Surviving spouse may roll trust-held IRAs into her own IRA

Plain-English summary

A married couple's revocable trust became beneficiary of the deceased spouse's two IRAs, which the surviving spouse controlled as sole trustee. She allocated the IRAs to a survivor's subtrust in which she was sole beneficiary and had an unlimited right to all income and principal. Because no third party could prevent her from taking the IRA proceeds, the IRS treated her as the distributee and allowed a 60-day rollover into an IRA in her own name, excluding amounts that were required minimum distributions. The rollover balance would not be taxable, and future required minimum distributions would be calculated with the surviving spouse as the IRA owner.

Ruling snapshot

• Question: May the surviving spouse roll the trust-held IRA balance into her own IRA without current income inclusion?
• Outcome: Approved, excluding required minimum distribution amounts
• Key authorities: IRC §§ 401(a)(9) and 408(d)(3); Treas. Reg. § 1.408-8, Q&A-5

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201632015 [Third Party Communication:
Release Date: 8/5/2016 Date of Communication: Month DD, YYYY]
Index Number: 408.00-00
Person To Contact:
----------------------- -----------------, ID No. ----------------
------------------- Telephone Number:
----------------------------------------- --------------------
Refer Reply To:
CC:TEGE:EB:QP3
PLR-137976-15
Date:
May 10, 2016

Taxpayer A = -----------------------
Decedent B = -----------------------
Trust C = --------------------------------
Custodian D = -------------------------------
IRA E = ------------------------------
IRA F = ------------------------------
Date 1 = ---------------------
Date 2 = ---------------------------
Date 3 = ----------------------------
Date 4 = -------------------
Date 5 = -------------------------
State G = ------------

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

This letter responds to your request dated September 24, 2015, as supplemented by
correspondence dated November 12, 2015, submitted on your behalf by your
authorized representative, in which you request a series of rulings under section 408(d)
of the Internal Revenue Code (“Code”).

The following facts and representations were submitted under penalty of perjury on your
behalf:

Decedent B and Taxpayer A (husband and wife) established Trust C on Date 1 under
the laws of State G. Trust C was subsequently amended and restated in its entirety on
Date 2. Decedent B died on Date 3. All assets held by Trust C consisted entirely of
Taxpayer A’s and Decedent B’s community property.
PLR-137976-15 2

Upon Decedent B’s death, Taxpayer A became the sole trustee of Trust C. Decedent B
owned IRA E and IRA F at the time of his death. It is represented that each of the IRAs
was a valid IRA under section 408(a). Decedent B was born on Date 4, and had
reached his required beginning date with respect to both IRAs on Date 5. At the time of
Decedent B’s death, Decedent B was receiving minimum distributions from the IRAs.

At the time of Decedent B’s death, both IRAs were held by Custodian D. Upon
Decedent B’s death, in accordance with the beneficiary designation for each IRA, both
IRAs passed to Trust C.

Upon Decedent B’s death, in accordance with the terms of Trust C, Trust C split into two
sub-trusts, the Survivor’s Trust and the Exemption Trust.

Taxpayer A, as sole Trustee of Trust C, under both the terms of Trust C and under
State G law, had sole authority to determine which Trust C assets were to be allocated
to the Survivor’s Trust and to the Exemption Trust. Accordingly, Taxpayer A allocated
IRA E and IRA F to the Survivor’s Trust (and allocated other assets to the Exemption
Trust). In addition, Taxpayer A, as sole Trustee of Trust C combined IRA E and IRA F
into a single IRA (as combined, Decedent B’s IRA).

Under the terms of the Survivor’s Trust, Taxpayer A, as sole beneficiary, is entitled to
receive all of the income and principal of the Survivor’s Trust (to which Decedent B’s
IRA was allocated), as Taxpayer A has the right to direct the trustee in writing to pay to
Taxpayer A or apply for Taxpayer A’s benefit such amounts from or portions of the
principal of the Survivor’s trust, up to the entire amount of the trust, as Taxpayer A may
designate.

Under the terms of the Exemption Trust, Taxpayer A may receive the income of the
Exemption Trust in the Trustee’s discretion (i.e., Taxpayer A’s discretion) and the
principal of the Exemption Trust in the Trustee’s discretion for Taxpayer A’s proper
health, support, and maintenance in accordance with the standard of living that
Taxpayer A enjoyed on the date of Decedent B’s death.

Taxpayer A as sole Trustee and sole beneficiary of the Survivor’s Trust intends to set
up and maintain an IRA in her name, to take distribution of the entirety of Decedent B’s
IRA, and to roll over the distribution (other than those amounts required to have been
distributed or to be distributed from Decedent B’s IRA during the period beginning with
the calendar year 2009 and ending with the calendar year of the roll over) to the
custodian of Taxpayer A’s IRA, pursuant to section 408(d)(3) (the Spousal Rollover
Transaction). The assets distributed and rolled over during the Spousal Rollover
Transaction are referred to as the Spousal Rollover Balance.

Based on the preceding facts, Taxpayer A requests the following rulings:
PLR-137976-15 3

1. That Decedent B’s IRA is not an inherited IRA for purposes of section 408(d)(3)
   with respect to Taxpayer A.

2. That Taxpayer A will be treated as the payee or distributee of Decedent B’s IRA
   with respect to the Spousal Rollover Balance following the Spousal Rollover
   Transaction.

3. That Taxpayer A will be eligible to roll over the Spousal Rollover Balance into an
   IRA established and maintained in Taxpayer A’s name following the Spousal
   Rollover Transaction, pursuant to section 408(d)(3).

4. That Taxpayer A will not be required to include the Spousal Rollover Balance in
   her gross income for federal income tax purposes for the year in which the
   Spousal Rollover Balance is distributed to the custodian of Taxpayer A’s IRA and
   rolled over into Taxpayer A’s IRA following the Spousal Rollover Transaction,
   pursuant to section 408(d)(3).

5. That beginning with the year following the year in which the Spousal Rollover
   Transaction occurs, minimum required distributions from Taxpayer A’s IRA will
   be calculated in accordance with section 401(a)(9)(A) with Taxpayer A as the
   IRA owner.

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 distribute, 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 section 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
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 the time
PLR-137976-15 4

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 his 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 1.408-8 of the Income Tax Regulations, Question and Answer 5, provides that a
surviving spouse of an IRA owner may elect to treat the spouse’s entire interest as a
beneficiary in an individual’s IRA as the spouse’s own IRA. In order to make this
election, the spouse must be the sole beneficiary of the IRA and have an unlimited right
to withdraw amounts from the IRA. If a trust is named as beneficiary of the IRA, this
requirement is not satisfied even if the spouse is the sole beneficiary of the trust.

The preamble to the regulations provides, in relevant part, that a surviving spouse who
actually receives a distribution from a deceased spouse’s IRA is permitted to roll that
distribution over into his or her own IRA even if the spouse is not the sole beneficiary of
the deceased’s IRA as long as the rollover is accomplished within the requisite 60-day
period.

Generally, if the proceeds of a decedent’s IRA pass through a third party, e.g. a trust or
an estate, and then are distributed to the decedent’s surviving spouse, the surviving
spouse shall be treated as having received the IRA proceeds from the third party and
not from the decedent. Thus, generally a surviving spouse shall not be eligible to roll
over the distributed IRA proceeds into his or her own IRA. However, the general rule
will not apply in a case where the IRA has not yet been distributed and the surviving
spouse as Trustee of the trust has sole authority and discretion to pay the IRA proceeds
to him or 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 or her name within 60 days.

In the present case, Decedent B’s IRA E and IRA F passed to Trust C. Taxpayer A, as
sole Trustee of Trust C, under both the terms of Trust C and under State G law, had
sole authority to determine which Trust C assets were to be allocated to each of the
sub-trusts (the Survivor’s Trust and the Exemption Trust). Accordingly, Taxpayer A
PLR-137976-15 5

allocated IRA E and IRA F to the Survivor’s Trust (and allocated other assets to the
Exemption Trust). In addition, Taxpayer A, as sole Trustee of Trust C combined IRA E
and IRA F into a single IRA (as combined, Decedent B’s IRA).

Under the terms of the Survivor’s Trust, Taxpayer A, as sole beneficiary, is entitled to
receive all of the income and principal of the Survivor’s Trust (to which Decedent B’s
IRA was allocated), as Taxpayer A has the right to direct the trustee in writing to pay to
Taxpayer A or apply for Taxpayer A’s benefit such amounts from or portions of the
principal of the Survivor’s trust, up to the entire amount of the trust, as Taxpayer A may
designate.

Under this set of circumstances, no third party can prevent Taxpayer A from receiving a
distribution of the proceeds of Decedent B’s IRA and from rolling over the amount (other
than those required minimum distribution amounts required to have been distributed or
to be distributed in accordance with section 401(a)(9) from Decedent B’s IRA during the
period beginning with the calendar year of Date 3 and ending with the calendar year of
the roll over) into another IRA set up and maintained in the name of Taxpayer A. In
addition, beginning with the year following the year in which the Spousal Rollover
Transaction occurs, the required minimum distributions from Taxpayer A’s IRA will be
calculated in accordance with section 401(a)(9) with Taxpayer A as the IRA owner.

Therefore, with respect to your ruling requests we conclude:

1. That Decedent B’s IRA is not an inherited IRA for purposes of section 408(d)(3)
   with respect to Taxpayer A.

2 That Taxpayer A will be treated as the payee or distributee of Decedent B’s IRA
with respect to the Spousal Rollover Balance following the Spousal Rollover
Transaction.

3 That Taxpayer A will be eligible to roll over the Spousal Rollover Balance into an
IRA established and maintained in Taxpayer A’s name following the Spousal
Rollover Transaction, pursuant to section 408(d)(3).

4 That Taxpayer A will not be required to include the Spousal Rollover Balance in
her gross income for federal income tax purposes for the year in which the
Spousal Rollover Balance is distributed to the custodian of Taxpayer A’s IRA and
rolled over into Taxpayer A’s IRA following the Spousal Rollover Transaction,
pursuant to section 408(d)(3).

5 That beginning with the year following the year in which the Spousal Rollover
Transaction occurs, minimum required distributions from Taxpayer A’s IRA will
be calculated in accordance with section 401(a)(9)(A) with Taxpayer A as the
IRA owner.
PLR-137976-15 6

Except as specifically set forth above, no opinion is expressed or implied concerning the
federal 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,



                                       John T. Ricotta
                                       Chief, Qualified Plans Branch 3
                                       Tax Exempt & Government Entities

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