IRC Section 72 manages income tax on pension contracts. Article 72 (u) (1) of the IRC treats it as if it were received by a non-natural owner and imposes on the pension contractual income owned by a "non-natural" person. However, if a non-natural person strictly holds a contract as an "agent" of a natural person, the contractual income is not treated as such. Unfortunately, the Internal Revenue Code and regulations do not explain when agency arrangements exist.
In 2010, the irrevocable trust reached the highest income tax rate (35%) at taxable income of $ 11,200. In comparison, married couple and joint taxpayers have not reached 35% income tax rate up to $ 357,700 taxable income! Therefore wealthy people tend to invest in trusts for growth rather than income. This is especially true for credit shelter trusts (also called family trusts and surplus trusts) that require surviving spouse needs and current income, but for trust benefits for children and grandchildren, I would like to raise without real estate tax. When using a pension contract as a trust investment, an important question to avoid the current income tax is to allow non-natural trusts to become agents of natural person beneficiaries.
Single beneficiary trust
At PLRs 9204010 and 9204014, the IRS determined that the trust is acting as a natural person's agent when the trust purchased the pension for the sole beneficiary of the trust. Under the terms of the trust, the trustee has a discretionary right to pay income and will to the beneficiary until the age of 40, at which time the consignment contract (including the pension contract) will be allocated to the beneficiary It was. The beneficiary was a valuable owner of the pension contract, as the IRS concluded that the owner of the pension contract of the trustee was nominal compared to that of the beneficiary. PLRs did not mention what would be governing if deceased persons and beneficiary trusts benefitted before age 40 were handed over to the contingent beneficiaries.
In PLRs 200449011, 2004449013, 2004449014, 2004449015, 2004449016 and 200449017 with nearly the same facts, the IRS says that when the trust purchases a pension contract for the sole benefit of the grantor, he is working as a natural person's agent It was judged. My grandchild's grandson. In these judgments, pension contracts were to be distributed in kind. However, the PLR did not mention what tax results would be under Article 72 of the IRC if the distribution from the trust was cash.
Multiple beneficiary trust
In PLR 9752035, the IRS decided that the trust is acting as a natural person's agent when purchasing a pension contract. PLR 9752035 had a life income beneficiary (also a pensioner) and the rest. Although the outcome of PLR 9752035 was favorable, it does not provide guidance most of when the trust is working as an agent of a natural person.
Trust distribution
Article 72 (e) (4) (C) of IRC partly stipulates that if an individual transfers a pension contract without adequate and appropriate consideration, it is taxed at an amount exceeding the transfer value of the contract I will. However, in PLR 199905015 and PLR 9204014, IRC Article 72 (e) (4) (C) is not applicable if the pension has been transferred from the trust to the beneficiary in kind. The trust beneficiary will simply become the owner of the pension contract, inherit the cost base, and will continue to be subject to tax payment.
Problems with Other Section 72
Required distribution . IRC section 72 (s) specifies the necessary distribution rules that the pension contract must fulfill at the time of the death of the holder of the pension contract. A summary of these rules is as follows.
- If the holder dies after the pension start date, the remaining share must be at least distributed as fast as the method of dividend used at the death date of the holder.
- Normally, if the holder dies before the start date of the pension, all holders must be distributed within five years of the death of the owner.
- As an exception to the rule of five years, designated beneficiaries can distribute income beyond their average life within a year from the death of the holder. Designated beneficiaries are individuals whose holders have named beneficiaries of the pension contract. Trusts are not eligible for designated beneficiaries.
- If the spouse he or she has is the designated beneficiary, the surviving spouse can continue the retirement agreement as if it were hers.
Under the trust owned pension contract, the pensioner is defined as the owner. Therefore, it is the pensioner 's death that causes the necessary allocation under IRC section 72 (s) (6). As usual, if the trust is beneficial to the contract, there will be a rule of five years. Because designated beneficiaries must be individuals, it seems that opportunities for refund of life expectancy can not be used. However, under IRC section 401 (a) (9) which governs qualified retirement plans and distribution from the IRA, beneficiaries of properly designed trusts with beneficiary trusts ("See-Through Trust" by IRS Is designated as the beneficiary of the plan or IRA to be processed. Does the same applies to pensioners naming Cisco trusts as beneficiaries for trust owned pensions? Unfortunately, this issue has not yet been addressed by courts or IRS.
What if the irrevocable trust is a "licensor" trust for income tax purposes and what happens if the grantor and pensioner (usually trust beneficiary) are not the same person? Definitely, the concessor should be treated as the owner of the contract. If so, it is the death of the grantor (not the pensioner) that determines when the contribution from the contract should be made.
Penalty for premature birth. Article 72 (q) of IRC imposes a 10% penalty tax on the early dividend payment contract. In general, penalty taxes will be applied to dividends to "taxpayers" before reaching 59 years of age. If the pension contract is owned by the trust, who is the "taxpayer" for purposes of IRC Article 72 (q)?
As mentioned above, the pensioner is treated as the owner of the trust property for the purpose of distribution necessary for the owner's death. Therefore, it is reasonable to look at the pensioner for the purpose of applying an exception 59-1 / 2 of the minor distribution fine. Assuming that the age of the pensioner is not an appropriate scale, it must be a beneficiary or a beneficiary. age. If so, should the applicable exceptions be beneficiaries over the age of 59? Furthermore, if the irrevocable trust is a grantor's trust, is there a penalty based on the age of the grantor? Unfortunately, we remain unanswered for each of these questions. To avoid these problems you need to consider distributing contracts to beneficiaries completely before starting withdrawals.
Design of trust
The PLR above is binding only to the taxpayer who requested the judgment and suggests that a pension contract that was not guilty of an irrevocable trust or a credit shelter trust can provide a tax late. However, to ensure that both the trust and pension contracts are properly structured, we must pay sufficient attention. When setting up a trust owned pension, consider the following factors.
- Trust agreements do not require investing assets in income-producing assets.
- Trust contracts should clearly allow the trustee to invest in pension contracts.
- In trust agreement, in order to avoid harmful result of income tax, it is necessary to distribute spot tenancy contract concretely. If a separate contract has been established in which each beneficiary is designated as a pension trustee for the respective contract, the actual distribution of the contract to the paid beneficiary must be a tax-free event.
- In order to avoid gift taxes, trusts need to purchase pension contracts directly.
- The trust must be the owner and beneficiary of the pension contract.
- If the grantor of the trust is named a pensioner, there is a high probability that full or taxable contract liquidation will be made within five years due to his or her death.
- If the pensioner dies while the pension contract is still being trusted, the contract is likely to be liquidated after five years. Therefore, it is necessary to consider distributing pension contracts to beneficiaries before they die. By doing so, the beneficiary - pension beneficiary can continue to enjoy all the benefits and warranties of the contract as new owner and newly designate the designated beneficiary.
- If possible, avoid 10% early distribution penalty.
- The holder shall not change. Otherwise, the contract must be liquid within 5 years.
Although the trust property pension is accompanied by considerable complexity and uncertainty, it is very beneficial. This is especially true for credit shelter trusts, it is possible to inherit the inheritance, not the income tax bill.
This article can not be used for the protection of fine.
EmoticonEmoticon