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Articles From Lumsden McCormick

Spousal IRA Rollover: IRS Decides in a Widow’s Favor

The IRS has issued a private letter ruling that allows a surviving spouse to roll over, tax free, into her individual retirement account (IRA) her deceased husband's IRA that was payable to a trust of which she was sole trustee and beneficiary.

Generally, the surviving spouse would be barred from treating the IRA as her account when the IRA beneficiary is a trust. However, the IRS concluded that this rule didn't apply because the surviving spouse was the trustee and sole beneficiary of the trust. So, she was entitled to all income and the entire corpus of the trust.

Facts at a Glance

Before the husband died, the widow had established a revocable living trust of which she was the sole trustee. She had the sole right to amend or revoke the trust and to distribute all income and the entire corpus for her own benefit.

Her husband maintained an IRA with a custodian when he died and named the trust as the primary beneficiary of his IRA. The assets of the IRA were transferred via a trustee-to-trustee transfer, to an IRA for the benefit of the trust.

The widow wanted to distribute the assets of the deceased husband's IRA to herself, as sole beneficiary of the trust, and roll over the distribution to one or more IRAs in her name.

Note: There's much to gain by making a trustee-to-trustee transfer to the surviving spouse's IRA. For example, the surviving spouse can designate her own beneficiaries. And the surviving spouse can compute required minimum distributions (RMDs) as if he or she had funded the receiving IRA. This setup will result in deferred RMDs if the surviving spouse is under the age of 70 1/2.

Favorable Ruling

In the private ruling, the IRS noted that, because the husband's IRA passed to the trust when he died, his widow can't treat the IRA as her own, because the trust was named a beneficiary. However, the IRS stated that, because the widow is the trust's trustee and sole beneficiary and, therefore, is entitled to all income and the entire corpus of the trust, she's effectively the individual for whose benefit the account is maintained.

Accordingly, the IRS concluded that, if the widow receives a distribution of the proceeds of the IRA, she may roll it over (other than amounts required to have been distributed into one or more IRAs established and maintained in her name).

The PLR concludes that the widow:

1. Will be treated as having acquired the IRA directly from her husband and not from the trust,

2. Is eligible to roll over the IRA distribution to one or more IRAs established and maintained in her name, if the rollover occurs no later than 60 days after the day the proceeds of the IRA are received, and

3. May exclude from gross income for the year in which the distribution from the IRA is made, any portion of the proceeds distributed from the IRA that are timely rolled over to one or more IRAs set up and maintained in the widow's name.

However, RMDs can't be rolled over, and the ruling's conclusions are subject to a one-rollover-per-year limit. (PLR 201844004)

For More Information

A private letter ruling, or PLR, is a written statement issued to a taxpayer that interprets and applies tax laws to that taxpayer's specific set of facts. The taxpayer requests the ruling and pays a fee. A PLR is issued to establish with certainty the federal tax consequences of a particular transaction before it takes place or before the taxpayer's tax return is filed. It's binding on the IRS if the taxpayer fully and accurately described the proposed transaction in the request and carries out the transaction as described.

A PLR, however, can't be relied on as precedent by other taxpayers. If you face a similar situation to the facts presented in this ruling, contact Dale to determine the likely tax consequences of rolling over an inherited IRA.

Spousal IRA Rollover: IRS Decides in a Widow’s Favor

for more information

Dale is an expert in the areas of individual income taxation, estate, trust, and gift tax planning, and succession planning for privately held businesses. Dale works one-on-one with clients to avoid surprises by taking the extra steps to run detailed projections, research likely outcomes, explore flexible tax-saving options, and prepare thoughtful recommendations. Dale enjoys working with both individual and corporate clients, providing valuable tax planning advice while serving as a trusted advisor – in many cases, for multiple generations. He was named partner in 1991 and has been with the Firm for more than 40 years. Dale assists in the supervision of approximately two dozen tax professionals who work together to assure conformity with federal and state tax standards, while minimizing taxes and related costs.

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