Take-Away: Despite many technical rules with regard to inherited IRAs and IRA rollovers, the IRS has a long accommodative history that enables a spousal rollover even when the surviving spouse is not named as the beneficiary of the decedent spouse’s IRA. That cooperative spirit was again on display in a recent Private Letter Ruling.

Private Letter Ruling 202034002 (May 21, 2020)

  • Facts: A joint trust was formed by husband and wife in a community property state. The husband died owning an IRA. His IRA was made payable to a the joint trust. The husband’s IRA was community property. The surviving spouse was the sole trustee of the trust after her husband’s death. The trust instrument provided that the survivor’s community property interest, including her interest in her late husband’s IRA, was to be allocated, along with her own separate property interests in that joint trust, to a subtrust. The subtrust provided that during the survivor’s lifetime she was entitled to receive as much of the income or principal as she requests, for any reason or purpose. The survivor intends to distribute that interest in the IRA that her late husband owned, from the subtrust, to herself in order to complete the rollover of the assets into one or more IRAs in her name.
  • Result: The IRS’ private letter ruling found that the survivor will be treated as having acquired her deceased husband’s one-half community property interest in his IRA that was used to fund the trust, directly from her late husband and not from the trust. [IRC 408(d)(3)(A)(i).]
  • Condition: The only condition imposed by the IRS was that the survivor’s rollover occur no later than 60 days after the proceeds of the late husband’s IRA are distributed.
  • Reasoning: Upon the husband’s death, his IRA passed to the trust. Under the terms of the trust, the survivor’s community property interest in the husband’s IRA, i.e. one-half, is allocated to the subtrust. Under the subtrust, the survivor, as trustee and sole beneficiary of the subtrust, was entitled to receive all of the income and principal of the assets held in the subtrust. For purposes of applying the rollover rule [IRC 408(d)(3)(A)] to the husband’s IRA, the survivor is effectively “ the individual for whose benefit the IRA is maintained.” Consequently, the survivor was entitled to rollover the decedent’s IRA assets into an IRA that was established and maintained in the survivor’s own name.
  • Income in Respect of a Decedent: The rollover of the one-half community property interest in the late husband’s IRA to one or more IRAs created by the survivor were not transfers causing immediate income taxation of the distribution. [IRC 691(a)(2.)] IRC 691(a)(2) in general provides that if a right to receive an amount is transferred by the estate of the decedent or a person who received such a right by reason of death of the decedent by bequest, devise or inheritance from the decedent, that amount must be included in the gross income of the estate or that person for the taxable period in which the transfer occurs the fair market value  of such right at the time of the transfer, i.e. it is taxable as income in respect of a decedent. In this situation, the survivor must include in her gross income the amounts of income in respect of a decedent (IRD) from the late husband’s IRA only when distributions are actually received by her from the IRAs established and maintained by her in her own name. [IRC 691(a)(1)(C).]

Treasury Regulations:  In many of the Private Letter Rulings in which the IRS permitted a surviving spouse to rollover retirement assets that were payable to an estate or a trust, it recites as its authority to permit the rollover the Preamble to the Final Regulations. That Preamble provides that: “a surviving spouse who actually receives distributions from an IRA is permitted to roll that distribution over…even if the spouse is not the sole beneficiary….A rollover may be accomplished even if IRA assets pass through either a trust or an estate.”  [PLRs 2004-06048; 2004-05017] Perhaps a better approach to provide guidance to surviving spouses was in a 2009 Private Letter Ruling, where the IRS held. While benefits may be rolled over by a surviving spouse only if the benefits pass to the spouse from the decedent, and that the general rule is that benefits that pass to the spouse through an estate or a trust are not deemed to pass to the spouse from the decedent, the general rule will not apply in a case where the surviving spouse is the sole trustee of the decedent’s trust and has the sole authority and discretion under trust language to pay the IRA proceeds to herself.”  [Private Letter Ruling 2009-34046.]

Conclusion: While not every IRA that is made payable to the deceased IRA owner’s trust will qualify for rollover treatment by the surviving spouse-trust-beneficiary, there is a long line of Private Letter  Rulings to assist the surviving spouse to find a way to rollover the decedent’s interest in his or her IRA to the survivor’s own IRA, often entailing disclaimers by other trust beneficiaries. While the IRS is pretty cooperative to find a rollover solution for a surviving spouse, that cooperation comes with the price of a minimum $10,000 Private Letter Ruling user fee.