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George F. Bearup, J.D. Senior Legal Trust Advisor

17-Aug-18

IRA Payable to Joint Trust – Rollover Permitted by Surviving Spouse

Take-Away: An IRA that was made payable to the trustee of a Joint Trust, which became irrevocable on the death of the IRA owner, was nonetheless permitted to be rolled out of the Joint Trust and into a rollover IRA by the surviving spouse. As a result, the IRA was not treated as an inherited IRA with immediate required minimum distributions by the surviving spouse.

Private Letter Ruling 201831004, issued August 3, 2018. IRS Index Number: 408 00-00

Background:  Basic facts were involved in this private letter ruling. Husband and wife established a Joint Trust, pooling their community property. On the IRA owner’s death his surviving spouse became trustee of the Joint Trust. The IRA owner had his IRA made payable to the Joint Trust on his death. As such, on the husband’s death, the IRA became an asset of the Joint Trust. The instrument directed that the IRA assets were to be allocated to the ‘Survivor’s Trust’ that was established under the Joint Trust. The surviving spouse was named as the sole income and principal beneficiary of the Survivor’s Trust. The surviving spouse had the right to all income for life from the Survivor’s Trust, along with the right to receive principal from the Survivor’s Trust for her health, support, maintenance, comfort and happiness, at a minimum, to continue her accustomed manner of living. The Survivor’s Trust also give to the surviving spouse the right to appoint any or all of the Survivor’s Trust property, including to herself. The surviving spouse exercised her general power of appointment and appointed all of the IRA assets from the Survivor’s Trust to a non-IRA account in her name alone. Then,  within 60 days,  the surviving spouse distributed the assets in the non-IRA account to a rollover IRA in her name alone. The surviving spouse’s concern was whether her husband’s IRA had to be treated as an inherited IRA which would require her to begin to take required minimum distributions over her life expectancy beginning within the year after her husband’s death.

IRS’s Approval of the IRA Rollover:  The IRS provided several favorable rulings to the surviving spouse’s requests for rulings.

  1. The surviving spouse was treated as the payee or distribute of her deceased husband’s IRA (not the Joint Trust.)
  2. The deceased husband’s IRA was not be treated as an inherited IRA by the surviving spouse. [IRC 408(d)(3).]
    • IRC 408(d)(1) provides as the general rule that a distribution from an IRA is to be included in gross income.
    • But there is an exception to this general rule of taxation for distributions from IRAs for rollover contributions that meet the requirement of IRC 408(d)(3)(A) and IRC 408 (d)(3)(B).
  1. The surviving spouse’s rollover of the assets from the deceased husband’s IRA into a rollover IRA in her name was treated as a valid rollover IRA even though she was not named as the IRA’s primary beneficiary. [IRC 408(d)(3).]
  • The IRS concluded: “In the present case, Decedent’s IRA passed to the Trust. Pursuant to the terms of the Trust, Trust assets, including IRA, were allocated to the Survivor’s Trust. However, under the terms of the Survivor’s Trust, Taxpayer [the surviving spouse], as sole beneficiary, was entitled to receive all of the income and principal of the Survivor’s Trust (to which IRA was allocated.) This is because Taxpayer had the right to, and did, in fact, direct the trustee in writing to pay to Taxpayer any such amounts from the Survivor’s Trust, as Taxpayer may designate, which included directing assets from IRA to first be distributed from IRA and then, within 60 days, rolled over to Rollover IRA (notwithstanding the fact that the assets were held in a non-IRA account before being paid to Rollover IRA.) Accordingly,  for purposes of applying section 408(d)(3)(A) to the IRA, Taxpayer is effectively the individual for whose benefit the account is maintained. As such, Taxpayer was entitled to rollover such amounts (other than those required minimum distribution amounts required to have been distributed under section 401(a)(9)) into a Rollover IRA, an IRA established and maintained in her name.”

In sum the surviving spouse was not be required to include in her gross income for federal income tax reporting purposes the amount distributed by her deceased husband’s IRA to the Survivor’s Trust,  and which assets were then, through a series of steps ultimately rolled over to the surviving spouse’s own rollover IRA. [IRC 408(d)(3).] The IRS did not distinguish in its reasoning whether this result was solely because the surviving spouse held a general power of appointment over the Survivor’s Trust, or whether as the sole trustee with absolute discretion to invade Survivor Trust principal for her own comfort and happiness [a non-ascertainable standard] that her discretion and that broad distribution standard was the equivalent of a general power of appointment over the Survivor’s Trust’s assets.

Post-Death Planning:  There have been several private letter rulings from the IRS over the years where the decedent failed to name a beneficiary of his/her IRA, which resulted in the IRA being treated as part of the decedent’s probate estate, but because the decedent’s surviving spouse was the sole personal representative of that estate, and also he/she was entitled to the decedent’s entire probate estate through rights of intestacy, he/she was permitted to rollover the decedent’s IRA into an IRA in the surviving spouse’s name alone, even though the decedent’s estate was effectively the default IRA beneficiary. Rollovers have also been permitted when there was probate court litigation where the IRS found a bona fide dispute and settlement in the probate court existed, resulting in the surviving spouse receiving the deceased spouse’s IRA. PLR 2001-27027.  There are also handful of private letter rulings where the spousal rollover was permitted, through a series of disclaimers by the surviving spouse as the trust-beneficiary, to make a rollover IRA transfer. [PLR 9050041; PLR 9045050.] This private letter ruling is different,  where the IRA rollover was permitted based upon the surviving spouse’s general power of appointment over the trust assets, which expressly was directed to receive the decedent’s IRA.

Conclusion: The goal, of course, is for all IRA owners to name a beneficiary for their IRA. But if the IRA is paid to the decedent’s estate, or like in this case paid to a lifetime trust for the surviving spouse’s benefit, there may still be a way to effect a spousal rollover and avoid having the trust be treated as receiving an inherited IRA subject to immediate required minimum distributions. The key when faced with the situation where the best tax result is a spousal rollover IRA is to look closely at the terms of the trust, or consider a series of timely qualified disclaimers, that could move the IRA assets directly to the surviving spouse. Often ‘where there is a will, there is a way.’