Court reformation cannot create an IRA designated beneficiary

Plain-English summary

An IRA owner intended only to move retirement assets to a new custodian but signed a form naming the estate as sole beneficiary instead of preserving three trusts as beneficiaries. After the owner's death, a state court retroactively changed the designation to match the earlier estate plan. The IRS concluded that the estate was the beneficiary on the date of death and could not be a designated beneficiary under the required minimum distribution rules. The later court order could change rights under state law but could not retroactively change the completed federal tax consequences. The IRA therefore had to be distributed using the deceased owner's remaining life expectancy rather than the life expectancy of a trust beneficiary.

Ruling snapshot

• Question: May a trust beneficiary's life expectancy govern inherited IRA distributions after a court retroactively replaced the estate as beneficiary?
• Outcome: Denied, the IRA had no designated beneficiary for federal tax purposes
• Key authorities: IRC §§ 401(a)(9) and 408(a)(6); Treas. Reg. §§ 1.401(a)(9)-4, 1.401(a)(9)-5, and 1.408-8

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201628006                                              Third Party Communication: None
Release Date: 7/8/2016                                         Date of Communication: Not Applicable
Index Number: 401.06-00, 401.06-02,
              408.02-01                                        Person To Contact:
                                                               ----------------, ID No. ----------------
------------------------------------------------------------   Telephone Number:
-----------------------------                                  --------------------
-----------------------                                        Refer Reply To:
-----------------------------------                            CC:TEGE:EB:QP4
                                                               PLR-116147-15
----------------------------------------------------           Date:
 -----------------------------------------------               March 30, 2016




Legend:

Decedent                  = ---------------------------------

Custodian A               = ----------------------------------------

Custodian B               = ----------------------

Trust C                   = --------------------------------------------------------------------------------------
                            -----------------------------------------------

Trust D                   = --------------------------------------------------------------------------------------
                            -------------------------------------------

Trust E                   = --------------------------------------------------------------------------------------
                            -------------------------------------------------

Beneficiary F             = ---------------------------

IRA X                     = --------------------------------------------------------------------------------------
                            ----------------------------------------------------------------------------------

State                     = ------

Court                     = ----------------------------------------------------------------------- --------------
                            ---
PLR-116147-15                                  2



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

This letter is in response to your request, submitted on your behalf by your authorized
representative, for a ruling under sections 408(a)(6) and 401(a)(9) of the Internal
Revenue Code.

The following facts and representations have been submitted under penalties of perjury
on your behalf:

Decedent maintained two individual retirement accounts (IRAs) with Custodian A and
worked with financial advisors who were employed by Custodian A. Consistent with
Decedent’s overall estate plan, Decedent named Trust C as a 50% beneficiary, and
Trusts D and E as 25% beneficiaries of the IRAs in a year after the year that included
his required beginning date under section 401(a)(9).

Later that year, Decedent’s financial advisors joined another firm and became affiliated
with Custodian B. Decedent subsequently met with one of the financial advisors to
facilitate the transfer of the IRA assets to Custodian B. The financial advisor provided a
beneficiary designation form for Decedent’s signature that named Decedent’s estate as
the sole beneficiary. Decedent signed that form and the assets of the two IRAs held by
Custodian A were directly transferred to a new IRA (IRA X) held by Custodian B. It has
been represented that, although Decedent signed the beneficiary designation form, he
merely intended to move assets from Custodian A to Custodian B and that he did not
intend to change beneficiaries as part of this transaction.

Trusts C, D, and E are represented as complying with the “look through” provisions of
§ 1.401(a)(9)-4, Q&A-5(b) of the Income Tax Regulations, and are represented to be
valid under the law of State.

After Decedent’s death, the trustees of the trusts petitioned the Court for a declaratory
judgment that would modify the beneficiary designation for IRA X to carry out the
original estate plan. Based on its finding of Decedent’s intent, the Court ordered that
the beneficiaries of IRA X are Trust C as a 50% beneficiary and Trusts D and E as 25%
beneficiaries, consistent with Decedent’s prior beneficiary designation. The order was
retroactively effective as if such designation were made on the date Decedent signed
the beneficiary designation form for IRA X.

Based on the foregoing, you request a ruling that the life expectancy (as set forth on the
Single Life Table at § 1.401(a)(9)-9, Q&A-1) of Beneficiary F, the beneficiary of Trust C,
based on the birthday such beneficiary will attain in the year after Decedent’s death,
may be utilized to determine the section 401(a)(9) “applicable distribution period” with
respect to the portion of IRA X that is payable to Trust C.
PLR-116147-15                                  3

With respect to your ruling requests, section 408(a)(6) provides, with respect to IRAs,
that under regulations prescribed by the Secretary, rules similar to the rules of section
401(a)(9) and the incidental death benefit requirements of section 401(a) shall apply to
the distribution of the entire interest of an individual for whose benefit the trust is
maintained.

Section 1.408-8, Q&A-1(a) provides that an IRA is subject to the required minimum
distribution rules provided in section 401(a)(9). In order to satisfy section 401(a)(9), the
rules of §§ 1.401(a)(9)-1 through 1.401(a)(9)-9 must be applied, except as otherwise
provided in that section. For example, the rules of § 1.401(a)(9)-4 apply for purposes of
determining an IRA owner’s designated beneficiary.

Section 1.408-8, Q&A-1(b) provides that for purposes of applying the required minimum
distribution rules in §§ 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)(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 1/2.

Section 401(a)(9)(B) provides that when an employee dies before his or her entire
interest has been distributed but after distributions have begun under subparagraph of
(A)(ii), the remaining portion of such interest will be distributed at least as rapidly as
under the method being used under subparagraph (A)(ii) as of the date of death.

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

Section 1.401(a)(9)-4, Q&A-1 provides, in relevant part, that a designated beneficiary is
an individual who is designated as a beneficiary under the plan. An individual may be
designated as a beneficiary under the plan either by the terms of the plan or, if the plan
so provides, by an affirmative election by the employee (or the employee’s surviving
spouse) specifying the beneficiary. A designated beneficiary need not be specified by
name in the plan in order to be a designated beneficiary so long as the individual who is
PLR-116147-15                                 4

to be the beneficiary is identifiable under the plan. The member of a class of
beneficiaries capable of contraction or expansion will be treated as being identifiable if it
is possible to identify the class member with the shortest life expectancy. However, the
passing of an employee’s interest to an individual under a will or otherwise under
applicable state law will not make that individual a designated beneficiary under section
401(a)(9)(E) unless that individual is designated as a beneficiary under the plan.

Section 1.401(a)(9)-4, Q&A-3 provides that only individuals may be designated
beneficiaries for purposes of section 401(a)(9). A person who is not an individual, such
as the employee’s estate or a charitable organization, may not be a designated
beneficiary. If a person other than an individual is designated as a beneficiary of an
employee’s benefit, the employee will be treated as having no beneficiary for purposes
of section 401(a)(9), even if there are also individuals designated as beneficiaries.

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.
It also provides that a beneficiary who is designated as of the date of death may not be
taken into account as a designated beneficiary if the person is no longer a beneficiary
as of September 30 of the calendar year following the calendar year of the employee’s
death, such as when the person has received the entire benefit to which he or she is
entitled prior to such date, or has disclaimed entitlement to the employee’s benefit
(through a qualifying disclaimer).

Section 1.401(a)(9)-4, Q&A-5 provides rules under which beneficiaries of a trust with
respect to the trust’s interest in an employee’s benefit may be treated as designated
beneficiaries if certain requirements are met.

Section 1.401(a)(9)-5, Q&A-5(a)(2) provides, in summary, that if an employee 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
determined in accordance with paragraph (c)(3) of A-5.

Section 1.401(a)(9)-5, Q&A-5(c)(3) provides, in general, that with respect to an
employee who does not have a designated beneficiary, the applicable distribution
period measured by the employee’s remaining life expectancy is the life expectancy of
the employee using the age of the employee as of the employee’s birthday in the
calendar year of the employee’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 death.

Applying these rules to your ruling request, Decedent’s estate was named as the
beneficiary of IRA X at the time of Decedent’s death. Under § 1.401(a)(9)-4, Q&A-3, an
estate cannot be a “designated beneficiary” for purposes of section 401(a)(9).
Accordingly, there was no “designated beneficiary” of IRA X for purposes of section
401(a)(9).
PLR-116147-15                                 5

In addition, although the Court order changed the beneficiary of IRA X under State law,
the order cannot create a “designated beneficiary” for purposes of section 401(a)(9).
Courts have held that the retroactive reformation of an instrument is not effective to
change the tax consequences of a completed transaction. For example, the Tax Court
considered the impact of a judicial reformation of a trust agreement for tax law purposes
in Estate of La Meres v. Commissioner, 98 T.C. 294 (T.C. 1992). In La Meres, a state
probate court order approved the post-death amendment of a trust to eliminate a
provision that caused adverse estate tax results, and held that such amendment was
retroactively effective as of the date of the decedent’s death. The Tax Court held that
such reformation was not effective for tax purposes, explaining that:

             This and other courts have generally disregarded the
             retroactive effect of State court decrees for Federal tax
             purposes. See Van Den Wymelenberg v. United States, 397
             F.2d 443, 445 (7th Cir. 1968); Straight Trust v.
             Commissioner, 245 F.2d 327, 329-330 (8th Cir. 1957), affd.
             24 T.C. 69 (1955); Estate of Nicholson v. Commissioner, 94
             T.C. 666, 673 (1990); Fono v. Commissioner, 79 T.C. 680,
             695 (1982), affd. without published opinion 749 F.2d 37 (9th
             Cir. 1984); American Nurseryman Publishing Co. v.
             Commissioner, 75 T.C. 271, 275 (1980), affd. without
             published opinion 673 F.2d 1333 (7th Cir. 1981). . . . While
             we will look to local law in order to determine the nature of
             the interests provided under a trust document, we are not
             bound to give effect to a local court order that modifies the
             dispositive provisions of the document after respondent has
             acquired rights to tax revenues under its terms. Estate of
             Nicholson v. Commissioner, supra at 673; American
             Nurseryman Publishing Co. v. Commissioner, supra at 275;
             Estate of Hill v. Commissioner, 64 T.C. 867, 875-876 (1975),
             affd. in an unpublished opinion 568 F.2d 1365 (5th Cir.
             1978). As the Seventh Circuit explained in Van Den
             Wymelenberg v. United States, supra at 445:

                 Were the law otherwise there would exist
                 considerable opportunity for “collusive” state court
                 actions having the sole purpose of reducing federal
                 tax liabilities. Furthermore, federal tax liabilities would
                 remain unsettled for years after their assessment if
                 state courts and private persons were empowered to
                 retroactively affect the tax consequences of
                 completed transactions and completed tax years.

La Meres at 311-312.
PLR-116147-15                                  6

In summary, because Decedent’s estate was named as the beneficiary of IRA X at the
time of Decedent’s death and an estate cannot qualify as a “designated beneficiary” for
purposes of section 401(a)(9), IRA X did not have a “designated beneficiary.” Because
Decedent died after the required beginning date and without a “designated beneficiary,”
the assets of IRA X must be paid out over the applicable distribution period described in
§ 1.401(a)(9)-5, Q&A-5(c)(3).

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) of the Code
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,



                                        Keith R. Kost
                                        Senior Technician Reviewer
                                        Qualified Plans Branch 2
                                        Office of Associate Chief Counsel
                                        (Tax Exempt & Government Entities)




cc: