Permitted Spousal Rollover

Permitted Spousal Rollover

Exception applies so that IRA distributions aren’t included in gross income

In Private Letter Ruling 201632015 (released Aug. 5, 2016), the taxpayer sought a ruling for a spousal rollover of an individual retirement account under Internal Revenue Code Section 408(d)(3), which was initially designated to a trust and then intended to be distributed in its entirety to the taxpayer before being distributed to the taxpayer’s IRA.

The decedent and his spouse (taxpayer) created a trust that held all of their community property. The decedent had two IRAs at the time of his death and was receiving the minimum distributions. The trust was the designated beneficiary of the decedent’s IRAs. 

On the decedent’s death, the trust split into two sub-trusts: an exemption trust and a survivor’s trust. The decedent’s spouse was the sole trustee of the sub-trusts and had the authority to determine how to allocate the assets between the sub-trusts under both state law and the trust agreement. The decedent’s spouse, as trustee, allocated the decedent’s IRAs to the survivor’s trust. The decedent’s spouse was the sole beneficiary of the survivor’s trust. She had a right to receive all of the income and principal of the survivor’s trust because she had the power to direct the trustee to distribute to her or for her benefit a portion or all of the trust principal.

Exception for Spousal Rollovers

Typically, the proceeds distributed out of an IRA are includible in the payee’s gross income.  However, an exception applies to a surviving spouse who rolls over the distributed IRA proceeds into her IRA within 60 days from the original date of distribution. 

When the proceeds of a decedent’s IRA pass through a third party (for example, a trust or an estate) and are then distributed to the surviving spouse, the surviving spouse is treated as receiving the proceeds from the third party and not the decedent. This would typically make the surviving spouse ineligible for a rollover since she wouldn’t be the payee from the IRA. But, if the surviving spouse as trustee of a trust that receives a decedent’s IRA (which hasn’t been distributed) has sole discretion to pay the proceeds to herself, then the actual proceeds from the IRA received by the surviving spouse may be rolled over within 60 days of their receipt.

The Internal Revenue Service held that since no third party could prevent the surviving spouse from receiving and rolling over the IRA proceeds into her IRA, she would be treated as the payee with respects to any proceeds distributed from the IRA to her. If those assets are rolled over within 60 days to her IRA, she won’t be required to include them in her gross income for the year of distribution from the decedent’s IRA. 

Additionally, a surviving spouse may elect to treat her interest in a decedent’s IRA as her own IRA as long as the spouse is the sole beneficiary and she has unlimited withdrawal rights over the IRA. The IRS also held that the minimum distributions from the surviving spouse’s IRA (which received the decedent’s IRA) would be calculated based on the surviving spouse’s as owner of the IRA and not the decedent.

Andrew S. Katzenberg is an attorney at Kleinberg, Kaplan, Wolff & Cohen, P.C. in the Trusts and Estates group, where his practice focuses on wealth preservation, estate and trust administration, charitable organizations and charitable giving. 

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