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Pension Plans
In General
Public Pensions
Procedures For Funding Public Pensions
Pre-Retirement
Post-Retirement
Private Pensions
IMPORTANT NOTICE TO USERS:
The information contained in this legal bulletin is general in nature and
does
not constitute legal advice. Non-attorneys should consult
with a qualified estate planning attorney regarding any trust funding matter.
Issues of state law may contradict any information contained herein.
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site should not be relied upon without first confirming with a qualified
attorney that the legal requirements in a particular state are satisfied.
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In
General: A pension is funded by changing the beneficiary
designation to name the trust as either the primary or contingent
beneficiary. Ownership of a pension can never be changed.
The term
"Pension" is often confused with a other types qualified retirement
plans. Qualified retirement plans such as IRAs, 401(k)s, 403(b)s,
and the like are known as "defined contribution" plans. Funding
these types of plans is discussed in the technical bulletin for
"Retirement Plans".
Like IRAs, 401(k)s,
and 403(b)s, pensions are qualified retirement plan benefits provided by an
employer. Pension plans are considered "defined benefit" retirement plans and
have different funding considerations from IRAs, 401(k)s, and 403(b)s.
Pension benefits
are established in the plan, usually based on a formula, and are provided by the
employer. The employer is required to pay the benefit from the pension
trust fund or its own fund if the trust fund is inadequate. A variation on
this type of plan is the Money Purchase Plan. In a Money Purchase Plan,
the employer contributes an amount of money annually and those funds are used to
purchase a small annuity each year. When the employee retires, the various
annuities are combined together and added to calculate the employee's monthly
benefit amount in retirement. Because a Money Purchase Plan
is similar to a private pension, it is funded according to the private
pension guidelines listed later in this technical bulletin.
The
procedures followed in funding pension plans will vary based on whether
the employer is a private or public entity, and in some circumstances,
whether the employee has made an irrevocable election as to how they
want to receive their pension benefits.
CAUTION:
Because of the legal intricacies of funding both public and private
pensions, we strongly recommend that you seek customized counsel from
your estate planning attorney.
Public Pensions:
When an employee works for a governmental entity, their pension is
considered a public pension and a completely different set of rules
apply when funding this type of a pension. Some examples of
governmental entities would include both federal, state and local
governmental offices and agencies, the U.S. post service, NASA, state
government officials, police, firefighters, public school employees and
teachers, and the like.
Public
pensions typically become vested (guaranteed) to the employee after a
period of time (i.e. five years). A public pension can be funded at any
time regardless of whether the employee has begun to receive benefits.
Procedures For Funding Public Pensions: The first step in funding a
public pension is to determine whether benefits have commenced (i.e. has
the employee retired). Public pensions have different benefits
that are extended based on whether the employee is retired.
Pre-Retirement:
When an employee is covered by a public pension, a decision will need to
be made as to whether the employee's trust or the spouse should be named
as the primary beneficiary. Many public pensions contain
restrictions that require the employee's spouse be named as the primary
beneficiary.
CAUTION: It is not uncommon for
public pensions that permit a trust to be named as the primary
beneficiary to contain provisions that result in a forfeiture of
ancillary benefits if the spouse or family member is not named as the
primary beneficiary. These ancillary benefits can include loss of
medical, dental, and prescription drug insurance coverage, and the like.
If there
are no minor or dependent children who would be entitled to benefits
under the pension, the preferred approach would be to name the spouse as
the primary beneficiary and the employee's trust as the contingent
beneficiary. This will enable the spouse to receive the full
benefits provided under the pension. If this approach is adopted,
a valid funding power of attorney should be in place to provide a means
of funding the pension payments in the event of the spouse's disability.
If there
are minor children, naming the spouse as the primary beneficiary is
still the recommended approach; however, who to name as the contingent
beneficiary is a more difficult issue. A potential risk is
involved if minor children are named as contingent beneficiaries.
A "probate guardianship" may need to be initiated to manage and control
the pension payments on behalf of minor children. However, the
full benefits under the pension would still be available.
NOTE:
Thus, the client with minor children will need to decide
whether they are more concerned with avoiding the probate or the loss of
ancillary benefits under the pension plan. The answer to this
question will determine who will be named as the contingent beneficiary.
CAUTION: Because of the complex
variables to consider when funding a public pension prior to retirement,
we strongly recommend that you seek customized counsel from your estate
planning attorney.
Post-Retirement:
Once an employee retires, they will need to make an election as to how
they want to receive their pension benefits in a single life pay-out or
joint life pay-out. If a single life pay-out option is selected, a
death benefit will be provided. The death benefits under the
single life pay-out option can be funded by naming the employee's trust
as the primary beneficiary and the spouse as the contingent
beneficiary.
NOTE:
Naming a trust as the primary beneficiary of the death benefits under a
single life pay-out option will generally not result in any loss of
ancillary benefits to the employee or the employee's spouse. Also
note that if a joint life pay-out option is selected, no death benefits
will be extended and the pension is un-fundable. However, as a
practical matter, it would be prudent to have an estate planning
attorney review a copy of the pension plan agreement to verify that no
penalty will result from naming a trust as a primary beneficiary.
CAUTION: Because of the complex
variables to consider when funding a public pension post retirement, we
strongly recommend that you seek customized counsel from your estate
planning attorney.
Private Pensions:
A private pension is offered by private employers. It typically
provides the employee the option of receiving a monthly benefit for the
life of the employee, or a smaller benefit for the joint lives of the
employee and the employee's spouse. Regardless of which type of
payment option is selected by the employee, the pension benefits will
terminate on the death of the employee, or on the death of the employee
and their spouse, depending upon what payment option the employee
selected. When a private pension terminates, there is no vested
balance in the plan and no benefits are paid to any surviving
beneficiary.
On its face,
it would appear that there would be little value in naming a trust as a
beneficiary of a private pension. However, it may still be
advisable to name the employee's trust as the beneficiary in order to
maintain control of the pension benefits in the event of the employee's
disability.
NOTE: Not
all private pensions will allow a trust to be named as a beneficiary.
Thus, it will be important to make certain that a valid funding power of
attorney is in place to provide a means for funding the pension proceeds
in the event of the employee's disability.
If the
private pension employee has already started receiving benefits from the
pension, the beneficiary designation cannot be changed and the pension
is un-fundable.
CAUTION: Because of the complex issues
to consider when funding a private pension, we strongly recommend that
you seek customized counsel from your estate planning attorney.
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