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Connecting The Spousal Rollover Dots

PLR treated non-designated beneficiary who got proceeds as IRA owner, not inheritor

In private letter ruling 201706004 (released Feb. 10, 2017), the Internal Revenue Service confirmed that a decedent’s surviving spouse may roll over her deceased husband’s individual retirement account to an IRA of her own, even though her husband’s IRA passed through his probate estate. That rollover IRA won’t be treated as an inherited IRA.

Because the IRS so ruled, required minimum distributions (RMDs) from the surviving spouse’s rollover IRA must be made under the rules that apply to an IRA owner and not those that apply to an IRA inheritor.

No Evidence of Trust

During his lifetime, the decedent named a trust as his IRA’s beneficiary. However, there was no evidence that the decedent actually created that trust. The PLR notes that the IRA custodian didn’t “keep a copy of the trust,” the trust wasn’t mentioned in the decedent’s will and no one could find a copy of the trust after the IRA owner died. For all practical purposes, the trust named as beneficiary never came into existence.

The decedent’s will left all of his property to his wife. 

IRA Custodian Insists on Court Order

The probate code of the state where the decedent resided contained a provision allowing a court to order a retroactive change in a beneficiary designation in certain limited circumstances. The published ruling doesn’t say what those circumstances were. Based on that state law provision, the surviving spouse intended to seek a court order changing the IRA’s beneficiary from the non-existent trust to herself.

The IRA custodian refused to release any funds to the surviving spouse in the absence of such an order, potentially frustrating the surviving spouse’s desire to complete a rollover during 2016. Although the PLR states neither the decedent’s date of birth nor his date of death, it can reasonably be inferred that the decedent hadn’t reached age 70½, when RMDs must begin. That’s because the ruling outlines how distributions must be made to his IRA’s beneficiary when death occurs before reaching that age. 

Five-Year Rule

Under the five-year rule, the entire IRA must be distributed by Dec. 31 of the year containing the fifth anniversary of the decedent’s death, unless RMDs over the life expectancy of the designated beneficiary begin by the end of the year following the year when the decedent dies.

As noted in this PLR, a surviving spouse may not make a rollover to an IRA of the surviving spouse after Dec. 31 of the year containing the fourth anniversary of the decedent’s death. Once the fifth year begins, the entire IRA’s balance is an RMD that can’t be rolled over. RMDs may not be rolled over by an IRA owner or by a surviving spouse. Indeed, the surviving spouse may have sought to complete a rollover during 2016 to avoid being so barred from making a rollover.

Spousal Rollover Permitted

The PLR confirms that the surviving spouse may make a spousal rollover to an IRA of her own that isn’t treated as an inherited IRA, even though a probate estate proceeding was necessary to reform the IRA beneficiary designation. The PLR specifically recognizes that the surviving spouse acquired the decedent’s IRA “by reason of Decedent's death,” a requirement for making a spousal rollover.

The PLR also holds that, because a court order can’t create a designated beneficiary, there was no designated beneficiary for purposes of RMDs from the decedent’s IRA—a compelling reason for seeking a spousal IRA rollover.

It all adds up to this: even though the IRA owner’s surviving spouse wasn’t the IRA’s designated beneficiary, she could roll the IRA over to her own IRA because she received the IRA proceeds. Yet, the PLR doesn’t mention preamble to the RMDs final regulations, specifically stating:

If the spouse actually receives a distribution from the IRA, the spouse is permitted to roll that distribution over within 60 days into an IRA in the spouse’s own name to the extent that the distribution is not a required distribution, regardless of whether or not the spouse is the sole beneficiary of the IRA owner. Further, if the distribution is received by the spouse before the year that the IRA owner would have been 70 ½, no portion of the distribution is a required minimum distribution for purposes of determining whether it is eligible to be rolled over by the surviving spouse.1 (Emphasis added.)

In this PLR, the surviving spouse was going to actually receive a distribution from her late husband’s IRA under a court order. And, the IRS said she could do so.

Reliance Guidance Needed

It is good policy to permit a surviving spouse to make an IRA rollover of the deceased spouse’s retirement benefits. That policy recognizes that married persons form an economic unity and make decisions about family, career and retirement accordingly. Yet, in spite of the preamble’s statement, IRA custodians are reluctant to facilitate spousal rollovers unless the spouse is actually named as death beneficiary, regardless of what rights the surviving spouse has in the decedent’s IRA. Yet, because the IRS hasn’t given clear guidance to support the preamble, surviving spouses are forced to obtain costly PLRs, take the risk that a spousal rollover will be challenged or suffer the economic detriment of failing to make a rollover. As a result, the policy of treating spouses as an economic unit tends to get undermined.

 

Endnote

1. Treasury Decision 8987, 67 F.R. 18988-19028 (April 17, 2002)

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