24-May-22
Surviving Spouse Permitted a Rollover of the Decedent’s IRA
Take-Away: We have yet another favorable IRS Private Letter Ruling that authorizes a surviving spouse to move a deceased’s spouse’s IRA assets to her own IRA and escape immediate income taxation and accelerated required minimum distributions.
Background: Generally if a decedent’s IRA proceeds pass through a 3rd party, like a probate estate, and then are distributed to the decedent’s surviving spouse, the survivor will be treated as having received the IRA proceeds from the 3rd party and not from the decedent’s IRA. Consequently, the surviving spouse would not be eligible to rollover the decedent’s IRA proceeds into the surviving spouse’s own traditional IRA.
- Exception: However, this general rule will not apply where the decedent’s estate is the beneficiary of the IRA proceeds and (i) the decedent’s surviving spouse is the sole independent administratrix, aka Personal Representative, of the estate; and (ii) the decedent’s surviving spouse is the sole beneficiary of the IRA proceeds that pass through the decedent’s estate, g. an “I Love You” Will. Under these limited circumstances no 3rd party can prevent the surviving spouse from receiving the IRA proceeds and from rolling over the proceeds to the surviving spouse’s own traditional IRA.
The application of this Exception appears in a recent Private Letter Ruling.
Private Letter Ruling 202214008 (January 11, 2022)
(Since names are not included in PLRs, I have given the parties names.)
Facts: The decedent Ricky, under age 72, established an IRA. The beneficiary designation form for Ricky’s IRA named himself as the designated beneficiary. Ricky did not name or designate any other beneficiaries for his IRA. As a result, on Ricky’s death, the IRA custodian treated Ricky’s estate as the beneficiary of his IRA [and thus, subject to the 5-year distribution rule.] Ricky died testate. The IRA custodian transferred the assets of Ricky’s IRA to a new IRA, a beneficiary-IRA established in the name of Ricky’s estate (the new estate IRA.) Ricky’s Will gave all of his assets to his wife, Lucy. Lucy was also named as the sole Personal Representative of Ricky’s estate under his Will.
Lucy’s Request: In this request for a Private Letter Ruling Lucy, as Personal Representative of Ricky’s estate, sought the approval of the rollover distribution of all of the assets held in the new estate IRA to a traditional IRA that is established in Lucy’s own name.
IRS Grant’s Relief: The IRS approved the rollover from the new estate IRA to Lucy’s own traditional IRA. In doing so the IRS held:
Not an Inherited IRA: The new estate IRA would not be treated as an inherited IRA with respect to Lucy [IRC 408(d)(3)]; and
60-day Rollover: Lucy is eligible to rollover the new estate IRA balance to a traditional IRA that Lucy establishes and maintains in her own name so long as that rollover occurs no later than 60 days after the proceeds are received by Lucy in her capacity as the sole Personal Representative of Ricky’s estate [IRC 408(d)(3)(A)(i)]; and
No Income Taxation: Lucy will not be required to include in her gross income for federal income tax purposes for the year in which the distribution of the new estate IRA is made, so long as the proceeds are timely rolled over by Lucy into a traditional IRA set up and maintained in Lucy’s name. [IRC 408(d)(3)(A)(ii).]
New Estate IRA: Under the limited circumstances as described, Lucy is effectively the individual for whose benefit the new estate IRA is maintained. [IRC 408(d)(A).]
Conclusion: There is nothing new with regard to this Private Letter Ruling. It is simply a helpful reminder that if the facts are right, a spousal rollover of a deceased spouse’s IRA is still possible to avoid immediate income taxation. No explanation is given why Ricky named himself as the beneficiary of his own IRA. I wonder if the IRA custodian was even read the IRA beneficiary form? The only question that I have with regard to the IRS’ Exception is its conclusion that “no 3rd party can prevent the surviving spouse from receiving the IRA proceeds.” What if Ricky had a large number of creditors who had to be paid from his estate before any other assets, including the IRA, could be distributed to Lucy? Would those priority creditor claims be considered 3rd parties who could prevent Lucy from receiving Ricky’s IRA? Just one more reason to periodically check (and update if needed) IRA beneficiary designations.