Monday, August 19, 2019

IRS Approves spousal rollover although decedent’s IRA did not designate a beneficiary

Generally, a surviving spouse may make a tax-free spousal rollover from a deceased spouse's IRA only if the survivor is designated as the IRA’s beneficiary. However, in PLR 201931006, IRS said this general rule did not apply—and a tax-free spousal rollover was approved where the decedent failed to designate an IRA beneficiary, died without a will, and the surviving spouse was the administrator and sole heir to the decedent’s estate. 
A surviving spouse designated as the beneficiary of an IRA need not leave the IRA in the decedent's name. The surviving spouse can either:
·       roll over the decedent's IRA into an IRA in the spouse's name; or
·       elect to treat the decedent's IRA as the spouse's own IRA. 
However, the regulations state the election to treat the decedent's IRA as the surviving spouse beneficiary's IRA is available only if the spouse is “the sole beneficiary” of the IRA and has an unlimited right to withdraw amounts from it. Note the sole beneficiary requirement is not met if a trust is named as the IRA's beneficiary, even if the spouse is the sole beneficiary of the trust (but see PLR 201923002).
There is no immediate tax if distributions from an IRA are rolled over to an IRA or other eligible retirement plan, annuity, or tax-sheltered annuity. For a rollover to be tax-free, the amount distributed from the IRA generally must be recontributed to an IRA or other eligible retirement plan no later than 60 days after the date that the taxpayer received the withdrawal from the IRA. A distribution rolled over after the 60-day period generally will be taxed (and also may be subject to a 10% premature withdrawal penalty tax). An individual is permitted to make only one nontaxable 60-day rollover between IRAs in any 1-year period.
In PLR 201931006 the Decedent established an IRA but failed to designate a beneficiary for the account. The IRA was maintained by a custodian that provided that if no beneficiary is designated for the IRA, the account balance remaining at the decedent’s death would be payable to her estate. The decedent died without a will and, under relevant state law, the decedent’s surviving spouse was the sole heir to the estate. The decedent’s surviving spouse was also the sole administrator of the estate.
The decedent’s surviving spouse intended to distribute the IRA to the estate, and as administrator of the estate, pay the proceeds of the IRA to himself. Within 60 days of receipt, he would roll over the proceeds of the IRA into one or more IRAs in his name.
The surviving spouses asked IRS to rule that:
·       the surviving spouse be treated as the payee or distributee of the IRA proceeds;
·       The IRA would not be treated as an inherited IRA; and
·       He will be eligible to do a tax-free 60-day rollover from the decedent’s IRA to his own IRA. 
The ruling points out that the surviving spouse would not be permitted to treat the IRA as his own, because he was not named the beneficiary of the IRA. However, because he was the administrator and sole heir to the estate he was effectively the individual for whose benefit the account was maintained. As a result, if the surviving spouse receives a distribution of the proceeds of the IRA, he could roll over the distribution into his own IRA.
In response to the ruling requests, IRS concluded that:
·       The surviving spouse will be treated as the payee or distributee of the proceeds from the IRA;
·       that the IRA would not be treated as an inherited IRA; and
·       That the surviving spouse will be eligible to make a tax-free rollover of the proceeds from the decedent’s IRA to an IRA set up and maintained in his own name, as long as the rollover occurred no later than 60 days after the proceeds were received by the surviving spouse in his capacity as administrator of the estate, and all other applicable requirements were satisfied.
In this case the surviving spouse was “lucky” in that he was the sole heir of the estate and the state statue was favorable.  In many case where clients are doing their estate planning the non-probate assets are overlooked.  Non-probate assets do not pass through the will; they pass by beneficiary designation. Therefore it is incumbent when doing your estate plan that you confirm that you have properly designated the beneficiaries of your retirement accounts, IRA’s etc., your life insurance, annuities, and other non-probate assets

No comments:

Post a Comment