drafted, your IRA or plan may be treated as if you died without nominating a beneficiary.

This would probably reduce the time that has been stipulated for the minimum distributions to be made after the death of the beneficiary. The trust must be able to provide for the distribution of trust income in relation to estate tax planning, and the provisions of your trust must also comply with the laws of the place where the trust was established. Furthermore, funding a trust that is exempt from death tax (for instance, a credit shelter trust) with assets that are inclined to have an income tax liability reduces the worth of the trust.

Also, depending on the trust's purpose and other factors, a trust may not be beneficial. Using a trust for estate tax purposes may or may not be appropriate or not, depending on the size of your estate and the estate tax exemption in the year you die. Please seek the advice of an attorney who specializes in estate planning.

Added Fact:

As of January 1, 2020, there is a significant change affecting trust beneficiaries of traditional IRAs or retirement plans with respect to taxes. New tax reforms have introduced the following provision: Ten years after the death of the original account owner, most non-spouse trust beneficiaries must take distribution of the entire IRA or retirement plan balance, which may result in higher taxes for the beneficiaries. However, there is an exception for eligible designated beneficiaries, including a surviving spouse, minor children, disabled individuals, and individuals not more than 10 years younger than the account owner. These eligible designated beneficiaries also have the opportunity to use the life expectancy method to determine post-death distributions and, therefore, may be able to do so more efficiently. These new rules affect Chevron employees and retirees and their heirs, so it is crucial to understand their implications and discuss them with a tax professional or estate planning attorney. (Source: IRS Publication 590-B, March 8, 2021, updated.)

Added Analogy:

Suppose your retirement savings are a treasure chest that you want to protect and leave to your loved ones. In the same way, a trust can protect your valuable treasures, it can also protect your traditional IRA or retirement plan assets. You can control how the treasure is distributed and provide for your beneficiaries after you die by making the trust the beneficiary. Look at the trust as a vault with different compartments for each beneficiary, so that they get their share and do not misuse it. Just as a vaultsecures valuable assets from outside threats, a trust protects your retirement savings from potential creditors and can offer extra tax benefits as well. However, it is important that the trust is set up correctly, like by a professional locksmith, in order to meet the legal requirements. With a well-crafted trust as your retirement plan's beneficiary, you can maintain your legacy and provide financial security to your loved ones for many years.

Sources:

1. Investopedia. 'Naming a Trust as Beneficiary of a Retirement Account: Pros and Cons.' Investopedia, 2022. 

2. Fiduciary Trust. 'Naming a Trust as IRA Beneficiary: Key Considerations.' Fiduciary Trust, 2022. 

3. Wealth.com. 'What to Know About Naming a Trust as a Beneficiary of Your Retirement Account.' Wealth, 2022. 

4. Cerity Partners. 'Trusts as IRA Beneficiaries.' Cerity Partners, 2022. 

5. Accounting Insights. 'Pros and Cons of Naming a Trust as an IRA Beneficiary.' Accounting Insights, 2022.