Naming a trust as an individual retirement account death beneficiary, at best, complicates making a rollover of that IRA by a surviving spouse. At worst, it can discourage the spousal IRA rollover. Private letter ruling 201225020 (March 28, 2012) serves both as an example of those complications and as a success story. But when a PLR’s blessing is needed and granted, the sweetness of success is muted by the cost and delay of preparing and submitting a request for such a ruling.
In PLR 201225020, a husband and wife formed a revocable living trust. The husband named the trust as beneficiary of his IRA. The husband died, and his wife sought a rollover of his IRA. The Internal Revenue Service granted the wife’s request.
Part of Trust Out of Reach
The revocable living trust provided that, upon the death of one of the spouses, the deceased spouse’s share of trust assets would pass to either of two subtrusts, named “Fund A” and “Fund B.”
Fund A was designed to qualify for the estate tax marital deduction. The amount designated to Fund A was, according to the PLR, “the maximum marital deduction allowable in determining the federal estate tax on” the deceased spouse’s estate, less certain adjustments. This is unusual language from an estate tax standpoint, in that it’s more common to specify as a marital deduction bequest the minimum amount needed to reduce the estate tax to zero (or to the lowest possible tax). But, the PLR doesn’t analyze this language, as the PLR’s subject wasn’t the estate tax. It may be that, under the formula bequest as written, all of the deceased spouse’s property would pass to Fund A.
The PLR states that Fund A granted the surviving spouse all of Fund A’s income for life and also “the right to require the trustee to deliver to her any part or all of the principal of Fund A at any time.”
Fund B’s terms aren’t described, but it seems likely that the spouse’s rights in this trust didn’t include the right to demand trust property.
There’s a substantial body of PLRs granting spousal IRA rollovers even though a trust or an estate is an IRA’s death beneficiary.[i] This PLR is different from most other spousal rollover rulings. In nearly all such PLRs, the surviving spouse, acting alone, had the ability to orchestrate every aspect of directing the proceeds of the decedent’s IRA to herself. What’s different in PLR 201225020 is that the IRA could have gone to either of the trust’s subtrusts. The PLR doesn’t specifically say that the surviving spouse wasn’t the trustee of the trust, but that must have been the case. A trustee other than the spouse threatens the rollover because the spouse wasn’t in control of which of the two subtrusts would receive the IRA as a consequence of the trustee’s allocation of trust assets to the subtrusts. If the trustee had assigned the IRA to Fund B, that would have placed a spousal rollover out of reach, because the surviving spouse had no ability to demand distributions of trust property to herself from Fund B.
Help From State Law
In this PLR, state law came to the rescue. The surviving spouse represented to the IRS that “the laws of the state having jurisdiction over the trust, in conjunction with the terms the trust, compel the trustee of the trust” to allocate the trust’s beneficial interest in the decedent’s IRA to Fund A (the subtrust granting the surviving spouse the power to demand distributions to herself). The ruling also notes that the surviving spouse “provided supporting documentation” to that effect. Insofar as a legal conclusion about application of state law was needed, one could reasonably speculate that the surviving spouse had to obtain a legal opinion on that question and provide that to the IRS. What remains a mystery to readers of the PLR is how state law had that effect on the trust.
Preamble to Regulations Cited
As in many other PLRs granting spousal rollovers, the IRS cited the preamble to required minimum distributions (RMD) regulations as authority for allowing a spousal rollover, even though an estate or trust is named as beneficiary of an IRA.[ii] In that preamble, the Treasury and the IRS state that a surviving spouse must be the sole beneficiary of an IRA to qualify for a spousal rollover. But, says the preamble, the “sole beneficiary” requirement isn’t met if an estate or a trust is the IRA’s beneficiary, even if the surviving spouse is the sole beneficiary of the estate or trust. Nevertheless, the preamble goes on to say that if the surviving spouse actually receives a distribution from the IRA, a spousal rollover may be made, except to the extent such distribution is a RMD. It’s this last sentence that forms the basis for this PLR’s holding as well as many others.[iii]
Go Direct?
The real lesson of PLR 201225020 is this: Planners should carefully consider the hazards, complications and costs of naming a trust or an estate as IRA beneficiary when the surviving spouse will wind up with the ability to direct the IRA to herself and roll it over. Analyzing trusts is difficult and time consuming. Convincing an IRA custodian to complete a spousal rollover without obtaining a PLR can be an uphill battle. It may take one or even two years to accomplish a rollover. The chance of making an error in the accomplishing the rollover increases because there are more steps to take. In a favorable PLR that I obtained for a client, the IRS wouldn’t allow the decedent’s IRA to be transferred in a trustee-to-trustee transfer to an IRA of the surviving spouse. The IRS insisted that the decedent’s IRA be distributed to the trust. Next, the trustee was required to write a check to the surviving spouse for the amount of the distribution. Finally, after the surviving spouse deposited the trustee’s check in her own account, she could make a rollover, provided that the rollover occurs within 60 days of when the trustee emptied out the decedent’s IRA.
In PLR 201225020, the situation was made worse, in that it was necessary to look outside the four corners of the trust document to determine the spouse’s rights in trust property under state law.
It’s simpler to name the IRA owner’s spouse as the IRA’s death beneficiary. That avoids the rollover complications. But, planners should design the couple’s estate plans to ensure that imbalances won’t result. Without will or trust provisions coordinating the IRA with the rest of the estate plan, the surviving spouse could wind up with a greater share of the decedent’s assets than intended or a greater estate tax marital deduction than needed.