Surviving spouse may roll over her community-property share of a deceased spouse's IRA held through a trust

Plain-English summary

A husband and wife in a community property state set up a family trust, and the husband's IRA named the trust as its beneficiary. When the husband died, half of the IRA was the wife's community property. Under the trust's terms, the wife became the sole trustee and the sole beneficiary of a subtrust that receives her community-property share and lets her withdraw all of its income and principal on request. She wanted to pull her half of the IRA out of the subtrust and roll it into an IRA in her own name, which normally only a surviving spouse (not a trust or other heir) can do. The IRS ruled in her favor: because she can freely reach the assets as sole trustee and beneficiary, she is treated as receiving her half of the IRA directly from her deceased husband rather than from the trust. That means she may roll it into her own IRA within the usual 60-day window without including it in income, and the trust's receipt and the rollover are not a "transfer" that would accelerate tax under the income-in-respect-of-a-decedent rules. She will still owe income tax on that inherited IRA money as she takes distributions from her own IRA later. The ruling is a common route for letting a surviving spouse get spousal rollover treatment when an IRA was left to a trust.

Ruling snapshot

• Question: Can a surviving spouse who is sole trustee and beneficiary of a subtrust roll her community-property share of her late husband's IRA into her own IRA?
• Outcome: approved (all four rulings granted)
• Key authorities: IRC § 408(d)(3)(A); IRC § 691(a)(1), (a)(2); Treas. Reg. § 1.691(a)-4; Rev. Rul. 92-47

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202034002 Third Party Communication: None
Release Date: 8/21/2020 Date of Communication: Not Applicable
Index Number: 408.03-00
Person To Contact:
-------------------------- ---------------, ID No. -----------------
------------------------------------------ Telephone Number:
---------------------------------------- -------------------
Refer Reply To:
CC:EEE:EB:QP3
PLR-112379-19
Date:
May 21, 2020

Taxpayer = --------------------------
Decedent = -----------------------
Trust T = ------------------------------------
Subtrust S = ---------------------
IRA D = --------------------------------
Date 1 = -------------------------
Date 2 = ---------------------
State E = ----------------

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

This letter responds to your request dated May 16, 2019, as supplemented by
correspondence dated December 17, 2019, and March 3, 2020, submitted on your
behalf by your authorized representative, in which you request rulings under sections
408(d) and 691 of the Internal Revenue Code.

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

Trust T was established by Decedent and Taxpayer (husband and wife) on Date 1. On
Date 2, Decedent died. At the time of Decedent’s death, Decedent owned IRA D. The
sole beneficiary of IRA D was Trust T. Decedent and Taxpayer live in State E, which is
a community property state. It is represented that IRA D is community property under
the laws of State E.

The terms of Trust T provide that upon the death of Decedent, Taxpayer becomes the
sole trustee of Trust T and all subtrusts within Trust T, including Subtrust S. The terms
of Trust T also provide that upon Decedent’s death, Taxpayer’s interest in community
property (including her interest in IRA D) and Taxpayer’s separate property are to be
allocated to Subtrust S.
PLR-112379-19 2

The terms of Subtrust S provide that during the life of Taxpayer, Taxpayer is the sole
current income and principal beneficiary of Subtrust S and is entitled to receive as much
of the income or principal as Taxpayer requests, for any reason or purpose.

Pursuant to the terms of Trust T, Taxpayer’s one-half community property interest in
IRA D will be allocated to Subtrust S. Further, pursuant to Taxpayer’s authority under
the terms of Subtrust S, Taxpayer intends to distribute the interest in IRA D held in
Subtrust S to herself, in order to complete a rollover of the assets into one or more IRAs
in her name.

Based on the preceding facts Taxpayer requests the following rulings:

1. Taxpayer, as Decedent’s spouse, will be treated as having acquired Taxpayer’s
   one-half community property interest in IRA D that is used to fund Subtrust S
   directly from Decedent, and not from Trust T;

2. Taxpayer is eligible to roll over her one-half community property interest in IRA D
   used to fund Subtrust S to one or more IRAs established and maintained in her
   name pursuant to section 408(d)(3)(A)(i), provided that the rollover occurs no
   later than 60 days after the proceeds of the IRA are distributed;

3. Taxpayer will not be required to include in gross income for federal tax purposes,
   for the year in which the distribution of IRA D is made, any portion of the
   proceeds distributed from IRA D that are timely rolled over to one or more IRAs,
   set up and maintained in Taxpayer’s name; and

4. Subtrust S’s receipt of the one-half community property interest in IRA D and the
   rollover of the one-half community property interest in IRA D to one or more IRAs
   set up and maintained in Taxpayer’s name are not transfers within the meaning
   of section 691(a)(2).

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-112379-19 3

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 her 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 691(a)(1) provides that the amount of all items of gross income in respect of a
decedent which are not properly includable in respect of the taxable period in which falls
the date of her 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 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
PLR-112379-19 4

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 her death or for a previous
taxable year.

Section 1.691(a)-4(a) provides that in general, the transferor must include in her 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 her gross income, only the transferee will include such income
when received in her gross income. In this situation, a transfer within the meaning of
section 691(a)(2) has not occurred.

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.

In the present case, upon Decedent’s death IRA D passes to Trust T. Pursuant to the
terms of Trust T, Taxpayer’s community property interests, including her one-half
interest in IRA D, are to be allocated to Subtrust S. Under the terms of Subtrust S,
Taxpayer, as trustee and sole beneficiary of Subtrust S, is entitled to receive all of the
PLR-112379-19 5

income and principal of the assets held by Subtrust S (to which Taxpayer’s one-half
community property interest in IRA D will be allocated). For purposes of applying
section 408(d)(3)(A) to IRA D, Taxpayer is effectively the individual for whose benefit
IRA D is maintained. As such, Taxpayer is entitled to roll over the IRA D assets held in
Subtrust S into one or more IRAs established and maintained in her name (other than
those required minimum distribution amounts required to have been distributed under
section 401(a)(9)).

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

1. Taxpayer, as Decedent’s surviving spouse, will be treated as having received the
   one-half community property interest in IRA D directly from Decedent and not
   from Trust T;

2. Taxpayer will be eligible to roll over the proceeds from Taxpayer’s one-half
   community property interest in IRA D to one or more IRAs set up and maintained
   in her name pursuant to section 408(d)(3)(A)(i), as long as the rollover occurs no
   later than 60 days after the proceeds of the IRA are distributed ;

3. Subject to section 408(d)(3)(B), Taxpayer will not be required to include in gross
   income for federal tax purposes, for the year in which the distribution of
   Taxpayer’s one-half community property interest in IRA D is made, any portion of
   the proceeds distributed from IRA D that are timely rolled over to one or more
   IRAs set up and maintained in Taxpayer’s name; and

4. Subtrust S’s receipt of the one-half community property interest in IRA D and the
   rollover of the one-half community property interest in IRA D to one or more IRAs
   set up and maintained in Taxpayer’s name are not transfers within the meaning
   of section 691(a)(2); and pursuant to section 691(a)(1)(C), Taxpayer must
   include in her gross income, the amounts of IRD from IRA D when distributions
   are received by Taxpayer from the IRA(s) set up and maintained in her name.

Except as specifically provided herein, no opinion is expressed or implied concerning
the federal tax consequences of any other aspects of any transaction or item discussed
or referenced in this letter.

The rulings contained in this letter are 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 penalties of perjury statement
executed by an appropriate party, as specified in Rev. Proc. 2020-1, 2020-1 I.R.B. 1,
§ 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
PLR-112379-19 6

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. 2020-1, § 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 representative.

                                      Sincerely,



                                      John T. Ricotta
                                      Branch Chief
                                      (Qualified Plans Branch 3)
                                      Employee Benefits, Exempt Organizations, and
                                      Employment Taxes

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