In PLR 201923002 (June 7, 2019), the IRS stated that a surviving spouse could roll over to an IRA in her own name a distribution from her late husband's IRA, even though the beneficiary was a trust for the benefit of the spouse, rather than the spouse. The IRS stated that, because the spouse was entitled to the IRA proceeds as the sole beneficiary of the trust during her life, she was effectively the individual for whose benefit the account is maintained for purposes of the roll-over rules.
Moreover
the Decedent's IRAs will not be treated as inherited IRAs under IRC §408(d) as to taxpayer/surviving spouse. Also, taxpayer/surviving
spouse was entitled to rollover distributions from stated IRAs into one or more
IRAs set up and maintained in her own name, as long as rollover occurred within
60 days from date distribution was received from stated IRAs.
The
Facts
The
Decedent was married to Taxpayer (hereinafter “Spouse”) until his death, at
which time both the Decedent and his Spouse were over 70 ½ years old.
At
the time of his death, the Decedent owned an individual retirement account- the
“Decedent's IRA.” The beneficiary of Decedent's IRA was a Trust for the benefit
of the spouse. The spouse was the sole trustee and beneficiary of Trust which
provided that the spouse could withdraw its net income and/or its principal. Additionally
the spouse has the right to modify, amend, or revoke the Trust at any time and
has the sole authority and discretion to distribute the Decedent's IRA proceeds
to herself at any time. The spouse decided to roll the amounts paid to her from
Decedent's IRA to an IRA in her own name rather than the Trust.
The
critical question was the application of IRC §1.408-8,
Q&A-5, which
provides that a surviving spouse of an individual may elect to treat the
spouse's entire interest as a beneficiary in the individual's IRA as the
spouse's own IRA. In order to make this election, the spouse must be the sole
beneficiary of the IRA and have an unlimited right to withdraw amounts from the
IRA. If a trust is named the beneficiary of the IRA, this requirement is not
satisfied even if the spouse is the sole beneficiary of the trust.
As
the Trust was the named beneficiary the interpretation and application of this provision
was critical.
Since the US Supreme
Court Decision in Clark v. Rameker, 134 S. Ct. 2242, (2014) the trusteed Individual Retirement
Account has become a way of shielding retirement account from creditors[1].
Accordingly it’s not uncommon to have a trusteed IRA rather than a custodial
IRA. Indeed several institutional investment companies have picked up on this
issued and have formulated their own trusteed IRA trusts.
The dilemma therefore
is how to draft a trusteed IRA trust to avoid the application of IRC §1.408-8,
Q&A-5. Most trusteed IRA trust have minimum distribution requirements and
limited withdrawal powers. If the beneficiary is a spouse of a second marriage
it is unlikely that the Settlor will give his or her spouse unlimited
withdrawal powers. If the spouse is the spouse of a long standing marriage it
is more likely that the spouse will have an unlimited withdrawal power.
In PLR 201923002
the spouse had an unlimited withdrawal power. The IRS reasoned that
notwithstanding IRC §1.408-8, Q&A-5, which prohibits a rollover of an IRA
to a spouse who is a beneficiary of a trust, because the spouse was entitled to
the proceeds of Decedent's IRA as the sole beneficiary of Spouse’s Trust during
her life, for purposes of applying IRC §408(d)(3)(A)
to Decedent's IRA, the Spouse is effectively the individual for whose
benefit the account is maintained. Accordingly, the IRS ruled that if the
Spouse receives a distribution of the proceeds of Decedent's IRA, subject to
the limitation of IRC §408(d)(3)(B), she may
roll over the distribution (other than amounts required to have been
distributed or to be distributed in accordance with section
401(a)(9)) into one or more IRAs established and maintained in her name.
[1]
Brunetti, the Trusteed Individual Retirement Account, New Jersey Law
Journal, (December 29, 2014).
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