PLR 200449040: Surviving spouse may roll inherited IRA share into her own IRA

Plain-English summary

A deceased IRA owner named a trust for his spouse and two daughters as the IRA beneficiary. The IRS ruled that the trust met the requirements for a see-through trust and approved a direct transfer that would place the spouse's share in an inherited IRA in the deceased owner's name. It also allowed the spouse to receive that share and roll it into an IRA in her own name within 60 days. The IRS recognized that a surviving spouse normally cannot roll over assets received through a trust or estate, but declined to apply that rule on these facts because the trust entitled the spouse to her share outright and she was its sole trustee. The ruling assumed that the IRAs met § 408(a)'s requirements and that the trust was valid under state law.

Ruling snapshot

• Question: May the spouse receive her share through a trust and inherited IRA, then roll the distribution into her own IRA?
• Outcome: Approved all three requested rulings.
• Key authorities: IRC §§ 401(a)(9), 408(a), 408(d)(3); Treas. Reg. §§ 1.401(a)(9)-4, 1.408-8; Rev. Rul. 78-406.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

200449040

UICs: 401.06-02
408.03-00
408.06-00

SEP - 8 2004

SE:T:EP:RA:T3

LEGEND:
Taxpayer A =
Taxpayer B =
Taxpayer C =
Taxpayer D =

IRA X =

Company M =
Trust T =

Date 1 =

Date 2 =

Date 3 =

Date 4 =

State W =
Percentage 1 =
Percentage 2 =
Percentage 3 =
Dear

This is in response to the , request for letter rulings under sections 401(a)(9) and 408(d)(3) of the Internal Revenue Code, as amended by correspondence

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received by the Internal Revenue Service on . The following facts and representations support your ruling request.

Taxpayer A, whose date of birth was Date 1, died on Date 2, a resident of State W, without having attained age 70 ½. Taxpayer A was survived by his spouse, Taxpayer B, and his two daughters, Taxpayers C and D. Taxpayer C is older than Taxpayer D. Taxpayer B is older than Taxpayer C.

At the time of his death, Taxpayer A was the owner of IRA X, an individual retirement account which it is represented complies within the requirements of Code § 408(a), maintained with Company M. By means of a beneficiary designation dated Date 4, Taxpayer A named Trust T as the beneficiary of his IRA X. Your authorized representative has asserted on your behalf that Trust T is valid under the laws of State W. Your authorized representative has also asserted on your behalf that a copy of Trust T was presented to Company M within nine (9) months of Date 2, the date of Taxpayer A’s death.

Trust T was established by Taxpayer A on Date 3, and has been subsequently amended. Article Seventh C. of Trust T provides that Trust T became irrevocable at the death of Taxpayer A. Article Eleventh B of Trust T provides that Taxpayer B became the sole trustee of Trust T upon the death of Taxpayer A.

Article Sixth B. of Trust T provides, in relevant part, that upon the death of Taxpayer A, Percentage 1 of the Trust T estate shall be distributed to Taxpayer B; Percentage 2 of the Trust T estate shall be distributed to Taxpayer C; and Percentage 3 of the Trust T estate shall be distributed to Taxpayer D.

Taxpayers B, C, and D have requested that Company M divide IRA X, by means of trustee-to-trustee transfers, into three IRAs. Each of the three transferee IRAs will be maintained in the name of Taxpayer A (Deceased). One of the three transferee IRAs will hold Percentage 1 of IRA X and will be set up and maintained to benefit Taxpayer B as a beneficiary of Trust T the named beneficiary thereof.

After the three transferee IRAs are set up, the transferee IRA set up to benefit Taxpayer B will be converted, by means of a distribution and subsequent rollover, into an IRA set up and maintained in the name of Taxpayer B. It has been represented that said rollover will occur within the time frame referenced in Code § 408(d)(3)(A)(i).

Based upon the above facts and representations you, through your authorized representative, request the following letter rulings:

(1) That Trust T constitutes a qualified “see-through” trust within the

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meaning of section 1.401(a)(9)-4 of the “Final” Regulations, Question and Answer-5;

(2) That Company M’s dividing IRA X, by means of trustee to trustee transfers, into three transferee IRAs in the name of Taxpayer A (Deceased) including one set up to benefit Taxpayer B as beneficiary of Trust T named beneficiary thereof will not result in the transferee IRA set up to benefit Taxpayer B failing to comply with the requirements of Code § 408(a) including the requirements of Code § 408(d)(3); and

(3) That Taxpayer B may receive a distribution of the transferee IRA set up to benefit her and roll over said distribution into an IRA set up and maintained in her name.

With respect to your ruling requests, Code section 408(a)(6) provides that under regulations prescribed by the Secretary, rules similar to the rules of section 401(a)(9) and the incidental death benefit requirements of section 401(a) shall apply to the distribution of the entire interest of an individual for whose benefit an IRA trust is maintained.

Code section 401(a)(9)(C) provides, in relevant part, that distributions from an IRA are required to begin to the IRA holder no later than April 1 of the calendar year following the calendar year during which the IRA holder attains age 70 ½.

Code § 401(a)(9)(B)(ii) provides, in summary, that a trust shall not constitute a qualified trust under this section unless the plan provides that, if an employee dies before the distribution of the employee’s interest has begun in accordance with subparagraph (A)(ii), the entire interest of the employee will be distributed within 5 years after the death of the employee.

Code § 401(a)(9)(B)(iii) provides, in general, that if any portion of the interest of a deceased plan participant is payable to (or for the benefit of a designated beneficiary), such portion will be distributed beginning not later than 1 year after the date of the deceased’s death (or a later date as prescribed by the Secretary under Regulations) in accordance with regulations over the life of the designated beneficiary (or a period not extending beyond the life expectancy of the beneficiary).

Section 401(a)(9)(E) of the Code provides, in summary, that the term “designated beneficiary” means any individual designated as a beneficiary by the employee.

With respect to your ruling requests, “Final” Income Tax Regulations under Code sections 401(a)(9) and 408(a)(6) were published in the Federal Register at 67 Federal Register 18987-19028 (April 17, 2002), and in the Internal Revenue Bulletin at 2002-19

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I.R.B. 852 (May 13, 2002). The Preamble to the “Final” Regulations, in relevant part, provide that the regulations apply for determining required minimum distributions for calendar years beginning after January 1, 2003.

Section 1.401(a)(9)-4 of the “Final” regulations, Q&A-3, provides that only individuals may be designated beneficiaries for purposes of section 401(a)(9). A person who is not an individual, such as the employee's estate, may not be a designated beneficiary. However, Q&A-5 of §1.401(a)(9)-4 provides that beneficiaries of a trust with respect to the trust's interest in an employee's benefit may be treated as designated beneficiaries if the following requirements are met:

(1) The trust is valid under state law or would be but for the fact that there is no corpus.

(2) The trust is irrevocable or the trust contains language to the effect it becomes irrevocable upon the death of the employee.

(3) The beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the employee's benefit are identifiable within the meaning of A-1 of this section from the trust instrument.

(4) The documentation described in A-6 of this section has been provided to the plan administrator.

Section 1.401(a)(9)-4 of the “Final” regulations, Q&A-6(b), provides, generally, with respect to required minimum distributions after the death of the employee, that documentation described therein must be provided by the trustee of the trust/beneficiary to the plan administrator by October 31 of the calendar year following the calendar year in which the employee died.

Section 1.401(a)(9)-8 of the “Final” regulations, Q&A-2(a) provides the “separate account” rules with respect to defined contribution plans. A “separate account” is an account under which the beneficiary or beneficiaries differ from the beneficiary or beneficiaries of the other accounts. In general, if separate accounts are set up, for years subsequent to the calendar year containing the date on which the separate accounts were established, or the date of death if later, a separate account under a plan is not aggregated with the other separate accounts under the plan in order to determine whether the distributions from such separate account satisfy the requirements of Code § 401(a)(9).

Instead, the rules in Code § 401(a)(9) apply separately to each separate account under the plan.

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Section 1.401(a)(9)-8 of the “Final” regulations, Q&A-3, provides that a separate account is a separate portion of an employee’s benefit which reflects the separate interest of an employee’s beneficiary under the plan as of the employee’s death for which separate accounting is maintained. The separate accounting must allocate all post-death investment gains and losses, contributions and forfeitures, for the period prior to the establishment of the separate accounts on a pro-rata basis in a consistent and reasonable manner among the separate accounts.

Section 1.401(a)(9)-4 of the “Final” regulations, Q&A-5(c), provides, in relevant part, that the separate account rules under A-2 of § 1.401(a)(9)-8 are not available to beneficiaries of a trust with respect to the trust’s interest in the employee’s benefit.

Revenue Ruling 78-406, 1978-2 C.B. 157, provides that the direct transfer of funds from one IRA trustee to another IRA trustee, even if at the behest of the IRA holder, does not constitute a payment or distribution to a participant, payee or distributee as those terms are used in Code § 408(d). Furthermore, such a transfer does not constitute a rollover distribution.

Additionally, a trustee to trustee transfer, as described in Rev. Rul. 78-406, does

not constitute a distribution or payment as those terms are defined for purposes of Code § 408(d).

Finally, Rev. Rul. 78-406 is applicable if the trustee to trustee transfer is directed by the beneficiary of an IRA after the death of the IRA owner as long as the transferee IRA is set up and maintained in the name of the deceased IRA owner for the benefit of the beneficiary.

Code section 408(d)(1) provides that, except as otherwise provided in this subsection, any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee, as the case may be, in the manner provided under section 72.

Code section 408(d)(3) provides that section 408(d)(1) does not apply to a rollover contribution if such contribution satisfies the requirements of sections 408(d)(3)(A) and (d)(3)(B).

Code section 408(d)(3)(A)(i) provides that section 408(d)(1) does not apply to any amount paid or distributed out of an IRA to the individual for whose benefit the account is maintained if the entire amount received (including money and any other property) is paid into an IRA (other than an endowment contract) for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution.

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Code section 408(d)(3)(C)(i) provides, in pertinent part, that, in the case of an inherited IRA, section 408(d)(3) shall not apply to any amount received by an individual from such account (and no amount transferred from such account to another IRA shall be excluded from income by reason of such transfer), and such inherited account shall not be treated as an IRA for purposes of determining whether any other amount is a rollover contribution.

Code section 408(d)(3)(C)(ii) provides that an IRA shall be treated as inherited if the individual for whose benefit the account is maintained acquired such account by reason of the death of another individual, and such individual was not the surviving spouse of such other individual. Thus, pursuant to Code section 408(d)(3)(C)(ii), a surviving spouse who acquires IRA proceeds from and by reason of the death of her

husband, may elect to treat those IRA proceeds as her own and roll them over into her own IRA.

Code section 408(d)(3)(E) provides, in general, that paragraph (d) does not apply to any amount to the extent such amount is required to be distributed under paragraph

(a)(6).

Section 1.408-8 of the “Final” Regulations, Question and Answer 5, provides that a surviving spouse of an IRA owner may elect to treat the spouse’s entire interest as a beneficiary in an individual’s IRA as the spouse’s own IRA. In order to make this election, the spouse must be the sole beneficiary of the IRA and have an unlimited right to withdraw amounts from the IRA. If a trust is named as beneficiary of the IRA, this requirement is not satisfied even if the spouse is the sole beneficiary of the trust.

The Preamble to the “Final Regulations” provides, in relevant part, that a surviving spouse who actually receives a distribution from an IRA is permitted to roll that distribution over into his/her own IRA even if the spouse is not the sole beneficiary of the deceased’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 a trust.

With respect to your first ruling request, Trust T is the named beneficiary of Taxpayer A’s interest in IRA X. Your authorized representative has asserted, on your behalf, that Trust T is a valid trust under the laws of State W; that Trust T became irrevocable upon the death of Taxpayer A (as provided for under Article Seventh C. of Trust T); and that relevant documentation relating to Trust T’s status as the beneficiary of Taxpayer A’s interest in IRA X was given to the administrator of IRA X by the date required under the “Final” Regulations. Furthermore, the Service notes that the identity of each person or entity entitled to receive any portion of Taxpayer A’s interest in IRA X upon Taxpayer A’s death is determinable by perusing the provisions of Trust T.

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Thus, with respect to your first ruling request, we determine as follows:

(1) That Trust T constitutes a qualified “see-through” trust within the meaning of section 1.401(a)(9)-4 of the “Final” Regulations, Question and Answer-5.

With respect to your second and third ruling requests, in this case the IRA X account balance remaining at Taxpayer A's death is payable to Trust T pursuant to the terms of Taxpayer A's beneficiary designation. Taxpayer B, Taxpayer A’s surviving spouse, is the sole trustee of Trust T. Furthermore, as the surviving spouse of Taxpayer A, Taxpayer B is the beneficiary of Percentage 1 of the Trust T estate including IRA X. As trustee of Trust T, Taxpayer B will cause Percentage 1 of the IRA X proceeds to be transferred, by means of a trustee to trustee transfer, into another IRA set up and maintained in the Taxpayer A for the benefit of Trust T, payable to Taxpayer B beneficiary thereof. After said transfer, the transferee IRA will be distributed to Taxpayer B and rolled over into an IRA set up and maintained in the name of Taxpayer B. Said rollover will occur no later than the 60th day following the day on which the transferee IRA proceeds are distributed to Taxpayer B as beneficiary thereof.

The general rule is that if a surviving spouse receives either qualified plan or IRA assets after said assets have passed through either a trust or an estate, the spouse shall be treated as having received said assets from the trust or estate. As a result, the surviving spouse shall not be eligible to roll over the plan or IRA assets into an IRA set up and maintained in the name of the surviving spouse.

However, in this case, the transferee IRA which holds Percentage 1 of the assets of Taxpayer A’s IRA X, the percentage due Taxpayer B at the death of Taxpayer A, will be distributed outright to Taxpayer B consistent with the terms of Trust T of which Taxpayer B became the sole trustee at the death of Taxpayer A.

Thus, based on the specific facts of this case, we shall not apply the general rule described above.

Therefore, with respect to your second and third ruling requests, we conclude as follows:

(2) That Company M’s dividing IRA X, by means of trustee to trustee transfers, into three transferee IRAs in the name of Taxpayer A (Deceased) including one set up to benefit Taxpayer B as a beneficiary of Trust T will not result in the transferee IRA set up to benefit Taxpayer B failing to comply with the requirements of Code § 408(a) including the requirements of Code

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§408(d)(3); and

(3) That Taxpayer B may receive a distribution of the transferee IRA set up to benefit her and roll over said distribution into an IRA set up and maintained in her name.

This letter ruling is based on the assumption that IRA X either meets, has met, or will meet the requirements of Code section 408(a) at all times relevant thereto. It also assumes that transferee IRA set up to benefit Taxpayer B will also meet the requirements of Code section 408(a) at all times relevant thereto. Next, it assumes that the IRA to be set up and maintained in the name of Taxpayer B will also meet the requirements of Code section 408(a). Finally, it assumes that Trust T is valid under State law as asserted.

This letter ruling is based on the facts and representations contained herein.

This letter is directed only to the taxpayer that requested it and is based solely on the representations made with respect thereto. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

Pursuant to a power of attorney on file with this office, the original of this letter ruling is being sent to your authorized representative.

The Service’s point of contact with respect to this letter ruling is (ID: ) who may be reached at 202 (phone) or 202 (FAX).

Sincerely yours,

Frances V. Sloan
Manager, Employee Plans
Technical Group 3

Enclosures:

Deleted copy of ruling letter
Notice of Intention to Disclose