The Importance of Naming a Contingent Beneficiary of a Retirement Account

The Importance of Naming a Contingent Beneficiary of a Retirement Account

A recent private letter ruling underscores a valuable lesson.

A recent private letter ruling underscores the importance of making sure your clients name both a primary beneficiary and a contingent beneficiary for their retirement accounts, in case their primary beneficiary dies before they do.

When a surviving spouse is the beneficiary of a decedent’s individual retirement account, the surviving spouse may roll over the decedent’s account into an IRA of the surviving spouse. In Private Letter Ruling 201612001 (released March 18, 2016), a spousal rollover was allowed when the surviving spouse had the right to receive the proceeds of her deceased husband’s IRA and his Roth IRA, but her husband’s estate was the beneficiary of both accounts.

Beneficiary Predeceased IRA Owner

The death beneficiary named for the IRA and Roth IRA wasn’t the surviving spouse. That individual predeceased the IRA owner, so the decedent’s estate became entitled to the IRA and Roth IRA. The ruling doesn’t say so, but it’s likely that the legal documents that govern the accounts provide that, if no beneficiary is chosen by the IRA owner, the IRA death benefits will be paid to the IRA/Roth IRA owner’s estate.

The surviving spouse became entitled to the proceeds of the decedent’s accounts because she was the sole beneficiary of the decedent’s estate. The surviving spouse also served as executor of the decedent’s estate.

The PLR’s facts state that the surviving spouse elected to treat both accounts as her own, but doesn’t say how that election was made. Question and Answer-5(b) of Treasury Regulations Section 1.408-8 provides three methods for doing so:

  • Redesignation of the account as one in the name of the surviving spouse as IRA owner rather than as beneficiary (presumably a change in how the account is titled);
  • Failing to make a required minimum distribution on time; or
  • Making a contribution to the IRA.

Preamble Saves the Day

In finding that the spouse was entitled to roll over the decedent’s IRA into her own IRA, the PLR relied on the preamble to regulations governing spousal rollovers, quoted in many other rulings. The PLR said:

Generally, if the proceeds of a decedent’s IRA pass through a third party, e.g. a trust or an estate, and then are distributed to the decedent’s surviving spouse, the surviving spouse will be treated as having received the IRA proceeds from the third party and not from the decedent’s IRA. Thus, generally a surviving spouse will not be eligible to roll over the distributed IRA proceeds into her own IRA. However, the general rule will not apply in a case where the IRA has not yet been distributed and the surviving spouse, as fiduciary of the decedent’s estate, has the sole authority and discretion to pay the IRA proceeds to her. In such a case, when the surviving spouse actually receives the IRA proceeds, the surviving spouse may roll over the amounts into an IRA set up and maintained in her own name within 60 days.

The preamble to the regulations provides, in relevant part, that a surviving spouse who actually receives a distribution from a deceased spouse’s IRA is permitted to roll that distribution over into the spouse’s own IRA even if the spouse is not the sole beneficiary of the decedent’s IRA as long as the rollover is accomplished within the requisite 60-day period. A rollover may be accomplished even if IRA assets pass through either a trust and/or an estate.

This favorable PLR appears to be an easy call. But, it would have been far easier and less costly for the surviving spouse if the beneficiary form had listed her as contingent beneficiary. 

Lesson Learned

Advisors can provide a simple but valuable service by reviewing IRA beneficiary forms with their clients before they’re submitted.

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