Surviving spouse may roll over trust-owned IRAs but may not treat the original accounts as her own

Plain-English summary

A decedent named a joint revocable trust or its marital subtrust as beneficiary of seven Roth IRAs and one traditional IRA. After a court retroactively reformed some beneficiary designations, the surviving spouse allocated all or part of the accounts to a survivor's trust that she controlled as sole trustee and sole beneficiary. The IRS ruled that distributions from the survivor's trust portions were not inherited IRA distributions to her and could be rolled into IRAs in her own name, subject to the one-rollover-per-year rule and exclusion of required minimum distributions. Because the trust, rather than the spouse individually, was the named beneficiary, she could not simply elect to treat the decedent's original IRAs as her own. Future required minimum distributions would follow the rules applicable to her own traditional and Roth IRAs after the rollovers.

Ruling snapshot

• Question: Could the surviving spouse roll trust-owned traditional and Roth IRA assets into IRAs in her own name and receive owner-based distribution treatment?
• Outcome: mixed, rollover relief was granted, but she could not treat the decedent's original accounts as her own
• Key authorities: IRC §§ 401(a)(9), 408(d)(3), and 408A; Treas. Reg. § 1.408-8, Q&A-5

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201707001 Third Party Communication: None
Release Date: 2/17/2017 Date of Communication: Not Applicable
Index Number: 408.00-00
Person To Contact:
------------------------------- ---------------------------, ID No. ---------------
------------------------------------ -----------------
---------------------------- Telephone Number:
----------------------
Refer Reply To:
CC:TEGE:EB:QP2
PLR-101460-16
Date:
November 08, 2016

Taxpayer = --------------------------------
Decedent = -----------------------
Trust = ------------------------------------------------------------------

Dear ------------------:

This letter responds to your request dated December 30, 2015, as supplemented by
correspondence dated October 28, 2016, submitted on your behalf by your authorized
representative, in which you request a series of rulings on the spousal rollover of
individual retirement accounts designated to a joint revocable trust.

The following facts and representations were submitted under penalty of perjury on your
behalf:

Decedent was married to Taxpayer until his death on ------------------, just prior to
attaining age 70 ½. Decedent has two adult children from a prior marriage and
Taxpayer has one adult child from a prior marriage. Decedent and Taxpayer were
residents of -------------- and held all of their assets as community property.

At the time of his death, Decedent owned seven Roth IRAs and one traditional IRA with
a combined value of approximately $------------ (the Retirement Accounts).

In -------, Decedent and Taxpayer created a revocable trust (Trust) of which they were
the sole trustees. The Trust was amended and restated in 2011. The IRAs are listed
on the schedule attached to the Trust document as property held in trust. From the time
the Trust was created until Decedent’s death, Decedent and Taxpayer were the trustees
of the Trust. Upon Decedent’s death, Taxpayer became the sole trustee of the Trust
PLR-101460-16 2

and various subtrusts that arose upon Decedent’s death. The Trust vests Taxpayer
with complete authority and sole control in allocating assets to the subtrusts. The first
subtrust is the Survivor’s Trust. Taxpayer, as sole trustee is to allocate her separate
property and a portion of the trust estate corresponding to her community property
interest in the trust estate to the Survivor’s Trust. During her life she is entitled to the
income and principal of the Survivor’s Trust up to and including the entire trust estate of
the Survivor’s Trust. Upon her death, any remaining assets will be added to the second
trust, the Bypass Trust. Taxpayer, as trustee, is to allocate an amount based on a
formula designed to minimize federal estate tax to the Bypass Trust, and the balance of
the Trust’s assets are to be allocated to the third subtrust, the Marital Trust. During
Taxpayer’s life she is entitled to all of the income from the Bypass Trust and the Marital
Trust as well as such amounts of principal as are necessary for her health, education,
support and maintenance, except that the distributions of principal from the Marital Trust
may not occur unless and until the Survivor’s Trust has no readily marketable assets
remaining, and distributions of principal from the Bypass Trust may not occur until both
the Survivor’s Trust and the Marital Trust have no readily marketable assets remaining.
Taxpayer is also required to receive any IRA distributions that are paid to either the
Bypass Trust or the Marital Trust. Upon Taxpayer’s death, remaining assets in the
Marital Trust will be distributed to the Bypass Trust and the Bypass Trust will pass to
two of the adult children.

Also, under the terms of the Trust, upon Decedent’s death the Trust became irrevocable
except with respect to the Survivor’s Trust.

As part of their estate planning, Taxpayer represents that she and Decedent
communicated to their attorney that they wanted Taxpayer to have the flexibility to elect
to treat Decedent’s IRAs as her own if she was the surviving spouse. For four of the
Roth IRAs, the attorney caused death beneficiary designation forms to name the Trust
as beneficiary. Taxpayer represents that it was her understanding that she could
achieve a spousal rollover of these amounts by first allocating them to the Survivor’s
Trust. For the other three Roth IRAs and the traditional IRA, the Marital Trust was
named beneficiary. The Trust does not grant Taxpayer the authority to reallocate
amounts from the Marital Trust to the Survivor’s Trust.

In order to remedy her situation, Taxpayer obtained an order from the Superior Court of
The County of --------------, reforming the Marital Trust beneficiary designations
retroactive to their original execution date to show the Trust as the primary beneficiary.
The order was entered on --------------------------. Pursuant to the order, Taxpayer
allocated the entirety of four of the Roth IRAs to the Survivor’s Trust and half of each of
the other three Roth IRAs and half of the traditional IRA to the Survivor’s Trust, with the
remaining half of each of those IRAs being allocated to the Marital Trust.

Taxpayer intends to set up and maintain a Roth IRA in her name and a traditional IRA in
her name to take a distribution of the traditional IRA and the Roth IRAs held by the
PLR-101460-16 3

Survivor’s Trust. Pursuant to section 408(d) of the Internal Revenue Code (Code),
Taxpayer intends to roll over the portion of the distribution consisting of Roth IRA assets
to the custodian of her Roth IRA and the portion of the distribution consisting of
traditional IRA assets to the custodian of her traditional IRA (Spousal Rollover
Transaction). The Spousal Rollover Transaction will not include any amounts that are
or were required minimum distributions for any of the IRAs for the calendar years 2012
through the calendar year in which the Spousal Rollover Transaction occurs.

Based on the preceding facts, Taxpayer requests the following rulings with respect to
the Spousal Rollover Transaction:

   1. The Survivor’s Trust Retirement Accounts are not inherited IRAs (or inherited
      Roth IRAs) with respect to Taxpayer for purposes of section 408(d)(3).
   2. Taxpayer will be treated as the payee or distributee of the Survivor’s Trust
      Retirement Accounts for purposes of qualifying to elect the Accounts as her
      own under § 1.408-8, Q&A-5 of the Income Tax Regulations, even though the
      Accounts did not designate her individually.
   3. The Spousal Rollover Transaction is a proper rollover pursuant to
      section 408(d)(3) and constitutes a valid election on Taxpayer’s part to treat
      each of the Survivor’s Trust Retirement Accounts as her own within the
      meaning of § 1.408-8, Q&A-5.
   4. Taxpayer will not be required to include any portion of the assets distributed
      pursuant to the Spousal Rollover Transaction in her gross income for federal
      income tax purposes for the year in which the Spousal Rollover Transaction
      occurs, pursuant to sections 408(d)(3) and 408A(d)(1).
   5. Beginning with the year following the year in which the Spousal Rollover
      Transaction occurs, Taxpayer will not be required to take required minimum
      distributions from Taxpayer’s Roth IRA pursuant to section 408A(c)(5).
   6. Beginning with the year following the year in which the Spousal Rollover
      Transaction occurs, Taxpayer will be required to take minimum required
      distributions from Taxpayer’s IRA as calculated in accordance with
      section 401(a)(9)(A) applied treating the Taxpayer as the IRA owner.

With respect to your ruling requests, section 408(d)(1) provides that, except as
otherwise provided in section 408(d), any amount paid or distributed out of an IRA shall
be included in gross income by the payee or distributee, as the case may be, in the
manner provided under section 72.

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).

Section 408(d)(3)(A) 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
PLR-101460-16 4

if: (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 he receives the payment or distribution; or (ii) the entire amount received
(including money and any other property) is paid into an eligible retirement plan 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)).

Section 408(d)(3)(B) provides that section 408(d)(3) does not apply to any amount
described in section 408(d)(3)(A)(i) received by an individual from an IRA if at any time
during the one-year period ending on the day of such receipt such individual received
any other amount described in section 408(d)(3)(A)(i) from an IRA which was not
includible in his gross income because of the application of section 408(d)(3).

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 gross 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.

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.

Section 408A(a) provides that except as provided in section 408A, a Roth IRA generally
is treated in the same manner as a traditional IRA.

Section 408A(c)(5)(A) provides that the required minimum distribution rules of
section 401(a)(9)(A) do not apply prior to the death of the Roth IRA owner.

Section 408A(a)(6) provides that the only rollover contribution permitted to a Roth IRA is
a qualified rollover contribution. Section 408A(e) defines a qualified rollover contribution
in pertinent part as a rollover to a Roth IRA from another Roth IRA. Under
section 408A(e)(1) a qualified rollover from an individual retirement plan other than a
Roth IRA to a Roth IRA is disregarded for purposes of the one-rollover-per-year rule of
section 498(d)(3)(B).

Section 1.408-8, Q&A 5, provides that a surviving spouse of an individual may elect to
treat the spouse’s entire interest as a beneficiary in the 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
PLR-101460-16 5

as beneficiary of the IRA, this requirement is not satisfied even if the spouse is the sole
beneficiary of the trust.

In the present case, Decedent’s traditional IRA and seven Roth IRAs passed to the
Trust upon Decedent’s death. Taxpayer, as sole trustee of Trust, under the terms of
Trust, had sole authority and discretion to determine which Trust assets were to be
allocated to each of the subtrusts (Survivor’s Trust, Bypass Trust and Marital Trust).
Pursuant to her authority, Taxpayer allocated the entirety of four of the Roth IRAs as
well a one-half of the traditional IRA and one-half of each of the three remaining Roth
IRAs to the Survivor’s Trust. Taxpayer allocated the remainder of the IRAs to the
Marital Trust.

Under the terms of the Survivor’s Trust, Taxpayer is entitled to receive as much of the
income and principal of the Survivor’s Trust as she directs, up to and including the
entire trust estate of the Survivor’s Trust. Under this set of circumstances, Taxpayer, as
the surviving spouse of Decedent, may not treat Decedent’s Roth IRAs or traditional
IRA as her own, because the Trust was named as the beneficiary of each of the IRAs.
However, because Taxpayer is the trustee and sole beneficiary of the Survivor’s Trust
and is entitled to the income and principal of the Survivor’s Trust up to and including the
entire trust estate of the Survivor’s Trust, for purposes of applying section 408(d)(3)(A)
to the Decedent’s IRAs, Taxpayer is effectively the individual for whose benefit the
accounts are maintained. Accordingly, if Taxpayer receives a distribution of the
proceeds of Decedent’s Roth IRAs and Decedent’s traditional IRA, she may roll over the
distribution (other than those required minimum distribution amounts required to have
been distributed or to be distributed in accordance with section 401(a)(9)) into a Roth
IRA and a traditional IRA established and maintained in her name. However, in
accordance with section 408(d)(3)(B), Taxpayer may not roll over more than one IRA
distribution within a one-year period. In order to avoid this limitation with respect to the
Roth IRAs, the Trust would need to consolidate the Roth IRAs into a single Roth IRA by
means of a series of trustee-to-trustee transfers.

To the extent that Taxpayer may roll over a distribution, beginning with the year
following the year in which each rollover occurs, the rules of section 401(a)(9) pertaining
to required minimum distributions will apply to Taxpayer’s traditional IRA or Roth IRA,
as the case may be, taking into account Taxpayer as the IRA owner.

Therefore, with respect to your ruling requests we conclude that:

1. Decedent’s IRA and Roth IRAs are not inherited IRAs for purposes of
   section 408(d)(3) with respect to Taxpayer.
   2 Taxpayer will be treated as the payee or distributee of the portions of Decedent’s
   traditional IRA and Roth IRAs that have been allocated to the Survivor’s Trust
   and that are distributed to Taxpayer from each IRA. However, in accordance with
   § 1.408-8, Q&A 5, Taxpayer may not treat Decedent’s IRAs as her own.
   PLR-101460-16 6

3 Taxpayer will be eligible to roll over the distributions she receives from the
traditional IRA and each Roth IRA to a traditional IRA or Roth IRA respectively,
established and maintained in Taxpayer’s name pursuant to section 408(d)(3),
provided that she does not roll over more than one IRA distribution within a one-
year period. However, in accordance with § 1.408-8, Q&A 5, Taxpayer may not
treat Decedent’s IRAs as her own.
4 Taxpayer will not be required to include the portion of any distribution to her from
Decedent’s traditional IRA and Roth IRAs in her gross income for federal income
tax purposes for the year in which that amount is distributed to Taxpayer and
rolled over into Taxpayer’s traditional IRA or Roth IRA, pursuant to
section 408(d)(3), provided that she does not roll over more than one IRA
distribution within a one-year period.
5 Beginning with the year following the year in which Taxpayer rolls over a Roth
IRA distribution to her own Roth IRA, Taxpayer will not be required to take
required minimum distributions from Taxpayer’s Roth IRA pursuant to
section 408A(c)(5).
6 Beginning with the year following the year in which Taxpayer rolls over a
distribution from Decedent’s traditional IRA to her own traditional IRA, minimum
required distributions from Taxpayer’s traditional IRA will be calculated in
accordance with section 401(a)(9)(A) with Taxpayer as the IRA owner.

This ruling is based on the assumption that the order from the ----------------------------------
---------------------------------------------------------- was effective to reform the beneficiary
designations retroactive to their original execution date such that the IRAs originally
assigned to the Marital Trust could be allocated to the Survivor’s Trust.

This ruling expresses no opinion concerning any effect of the order from the ---------------
-------------------------------------------------------------------------- on the determination of
required minimum distributions under section 408(a)(6).

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party, as specified in Rev. Proc. 2016-1, 2016-1 I.R.B. 1, §
7.01(15)(b). This office has not verified any of the material submitted in support of the
request for ruling, and such material is subject to verification on examination. The
Associate office will revoke or modify a letter ruling and apply the revocation
retroactively if there has been a misstatement or omission of controlling facts; the facts
at the time of the transaction are materially different from the controlling facts on which
the ruling was based; or, in the case of a transaction involving a continuing action or
series of actions, the controlling facts change during the course of the transaction. See
Rev. Proc. 2016-1, § 11.05.
PLR-101460-16 7

Except as specifically set forth above, no opinion is expressed or implied concerning the
federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

                                               Sincerely,



                                               Laura B. Warshawsky
                                               Senior Technician Reviewer
                                               (Qualified Plans Branch 2)
                                               Tax Exempt & Government Entities

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