PLR 1210045: Inherited IRA distributions may use the surviving spouse's life expectancy

Plain-English summary

A decedent named a trust as the beneficiary of an IRA, with the surviving spouse and two children as the trust's beneficiaries. The IRS ruled that the IRA could be divided through trustee-to-trustee transfers into an IRA for the spouse and inherited IRAs for the children without creating taxable distributions. The spouse could use the Uniform Lifetime Table for the IRA in her own name, while the children's inherited IRAs could use the Single Life Table based on the spouse's life expectancy. The ruling treated the trust beneficiaries as designated beneficiaries because the trust met the applicable see-through trust requirements.

Ruling snapshot

• Question: Can an inherited IRA be divided among a surviving spouse and children, with required distributions calculated using the applicable beneficiary life expectancies?
• Outcome: Approved.
• Key authorities: IRC §§ 401(a)(9) and 408(d); Treas. Reg. §§ 1.401(a)(9)-4, 1.401(a)(9)-5, 1.401(a)(9)-9, and 1.408-8

Full text (IRS public release)

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

201210045
TAX EXEMPT AND GOVERNMENT ENTITIES
DEC 15 2011

DIVISION

Uniform Issue List: 401.06-02

LEGEND:
Taxpayer A: ***
Decedent B: ***
Individual C: ***
Individual D: ***
Trust T: ***
IRA X: ***
Company Y: ***
Date 1: ***
Date 2: ***
Date 3: ***
State S: ***
Dear ***:

This letter is in response to your request dated August 26, 2010, as amended by
letters dated October 19, 2011 and November 8, 2011, submitted on your behalf
by your authorized representative, in which you request a ruling under section
401(a)(9) and section 408 of the Internal Revenue Code (“Code”).

Page 2 201210045

The following facts and representations have been submitted under penalty of
perjury in support of the ruling requested.

Decedent B was a resident of State S and established Trust T on Date 1. On
Date 2, Decedent B died at age 74 and was survived by his spouse, Taxpayer A,
and his two children, Individuals C and D. At the time of his death, Decedent B
owned IRA X, an individual retirement account within the meaning of Code
section 408(a), with Company Y.

Decedent B’s beneficiary designation form, received by Company Y on Date 3,
designated Trust T as the beneficiary of IRA X. Article V of Trust T provides that
upon the death of Decedent B, Taxpayer A shall receive one-third of Decedent
B’s interest in all assets of Trust T, with the remaining two-thirds divided equally
among each of Decedent B's living children. Individuals C and D were Decedent
B’s only living children on his date of death.

Taxpayer A represents that Trust T is valid under the laws of State S, and that a
copy of Trust T was delivered to Company Y by October 31 of the calendar year
following the year Decedent B died. Trust T became irrevocable upon Decedent
B’s death.

Based on the above, you, through your authorized representative, request the
following rulings:

1. That IRA X may be divided by means of trustee-to-trustee transfers into an
   IRA for Taxpayer A, in her own name, and IRAs for Individuals C and D, in the
   name of Decedent B for the benefit of Trust T, without resulting in taxable
   distributions or payments under Code section 408(d)(1).

2. That the minimum distribution requirements under Code section 401(a)(9)
   may be met by (a) for the IRA in Taxpayer A’s name, applying the Uniform Life
   Table found in section 1.401(a)(9)-9, Q&A-2, of the Income Tax Regulations
   (“Regulations”), and (b) for the IRAs set up to benefit Individuals C and D (in the
   name of Decedent B for the benefit of Trust T), applying the Single Life Table
   found in section 1.401(a)(9)-9, Q&A-1 of the Regulations, using the life
   expectancy of Taxpayer A.

With respect to your first ruling request, Code section 408(d)(1) provides
generally that, in accordance with the rules of Code section 72, amounts paid or
distributed from an IRA are included in gross income by the payee or distributee.

Code section 408(d)(3)(A) provides that paragraph (d)(1) of this section does not
apply to any amount paid or distributed out of an IRA to the individual for whose
benefit the IRA is maintained if -

"*** 201210045

(i) the entire amount received (including money and any other property) is paid
into an IRA for the benefit of such individual not later than the 60th day after the
day on which the individual receives the payment or distribution; or

(ii) the entire amount received (including money and any other property) is paid
into an eligible retirement plan (other than an IRA) for the benefit of such
individual not later than the 60th day after the date on which the payment or
distribution is received, except that the maximum amount which may be paid into
such plan may not exceed the portion of the amount received which is includible
in gross income (determined without regard to section 408(d)(3) of the Code).

Code section 408(d)(3)(C) provides, generally, that amounts from an “inherited”
IRA cannot be rolled over into another IRA. In general, an “inherited” IRA is an
IRA maintained by an individual who acquired said IRA by reason of the death of
another if the acquiring individual is not the surviving spouse of said other
individual.

On April 17, 2002, Final Regulations were published in the Federal Register with
respect to Code sections 401(a)(9) and 408(a)(6) (see also 2002-19 1.R.B. 852,
May 13, 2002). Section 1.408-8 of the Regulations, Q&A-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. Ifa trust is named as
beneficiary of the IRA, this requirement is not satisfied even if the spouse is the
sole beneficiary of the trust.

However, the Preamble to the Regulations under Code section 401(a)(9) and
408(a)(6) provides, in relevant part, that a surviving spouse who actually receives
a distribution from an IRA is permitted to roll that distribution over to his/her own
IRA even if the surviving 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 either a trust or
an estate.

Revenue Ruling 78-406, 1978-2 C.B. 157, (“Rev. Rul. 78-406”) 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 section 408(d).
Furthermore, such a transfer does not constitute a rollover distribution. 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.

With respect to your first ruling request, we note that Taxpayer A has the right to
receive a distribution of her portion of IRA X. Thus, we believe it is appropriate to

*** 201210045

Page 4

treat Taxpayer A as the “payee” or “distributee” of her portion of IRA X for
purposes of Code section 408(d) even though IRA X must originally pass through
Trust T. As such, she is eligible to roll over or transfer, by means of a trustee-to-
trustee transfer, her portion of IRA X into an IRA established in her name.

With regard to Taxpayers C and D, under the terms of Trust T, they are the
beneficiaries of the remaining shares of IRA X. Code section 408(d)(3)(C)
provides that amounts from “inherited” IRAs—i.e., IRAs acquired by reason of
death by persons other than the surviving spouse of the decedent—may not be
rolled over to another IRA, and therefore constitute taxable distributions.
However, as noted above, a trustee-to-trustee transfer described in Rev. Rul. 78-
406 does not constitute a payment or distribution. Such a transfer may be
accomplished after the death of the IRA holder on behalf of the beneficiaries of a
decedent's IRA. The IRAs must be maintained in the name of Decedent B
(deceased) for the benefit of Individual C (or Individual D, as applicable) as
beneficiary of Trust T.

Therefore, with respect to your first ruling request, we conclude:

4. That IRA X may be divided by means of trustee-to-trustee transfers into an
   IRA for Taxpayer A, in her own name, and IRAs for Individuals C and D, in the
   name of Decedent B for the benefit of Trust T, without resulting in taxable
   distributions or payments under Code section 408(d)(1).

With respect to your second ruling request, Code section 408(a) provides the
rules governing IRAs. 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 the trust is
maintained.

Code section 401(a)(9)(A) provides, in general, that a trust will not be considered
qualified unless the plan provides that the entire interest of each employee/ IRA
holder —

(i) will be distributed to such employee not later than the required beginning date,
or

(ii) will be distributed, beginning not later than the required beginning date, over
the life of such employee or over the lives of such employee and a designated
beneficiary or over a period not extending beyond the life expectancy of such
employee or the life expectancy of such employee and a designated beneficiary.

Code section 401(a)(9)(B)(i) provides, in general, that if an employee/IRA holder
dies after distribution of his interest has begun in accordance with section
401(a)(9)(A)(ii) (after his required beginning date), the remaining portion of his
interest must be distributed at least as rapidly as under the method of distribution
being used as of the date of his death.

Page 5 201210045

Code section 401(a)(9)(C) provides, in relevant part, that, for purposes of section
401(a)(9), the term “required beginning date” means April 1 of the calendar year
following the calendar year in which the employee attains age 70 1/2.

Code section 401(a)(9)(E) provides that for purposes of section 401, the term
“designated beneficiary” means any individual designated as a beneficiary by the

employee.

Section 1.401(a)(9)-4 of the Regulations, Q&A-1, provides, in relevant part, that a
designated beneficiary is an individual who is designated as a beneficiary under
the plan. An individual may be designated as a beneficiary under the plan either
by the terms of the plan or, if the plan so provides, by an affirmative election by
the employee (or the employee's surviving spouse) specifying the beneficiary.
Under these Regulations, a designated beneficiary need not be specified by
name in the plan in order to be a designated beneficiary so long as the individual
who is to be the beneficiary is identifiable under the plan. The member of a class
of beneficiaries capable of contraction or expansion will be treated as being
identifiable if it is possible to identify the class member with the shortest life
expectancy. Further, the passing of an employee’s interest to an individual under
a will or otherwise under applicable state law will not make that individual a
designated beneficiary under section 401(a)(9)(E) unless that individual is
designated as a beneficiary under the plan.

Section 1.401(a)(9)-4 of the 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 or a charitable
organization, may not be a designated beneficiary. If a person other than an
individual is designated as a beneficiary of an employee’s benefit, the employee
will be treated as having no beneficiary for purposes of section 401(a)(9), even if
there are also individuals designated as beneficiaries.

Section 1.401(a)(9)-4 of the Regulations, Q&A-4, provides in relevant part, that in
order to be a designated beneficiary, an individual must be a beneficiary as of the
date of the employee’s death. Generally, an employee’s designated beneficiary
will be determined based on the beneficiaries designated as of the date of death
who remain beneficiaries as of September 30 of the calendar year following the
calendar year of the date of death.

Section 1.401(a)(9)-4 of the Regulations, Q&A-5, provides that where a trust is
named as a beneficiary of an employee, beneficiaries of the trust with respect to
the trust’s interest in the 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 there is no

corpus.
(2) the trust is irrevocable or will, by its terms, become irrevocable upon the

es 201210045

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 Q&A-1 of this
section from the trust instrument.

(4) relevant documentation has been timely provided to the plan administrator.

Section 1.401(a)(9)-4, Q & A-6(b) of the Regulations provides, in relevant
summary, that at a minimum, documentation sufficient to enable an IRA
custodian to identify beneficiaries of an IRA must be provided by a trustee to the
custodian by October 31 of the calendar year immediately following the calendar
year in which the IRA owner died.

Section 1.401(a)(9)-4 of the Regulations, Q&A-5(c), provides that if the trust has
more than one beneficiary, the rules under section 1.401(a)(9)-5, Q&A-7,
determine which beneficiary’s life expectancy shall be used to determine the
distribution period.

Section 1.401(a)(9)-5 of the Regulations, Q&A-7(a), states that if more than one
individual is a designated beneficiary, the beneficiary with the shortest life
expectancy will be the designated beneficiary for purposes of determining the
applicable distribution period.

Section 1.401(a)(9)-9 of the Regulations, Q&A-1, sets forth the “Single Life
Table,” to be used to determine the life expectancy of an individual.

Section 1.401(a)(9)-9 of the Regulations, Q&A-2, sets forth the “Uniform Lifetime
Table,” to be used to determine the distribution period for lifetime distributions to
an employee or IRA holder in situations in which the employee/ IRA holder's
spouse is either not the sole designated beneficiary or is the sole designated
beneficiary but is not more than 10 years younger than the employee/ IRA
holder.

With respect to your second ruling request, Taxpayer A, as discussed above,
may roll her interest in IRA X into an IRA in her own name. Therefore, her
minimum required distributions should be calculated using the Uniform Lifetime
Table found in section 1.401(a)(9)-9, Q&A-2, of the Regulations.

With regard to the IRAs set up to benefit Individuals C and D, you have
represented that Trust T is valid under the laws of State S, that it became
irrevocable upon the death of Decedent B, and that a copy of Trust T was timely
given to the IRA custodian, Company Y. Furthermore, the identity of each
person entitled to receive any portion of IRA X upon Decedent B’s death—
Taxpayer A and Individuals C and D—is determinable under the provisions of
Trust T. Therefore, Trust T meets the requirements of section 1.401(a)(9)-4,
Q&A-5, of the Regulations for a “see-through trust,” and the beneficiaries of Trust
T may be treated as designated beneficiaries of IRA X.

Page 5 201210045

Page 7

Section 1.401(a)(9)-5 of the Regulations, Q&A-7(a) provides that the minimum
required distributions are paid out over the life expectancy of the oldest
designated beneficiary. Taxpayer A is older than Individuals C and D; thus, in
the case of the IRAs maintained for Individuals C and D (in the name of
Decedent B for the benefit of Trust T), the required minimum distributions should
be calculated using the Single Life Table found in section 1.401(a)(9)-9, Q&A-1,
of the Regulations, over the life expectancy of Taxpayer A.

Therefore, with respect to your second ruling request, we conclude:

2. That the minimum distribution requirements under Code section 401(a)(9)
   may be met by (a) for the IRA in Taxpayer A’s name, applying the Uniform Life
   Table found in section 1.401(a)(9)-9, Q&A-2, of the Regulations, and (b) for the
   IRAs set up to benefit Individuals C and D (in the name of Decedent B for the
   benefit of Trust T), applying the Single Life Table found in section 1.401(a)(9)-9,
   Q&A-1, of the Regulations, using the life expectancy of Taxpayer A.

No opinion is expressed as to the tax treatment of the transaction described
herein under the provisions of any other section of either the Code or regulations
which may be applicable thereto. This ruling letter is based on the assumption
that IRA X and the IRAs to be established met or will meet the requirements of
Code section 408(a) at all relevant times. Furthermore, this ruling letter assumes
that Trust T is valid under the laws of State S as represented.

This letter is directed only to the taxpayer who requested it. 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, a copy of this letter ruling
is being sent to your authorized representative. If you wish to inquire about this
ruling, please contact ***. Please address all correspondence to SE:T:EP:RA:T2.

Sincerely yours,

Donzell Littlejohn, Manager,
Employee Plans Technical Group 2

Jason Levine, Acting for Donzell Littlejohn

Enclosures:
Deleted copy of ruling letter
Notice of Intention to Disclose