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

10-Feb-21

IRAs Transferred to Estate Beneficiaries

Take-Away: When an IRA owner dies without naming a beneficiary, the  assets held in the IRA pass to the default beneficiary under the IRA custodial agreement, which is usually the deceased IRA owner’s estate. The IRS has issued several favorable private letter rulings this year that show how the decedent’s  IRA can be directly transferred to inherited IRAs in the names of the estate beneficiaries.

Background: If an IRA owner dies without naming a designated beneficiary, or the named beneficiary predeceases the IRA owner, then the default beneficiary under the IRA custodial agreement controls, which is often the IRA owner’s estate. The owner’s estate is not a designated beneficiary for the purpose of the IRA distribution rules. If the IRA owner died prior to his or her required distribution date (age 72, now), then the distribution is over 5 years. If the IRA owner died after his or her required distribution date, then the distribution of the IRA is over the decedent’s expected life expectancy under the IRS life expectancy tables, which might be more than 10 years.

Challenge: One problem is that most probate estates do not want to remain open for either 5 or 10 years in order  to accommodate the delayed distributions from the decedent’s IRA. Rather, a personal representative will want to close the decedent’s probate estate and move the IRA to the estate’s beneficiaries asap, while permitting the estate beneficiaries to control IRA distributions for the balance of the required payout period. This transfer of the decedent’s IRA to the estate beneficiaries can be accomplished, despite the position of some IRA custodians to the contrary. In short, there is no problem with the transfer of the decedent’s IRA from the estate to the estate’s beneficiaries. This ability to transfer the decedent’s IRA directly to inherited IRAs established for the beneficiaries of the decedent’s estate was confirmed in two private letter rulings this year which address questions that arose prior to the SECURE Act.

Private Letter Ruling 2020-31007 (July 31,2020)

Facts: The decedent died after her required beginning date (RBD) leaving her IRA to her estate as the sole beneficiary of the IRA. Her Will left her residuary estate, which included the IRA, to a Trust. The Trust’s residuary provisions were to be divided and distributed equally to the decedent’s children. The named personal representative of the estate was also the successor trustee of the Trust.

Request: The personal representative proposed to transfer, by a trustee-to-trustee transfer, each of the trust beneficiaries’ respective interests in their deceased mother’s IRA into an inherited IRA to be titled “Mrs. [ X] IRA f/b/o [child] as beneficiary of Mrs. X’s estate.”

IRS Rulings: The IRS gave the following rulings to the estate’s personal representative:

  • Separate IRAs, Not Separate Accounts: The beneficiaries’ respective interests in their mother’s IRA can be segregated and held in separate IRAs for purposes of paying the beneficiaries’ RMDs. These separate IRAs would not be treated as separate accounts. [Treasury Regulation 1.401(a)(9)-8, A-3.]
  • Treated as an Inherited IRA: The separate IRAs that are established for each of the mother’s children constitute inherited IRAs. [IRC 408(d)(3)(c).]
  • RMDs Using the Mother’s Ghost  Life Expectancy: Each beneficiary will receive RMD’s from their specific inherited IRA, to be computed using their mother’s remaining, or ghost, life expectancy, since their mother died after her required beginning date leaving her IRA to a beneficiary (her estate) that was not a designated beneficiary.
  • Not a Taxable Distribution: The transfer of each beneficiary’s respective interest in their deceased mother’s IRA to their respective inherited IRA will not be treated as a taxable distribution. [IRC 408(d)(1).]
  • Not a Rollover: The transfer of each beneficiary’s respective interest in their mother’s IRS to their respective inherited IRA will not constitute a rollover as that is defined in the Tax Code. [IRC 408(d)(3).]
  • No Required Transfer to the Trust: The IRS did not require that the personal representative initially transfer the IRA to the Trust which was the residuary beneficiary of the mother’s probate estate. In short, the intermediate step of transferring the IRA to the Trust, and then again out of that Trust to the inherited IRAs was ignored. This position, which ignores a wasteful step is consistent with earlier private letter rulings. [PLRs 2001-36031; PLR 2002-10066; 2012-11034.]

Private Letter Ruling 2020-39002 (September 25, 2020)

Facts: An unmarried man dies after her required beginning date (now age 72) without having named designated beneficiaries for his two IRAs. Consequently, the default beneficiaries for his two IRAs is his estate, as the sole beneficiary. The man’s estate is left in shares of equal value to three named beneficiaries. On the man’s death, the two IRAs are then consolidated into a third IRA ( the ‘consolidated IRA’) in the name “IRA of Mr. [X] f/b/o Estate of Mr. [X.]”

Request: The personal representative proposed to transfer the consolidated IRA into three separate IRAs by trustee-to-trustee transfers. Each transferee IRA would be titled: “Decedent [Mr. X] IRA f/b/o [named beneficiary] of [Mr. X’s] estate.”

IRS Rulings: The IRS provided the following answers to the personal representative’s questions:

  • Not Taxable Distributions: The proposed transfers will not constitute taxable distributions to the beneficiaries. [IRC 408(d)(1).]
  • Not a Rollover: The proposed transfer will not constitute rollovers to another IRA. [IRC 408(d)(3).]
  • Not Taxable to the Estate: No distributions from the IRAs after the transfers to them will be reportable as income to the probate estate, or by the IRA custodian as taxable distributions to the probate estate.
  • IRA-to-IRA is not a Distribution: The transfer of inherited IRAs from an estate or a trust to the beneficiaries of such estate or trust by means of an IRA-to-IRA- transfers (from an inherited IRA set up in the name of such estate or trust to one or more inherited IRAs in the name of the beneficiaries) is not a distribution. The transfer of an IRA-to-IRA  is not a distribution. [Revenue Ruling 78-406.] The IRS went on to state:

“Consistent with the principles of Rev. Rul.78-406, because each of the transferee IRAs is set up and maintained in the name of the deceased IRA owner for the benefit of a Beneficiary as beneficiary of the decedent’s estate, the transfer of each Beneficiary’s respective one-third interest in the estate’s interest in [the] IRA to each transferee IRA will not constitute a taxable distribution within the meaning of IRC 408(d)(1) to each of the beneficiaries and does not constitute a rollover as that term is used in section 408(d)(3).”

  • Merging Inherited IRAs: Apparently it was permissible for the personal representative to consolidate the decedent’s two inherited IRAs into a single inherited IRA. [PLR 200211047.]