IRS Allows Spouses to Roll Inherited IRAs Through Own Trusts to Their IRAs

In private letter rulings (PLRs) 201430026 and 2014130029, IRS allowed the surviving spouses to roll their inherited IRAs through a trust to their own IRAs. The twist here is that the trust beneficiary was the spouse’s own trust, not a trust established by the decedent.

In nearly identical situations, a husband named his wife’s trust as the beneficiary of his IRA. Both husbands died before attaining age 70 ½. Properly titled inherited IRAs were set up for the trust beneficiaries. Each wife was the trustee of her own trust and had no limits on her ability to take distributions from the trust.

PLR 201430026
The wife in this PLR had “the power to control and direct payments, add or remove trust property, and amend or revoke” the trust. In addition she did not need the approval of any trustee or beneficiary with regard to transactions in retirement accounts.

She proposed to rollover the inherited IRA into one or more IRAs titled in her name only. She asked IRS to be treated as having received the IRA directly from her spouse, not from the trust; that she be eligible to roll over the distribution from the inherited IRA into an IRA in her own name, and that she would not have to include the IRA assets in income in the year of the rollover.

PLR 201430029
Here, the wife had similar rights. She could “modify, amend, or revoke” the trust. She also had the right to withdraw income as well as principal. She requested the same things of IRS as the wife in the previous PLR, that the IRA not be treated as an inherited IRA, that she be eligible to roll over the distribution from the IRA to an IRA in her own name, and that she not be taxed on the rollover.

IRS Allows the Rollover
In both PLRs, IRS allowed the wife to take a distribution of the inherited IRA from the trust and within 60 days do a rollover into an IRA in her own name. They followed the same logic they have used many times in the past.

From IRS:
However, the general rule will not apply in a case where the IRA has not yet been distributed and the surviving spouse as the sole trustee of the decedent’s trust has sole authority and discretion under trust language to pay the IRA proceeds to him/her. In such a case, when the surviving spouse actually receives the IRA proceeds, the surviving spouse may roll over the amounts into an IRA set up and maintained in his/her name within 60 days.

What Wasn’t Said
When IRS issues a PLR, they generally only respond to the questions they are asked. These two PLRs are notable for what was not asked. These trust beneficiaries would never have qualified as see-through trusts! In order to be a see-through trust, the trust must meet four qualifications.

  1. The trust must be valid under state law or would be but for the fact that there is no corpus.
  2. The trust is irrevocable or the trust contains language that it becomes irrevocable upon the death of the IRA owner.
  3. The beneficiaries of the trust are identifiable.
  4. Trust documentation (either a copy of the trust or a list of the beneficiaries of the trust) has been provided by the trustee of the trust to the IRA custodian by October 31 of the year after the year of the IRA owner’s death.

These two trusts failed on the second item. Since they were the wives’ trusts and the wives were still living, the trusts remained revocable.

A see-through trust allows you to look through the trust and use the age of the oldest beneficiary of the trust for calculating required minimum distributions (RMDs). The trust is treated as a designated beneficiary and can use stretch distributions. When a trust is not a see-through trust, it is treated as a non-designated beneficiary.

The distribution options for a non-designated beneficiary are very different from those of a designated beneficiary. They will depend on whether or not the IRA owner died before or after his required beginning date (RBD). The RBD is April 1 of the year after attainment of age 70½. When the account owner dies after his RBD, then distributions to the beneficiary can be made using the remaining life expectancy of the account owner, had he lived. (Isn’t the tax code wonderful? You can die but still have a life expectancy!)

In both of these PLRs, however, the husband died before age 70½. This is the worst possible scenario – non-designated beneficiary and not age 70½. It is the only time when the tax code mandates a payout of the entire account balance within five years. Both wives faced the prospect of losing a significant portion of the retirement account balance to income taxes. Luckily for the wives, IRS allowed them to correct this serious problem. And all for a cost of only $10,000 to IRS plus a preparer’s fee to prepare the PLR request and a wait of over a year for IRS’ answer.

What Should Have Happened
In contrast, if the individuals had known what they were doing or if they had received competent advice, one of two things would have happened.

One, the husband could have named his wife directly as the beneficiary of the retirement benefits. This is the simplest of estate plans. The wife could then roll his IRA into one in her own name – which is what eventually happened here but it would be done without the expense and the lengthy time delay. The wife could then delay RMDs until her age 70 ½, she would get to use the more favorable Uniform Lifetime Table, and her named beneficiaries would get to utilize stretch distributions.

Two, if a trust was truly necessary to the estate plan, then the husband should have named his own trust as the beneficiary of his IRA. Presumably his trust would become irrevocable at his death and would thus be a qualifying trust. The trust could then take distributions from the inherited IRA using the age of the oldest trust beneficiary.

In the first option, all beneficiaries of the wife get to use their own life expectancy, assuming she did not name her trust as her IRA beneficiary. In the second option, at the wife’s death the subsequent trust beneficiaries must continue to use the wife’s life expectancy for RMDs that are paid to the trust. The first option offers IRA owners and beneficiaries the best possible option for stretching distributions. As always, it always comes down to what the individual wants to accomplish and finding the best way to do that. No one answer is right for all individuals.

Learn More about Trusts and Self Directed accounts HERE

– By Beverly DeVeny