Splitting a deceased owner's estate-beneficiary IRA into separate inherited IRAs is not a taxable distribution

Plain-English summary

When an IRA owner dies and names his estate (not individuals) as the IRA beneficiary, the estate's personal representatives sometimes want to divide the account so each estate beneficiary can manage their own share. Here the decedent's two IRAs were combined into one inherited IRA titled for the estate, and the estate's residuary (including the IRA) passed in equal shares to three beneficiaries. The personal representatives proposed to split the inherited IRA into three separate inherited IRAs by trustee-to-trustee transfers, each titled in the decedent's name for the benefit of one beneficiary as a beneficiary of the estate. The IRS ruled that these direct trustee-to-trustee transfers are not taxable distributions under section 408(d)(1) and are not rollovers under section 408(d)(3), following Rev. Rul. 78-406, and that the estate will not have to include in income (and the custodian need not report) amounts later distributed from the split IRAs to the beneficiaries. This matters because it lets an estate cleanly divide an inherited IRA among heirs without triggering immediate tax.

Ruling snapshot

• Question: Is a trustee-to-trustee subdivision of an estate-beneficiary inherited IRA into separate inherited IRAs a taxable distribution or rollover, and is the estate taxed on later distributions to the beneficiaries?
• Outcome: approved (no taxable distribution, no rollover; estate not taxed)
• Key authorities: IRC § 408(d)(1), (d)(3); Rev. Rul. 78-406

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202039002                                              Third Party Communication: None
 Release Date: 9/25/2020                                        Date of Communication: Not Applicable
 Index Number: 401.06-00, 408.06-00
                                                                Person To Contact:
 ----------------------------------------                       ------------------, ID No. -----------------
 ------------------------------------------------------------   Telephone Number:
 ---------------------------------------------------            --------------------
 --------------------------------                               Refer Reply To:
 ---------------------------                                    CC:EEE:EB:QP4
                                                                PLR-101580-20
                                                                Date:
                                                                June 25, 2020




Legend

 Decedent                               =    ---------------------------
 Estate A                               =    ----------------------------------------
 Personal Representative A              =    ---------------------
 Personal Representative B              =    ------------------------------
 IRA X                                  =    -------------------------------------------------------
 IRA Y                                  =    -------------------------------------------------------
 IRA Z                                  =    -----------------------
 Beneficiaries                          =    -----------------------------------------------------------
                                             ---------------------------
 Date N                                 =    -----------------------
 Date O                                 =    ---------------------------
 County P                               =    -------------------
 State Q                                =    ---------------



Dear -------------------------------------

This is in response to your letter dated December 20, 2019, submitted on your behalf by
your authorized representative, in which you request rulings under § 408 of the Internal
Revenue Code.

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

Decedent maintained two Individual Retirement Accounts (IRAs), IRA X and IRA Y.
Decedent died on Date N, at age --- after his required beginning date, as defined in
§ 401(a)(9). Decedent was unmarried at the time of his death. Decedent was survived
PLR-101580-20                                2

by his son, partner, and grandson (Beneficiaries). Estate A was the sole beneficiary of
IRA X and IRA Y. After Decedent’s death, the assets of IRA X and IRA Y were
transferred into IRA Z, which is titled as IRA of Decedent (Deceased) f/b/o Estate A.
Personal Representative B and Personal Representative C are the co-personal
representatives of Estate A (the personal representatives).

Decedent’s Last Will and Testament, executed on Date O, was duly admitted to probate
in County P, of State Q. Pursuant to Article IV of Decedent’s Last Will and Testament,
the Decedent’s residuary, including the assets of IRA X and IRA Y, passed to the
Beneficiaries in equal shares.

The personal representatives propose to subdivide the assets of IRA Z into three
separate IRAs by means of trustee-to-trustee transfers. Each transferee IRA will be
titled “Decedent (Deceased) IRA f/b/o Beneficiary as beneficiary of Decedent’s estate.”

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

1. That the transfer of each of the Beneficiary’s respective one-third interest in the
Decedent’s interest in IRA Z to each transferee IRA will not constitute a taxable
distribution within the meaning of § 408(d)(1) to each of the Beneficiaries and will not
constitute a rollover as that term is used in § 408(d)(3); and

2. That after the transfer of assets from IRA Z to each of the transferee IRAs, Estate A
will not include in its gross income, and the custodian of the transferee IRAs will not
report as income to the Estate, any amounts distributed from transferee IRAs to the
Beneficiaries.

Law

Section 408(d)(1) provides that, except as otherwise provided in § 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 § 72.

Section 408(d)(3)(A) provides that § 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 § 408(d)(3)).
PLR-101580-20                                  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 individual if the
acquiring individual is not the surviving spouse of the other 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 § 408(d). Furthermore, such a transfer does not constitute a rollover
distribution. Revenue Ruling 78-406 specifically applies in the case of a transfer by the
original IRA owner from one IRA titled in the IRA owner’s name to another IRA titled in
the same manner.

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

1. Consistent with the principles of Rev. Rul. 78-406, because each of the transferee
IRAs is set up and maintained in the name of the deceased IRA owner for the benefit of
a Beneficiary as beneficiary of Decedent’s estate, the transfer of each Beneficiary’s
respective one-third interest in Estate A’s interest in IRA Z to each transferee IRA will
not constitute a taxable distribution within the meaning of § 408(d)(1) to each of the
Beneficiaries and does not constitute a rollover as that term is used in § 408(d)(3).

2. That after the transfer of assets from IRA Z to each of the transferee IRAs, Estate A
will not include in its gross income, and the custodian of the transferee IRAs will not
report as income to the Estate, any amounts distributed from the transferee IRA to a
Beneficiary.

This letter assumes that IRA Z satisfies the requirements of § 408 at all relevant times.
It also assumes that the transferee IRAs to be set up by the Beneficiaries will also
satisfy the requirements of § 408 at all relevant times.

The rulings contained in this letter are based upon information and representations
submitted by your personal representative 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 rulings, 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. 2020- 1, § 11.05.
PLR-101580-20                                  4

Except as expressly provided above, no opinion is expressed or implied concerning the
federal income tax consequences of any other aspects of any transaction or item of
income described in this letter ruling.

This letter 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.


                                           Sincerely,




                                           Neil Sandhu
                                           Senior Technician Reviewer
                                           Qualified Plans Branch 1
                                           Office of Associate Chief Counsel
                                           (Employee Benefits, Exempt Organizations,
                                           and Employment Taxes)




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