Splitting a decedent's IRA (left to his estate) into separate inherited IRAs for the heirs is not a taxable distribution

Plain-English summary

A man died after he had started taking required minimum distributions (RMDs) from his IRA, and he had named his estate (not a person) as the account's beneficiary. His will left the estate's interest to several individual heirs. The executor asked the IRS whether he could split the single IRA, by direct trustee-to-trustee transfers, into separate "inherited IRAs" for each heir, each titled in the decedent's name for the benefit of one heir. The IRS said yes on all counts: the split is not a taxable payout to the estate under section 408(d)(1), because a trustee-to-trustee transfer is not a distribution. Because the estate is not an individual, the IRA is treated as having no "designated beneficiary," so each heir must continue emptying their inherited IRA over the decedent's remaining single-life expectancy (measured from his age in the year of death, reduced by one each year), figured independently for each account. The split is also not a "transfer" of income-in-respect-of-a-decedent under section 691(a)(2), so each heir, not the estate, reports the income as they receive their RMDs. This matters to families who inherit an IRA through an estate: they can carve it into individual accounts without triggering immediate tax, though the payout schedule stays tied to the original owner's life expectancy.

Ruling snapshot

• Question: May an estate-beneficiary IRA be divided by trustee-to-trustee transfer into separate inherited IRAs for the heirs without a taxable distribution, and how are RMDs and income-in-respect-of-a-decedent handled afterward?
• Outcome: approved (all four rulings granted)
• Key authorities: IRC §§ 401(a)(9), 408(d)(1), 408(d)(3), 691(a); Treas. Reg. §§ 1.401(a)(9)-4, -5, -8, 1.408-8, 1.691(a)-1, -4; Rev. Rul. 78-406; Rev. Rul. 92-47

Full text (IRS public release)

Internal Revenue Service                        Department of the Treasury
                                                Washington, DC 20224

Number: 201909003                               Third Party Communication: None
Release Date: 3/1/2019                          Date of Communication: Not Applicable
Index Number: 401.06-01, 408.03-00,
              691.01-00                          Person To Contact:
                                                 ----------------------------, ID No. --------------
--------------------------------                 -----------------
-----------------------------                    Telephone Number:
------------------------------                   --------------------
---------------------------                      Refer Reply To:
------------------------------------------------ CC:TEGE:EB:QP4
----                                             PLR-118480-18
                                                 Date:
                                                 November 28, 2018


Legend:

Decedent             = -------------------
Estate A             = --------------------------------
Executor B           = --------------------
IRA X                = ------------------------------------------------------------------------------------------------
                       ---------------------------------------------------------
N                    = ------------
Beneficiaries        = ------------------------------------------------------------------------------------------------
                       ------------------------------------------------------------------------------------------------
                       ------------------------------------------------------------------------------------------------
                       ------------------------------
Date O               = ------------------------
County P             = ------------------
State Q              = ----------

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

This is in response to your letter dated May 29, 2018, as supplemented by
correspondence dated September 6, 2018, submitted on your behalf by your authorized
representative, in which you request rulings under sections 401(a)(9), 408, and 691(a)
of the Internal Revenue Code.

The following facts and representations have been submitted under penalties of perjury
in support of the rulings requested:

Decedent maintained an Individual Retirement Account (IRA), IRA X. Decedent died on
-------------------, at age ---, after his required beginning date, as defined in section
401(a)(9). Prior to his death, Decedent had received required minimum distributions
from IRA X for the year of death. Estate A was sole the beneficiary of IRA X. Executor
B is the executor of Estate A. Decedent was unmarried at the time of his death.
Decedent was survived by N nonspousal beneficiaries.(Beneficiaries)

Decedent's Last Will and Testament, executed on Date O, was duly admitted to probate
in County P, of State Q. Pursuant to Item 5 of Decedent's Last Will and Testament, the
Estate's interest was bequeathed to the Beneficiaries.

Executor B proposes to divide IRA X, as of Decedent's date of death, by trustee-to-
trustee transfer into N inherited IRAs for the benefit of each Beneficiary according to
their equitable bequests under the Decedent's Last Will and Testament. Each inherited
IRA will be titled under the Decedent's name for the benefit of each Beneficiary.

Based on the foregoing facts and representations, you have requested the following
rulings:

1. The division of IRA X as of the date of Decedent's death by means of trustee-to-
trustee transfers into IRAs for the benefit of the N Beneficiaries according to their
equitable percentages and titled in the name of the Decedent for the benefit of each
individual Beneficiary (instead of titled to Estate A), will not result in taxable distributions
or payments under section 408(d)(1) to Estate A.

2. The Beneficiaries can take the required minimum distributions from their inherited
IRAs for the remaining life expectancy of the Decedent using the actuarial table and
each inherited IRA will be independent of any required minimum distributions taken by
other Beneficiaries.

3. The division of IRA X and the establishment of the N inherited IRAs will not
constitute a transfer within the meaning of section 691(a)(2) and the Beneficiaries will
include in gross income the amounts of income in respect to their required minimum
distributions from their respective inherited IRAs when the distributions are received by
the Beneficiaries, under section 691(a)(1)(C).

4. When the Beneficiaries receive their required minimum distributions, the
Beneficiaries are responsible separately for any tax liabilities on the required minimum
distributions for the tax year subsequent to the year the inherited IRAs are established
or the year of death if later (and all subsequent tax years). No income taxes or
penalties for failure of the Beneficiaries to take their own required minimum distributions
for the tax year subsequent to the year the inherited IRAs are established or the year of
death if later (and all subsequent tax years) will be passed to Estate A or Executor B.

Under section 408(a)(6) and the regulations thereunder, rules similar to the rules of
section 401(a)(9) and the incidental death benefit requirements of section 401(a) apply
to the distribution of the entire interest of an individual for whose benefit the IRA is
maintained.

Section 1.408-8, Q&A-1(a), provides that an IRA is subject to the required minimum
distribution rules under section 401(a)(9). In order to satisfy section 401(a)(9), the rules
of section 1.401(a)(9)-1 through 1.401(a)(9)-9 must be applied, except as otherwise
provided.

Section 1.408-8, Q&A-1(b) provides that for purposes of applying the required minimum
distribution rules in section 1.401(a)(9)-1 through 1.401(a)(9)-9, the IRA trustee,
custodian or issuer is treated as the plan administrator, and the IRA owner is substituted
for the employee.

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 (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.

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.

Section 401(a)(9)(C) provides, in relevant part, that for purposes of this paragraph, the
term "required beginning date" means April 1 of the calendar year following the calendar
year in which the IRA holder attains age 70 ½.

Section 401(a)(9)(E) provides that for purposes of section 401(a)(9), the term
designated beneficiary means any individual designated as beneficiary by the
employee.

Section 1.401(a)(9)-4, Q&A-3, states that only individuals may be designated
beneficiaries for purposes of section 401(a)(9). A person that is not an individual, such
as the employee's/IRA holder's estate, may not be a designated beneficiary.

Section 1.401(a)(9)-4, 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 for purposes of determining the
distribution period for required minimum distributions after the employee's death 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 (that is, have not received their entire interest before that September 30).

Section 1.401(a)(9)-5, Q&A-5(a)(2) provides, in summary, that if an employee/IRA
holder dies on or after his required beginning date without having designated a
beneficiary, then post-death distributions must be made over the remaining life
expectancy of the employee/IRA holder determined in accordance with paragraph (c)(3)
of this A-5.

Section 1.401(a)(9)-5, Q&A-5(c)(3) provides, in general, that with respect to an
employee/IRA holder who does not have a designated beneficiary, the applicable
distribution period measured by the employee's/IRA holder's remaining life expectancy
is the life expectancy of the employee/IRA holder using the age of the employee/IRA
holder as of the employee's/IRA holder's birthday in the calendar year of the
employee's/IRA holder's death. In subsequent calendar years, the applicable
distribution period is reduced by one for each calendar year that has elapsed after the
calendar year of the employee's/IRA holder's death.

Under section 1.401(a)(9)-8, Q&A-2, in general and relevant part, if an account/IRA is
divided into separate accounts/IRAs for the benefit of different beneficiaries, for years
subsequent to the year the separate accounts/IRAs are established or the date of death
if later, then the rules of section 401(a)(9) are applied separately to each of the
respective accounts/IRAs.

Section 1.401(a)(9)-8, Q&A-3, provides that, for purposes of section 401(a)(9), separate
accounts in an employee's/IRA holder's account are separate portions of an
employee's/IRA holder's benefit reflecting the separate interests of the employee's/IRA
holder's beneficiaries under the plan as of the date of the employee's/IRA holder'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 reasonable
and consistent manner among the separate accounts. However, once the separate
accounts are actually established, the separate accounting can provide for separate
investments for each separate account under which gains and losses from the
investment of the account are only allocated to that account, or investment gain or
losses can continue to be allocated among the separate accounts/IRAs on a pro rata
basis. A separate accounting must allocate any post-death distribution to the separate
account/IRA of the beneficiary receiving that distribution.

The relevant Single Life Table determining life expectancy is provided in 1.401(a)(9)-9,
Q&A-1.

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)(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 IRA is maintained 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
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)).

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 the IRA by reason of the death of another if the acquiring
individual is not the surviving spouse of such individual.

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 distribute, as those terms
are used in section 408(d). Furthermore, such a transfer does not constitute a rollover
distribution. Revenue Ruling 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.

Section 691(a)(1) provides that the amount of all items of gross income in respect of a
decedent which are not properly includible in respect of the taxable period in which falls
the date of his death or a prior period (including the amount of all items of gross income
in respect of a prior decedent, if the right to receive such amount was acquired by
reason of the death of the prior decedent or by bequest, devise, or inheritance from the
prior decedent) shall be included in the gross income, for the taxable year when
received, of: (A) the estate of the decedent, if the right to receive the amount is acquired
by the decedent's estate from the decedent; (B) the person who, by reason of the death
of the decedent, acquires the right to receive the amount, if the right to receive the
amount is not acquired by the decedent's estate from the decedent; or (C) the person
who acquires from the decedent the right to receive the amount by bequest, devise, or
inheritance, if the amount is received after a distribution by the decedent's estate of
such right.

Section 691(a)(2) provides that if a right, described in section 691(a)(1), to receive an
amount is transferred by the estate of the decedent or a person who received such right
by reason of the death of the decedent or by bequest, devise, or inheritance from the
decedent, there shall be included in the gross income of the estate or such person, as
the case may be, for the taxable period in which the transfer occurs, the fair market
value of such right at the time of such transfer plus the amount by which any
consideration for the transfer exceeds such fair market value. For purposes of this
paragraph, the term "transfer" includes sale, exchange, or other disposition, or the
satisfaction of an installment obligation at other than face value, but does not include
transmission at death to the estate of the decedent or a transfer to a person pursuant to
the right of such person to receive such amount by reason of the death of the decedent
or by request, devise, or inheritance from the decedent.

Section 1.691(a)-1(b) provides that the term "income in respect of a decedent" (IRD)
refers to those amounts to which a decedent was entitled as gross income, but which
were not properly includible in computing the decedent's taxable income for the taxable
year ending with the date of the decedent's death or for a previous taxable year under
the method of accounting employed by the decedent. Section 1.691(a)-1(c) provides
that the term "income in respect of decedent" also includes the amount of all items of
gross income in respect of a prior decedent, if (1) the right to receive such amount was
acquired by the decedent by reason of the death of the prior decedent or by bequest,
devise, or inheritance from the prior decedent and if (2) the amount of gross income in
respect of the prior decedent was not properly includible in computing the decedent's
taxable income for the taxable year ending with the date of his death or for a previous
taxable year.

Section 1.691(a)-4(a) provides that in general, the transferor must include in his gross
income for the taxable period in which the transfer occurs the amount of the
consideration, if any, received for the right or the fair market value of the right at the
time of the transfer, whichever is greater.

Section 1.691(a)-4(b) provides that if the estate of a decedent or any person transmits
the right to IRD to another who would be required by section 691(a)(1) to include such
income when received in his gross income, only the transferee will include such income
when received in his gross income. In this situation, a transfer within the meaning of
section 691(a)(2) has not occurred.

Section 1.691(a)-4(b)(2) provides that if a right to IRD is transferred by an estate to a
specific or residuary legatee, only the specific or residuary legatee must include such
income in gross income when received.

Revenue Ruling 92-47, 1991-1 C.B. 198, holds that a distribution to the beneficiary of a
decedent's IRA that equals the amount of the balance in the IRA at the decedent's
death, less any nondeductible contributions, is IRD under section 691(a)(1) that is
includible in the gross income of the beneficiary for the tax year the distribution is
received.

The rules discussed above will apply to your ruling requests as follows:

1. The division of IRA X as of the Decedent's date of death by means of trustee-to-
trustee transfers into inherited IRAs for the benefit of the N Beneficiaries, according to
their equitable percentages and titled in the name of the Decedent and each individual
Beneficiary (instead of titled to Estate A), will not result in taxable distributions or
payments under section 408(d)(1) to Estate A.

2. Because Estate A was listed as the designated beneficiary of IRA X, IRA X is treated
as having no designated beneficiary. Because IRA X had no designated beneficiary
and the Decedent died after his required beginning date, the Beneficiaries can take
required minimum distributions from each of their inherited IRAs for the remaining life
expectancy of the Decedent. The amount required to be distributed each year is
determined using the Decedent's age in the calendar year of death and the applicable
actuarial table. The life expectancy factor is reduced by one each subsequent calendar
year. The amount required to be taken from each inherited IRA will be determined
independently of any required minimum distributions required to be taken by the other
Beneficiaries.

3. The division of IRA X by means of trustee-to-trustee transfer into N inherited IRAs
will not constitute a transfer within the meaning of section 691(a)(2). The Beneficiaries
will each include, in their gross income, the amounts of IRD from their respective
inherited IRA when the distribution or distributions from the inherited IRAs are received.

4. The Beneficiaries of each respective inherited IRA are separately responsible for any
tax liabilities relating to required minimum distributions from their inherited IRAs for the
tax year subsequent to the year the inherited IRAs are established or the year of death
if later (and all subsequent tax years). No income taxes or penalties for failure of the
Beneficiaries to take their required minimum distributions for the tax year subsequent to
the year the inherited IRAs are established or the year of death if later (or any
subsequent tax years) will be passed to Estate A or Executor B.

Except as expressly provided herein, no opinion is expressed or implied concerning the
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.

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. 2018-1, 2018-1 I.R.B. 1, section
7.01(16)(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. 2018-1, section 11.05.

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

                                     Sincerely,



                                     Cathy V. Pastor
                                     Senior Counsel
                                     Qualified Plans Branch 4
                                     Office of Associate Chief Counsel
                                     (Tax Exempt & Government Entities)


cc: