Surviving spouse may roll over inherited IRA funds after court changes beneficiary

Plain-English summary

A decedent's IRA named an inter vivos trust as beneficiary, but neither the custodian nor the surviving spouse could find evidence that the trust had ever been created. The surviving spouse planned to obtain a state court order changing the beneficiary designation to herself and then roll the IRA into her own account. Conditional on that order, the IRS ruled that the account would not be an inherited IRA as to the spouse and that she could receive rollover-eligible distributions. The court order could not make her a designated beneficiary retroactively for required-minimum-distribution purposes because she was not the beneficiary at death. As a result, the five-year distribution rule applied, and payments in years one through four could be rolled over if the other requirements were met, while amounts payable in the fifth year were required distributions and could not be rolled over.

Ruling snapshot

• Question: Could the surviving spouse roll IRA funds into her own IRA after a court order changed the beneficiary from a nonexistent trust to the spouse?
• Outcome: approved conditionally for eligible distributions made before the fifth-year required distribution
• Key authorities: IRC §§ 401(a)(9) and 408(d)(3); Treas. Reg. §§ 1.401(a)(9)-3, 1.401(a)(9)-4, and 1.408-8

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201706004 Third Party Communication: None
Release Date: 2/10/2017 Date of Communication: Not Applicable
Index Number: 408.02-01, 408.03-00
Person To Contact:
---------------------- ------------------------------, ID No. ------------
--------------------------- -----------------
----------------------------------- Telephone Number:
----------------------
Refer Reply To:
CC:TEGE:EB:QP4
PLR-115567-16
Date:
November 03, 2016

Legend:

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

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

Taxpayer B = ----------------------

IRA C = ------------------------------------------------------------------------------------------

                       ------------------------------------------------------------------

State D = -------------

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

This letter is in response to your request dated May 5, 2016, submitted by your
authorized representative, for a ruling under section 408(d) of the Internal Revenue
Code (Code).

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

Decedent maintained an individual retirement account (IRA) with Custodian A.
Decedent died on ------------------------, at age ----. At the time of his death, Decedent
was a resident of State D. Taxpayer B is also a resident of State D.

The beneficiary forms on file with Custodian A provide that the pay on death

beneficiary for IRA C is an inter vivos trust created by the Decedent. However, there is
no evidence that Decedent created this trust. Custodian A did not keep a copy of the
trust in its file when it accepted the Decedent’s beneficiary designation. Taxpayer B has
PLR-115567-16 2

looked through Decedent’s records and is unable to find any evidence that a trust was
created.

Decedent’s Last Will dated --------------------------, does not refer to any trust.
Pursuant to Decedent’s will, Decedent’s entire estate was left to Taxpayer B. Taxpayer
B, as the surviving spouse, wants to rollover Decedent’s IRA C to her own IRA.

The Probate Code of State D has a provision that allows a court to order a

retroactive change in a beneficiary designation in certain limited circumstances.
Taxpayer B intends to obtain court approval to change the beneficiary designation on
IRA C from the trust to herself and then accomplish a rollover. Taxpayer B would like to
complete the rollover in 2016. However, because the beneficiary forms on file with
Custodian A still list a trust as beneficiary, Custodian A will not release the balance of
IRA C to Taxpayer B unless she obtains a court order from state court to modify “the
terms of a governing instrument in a manner that is not contrary to the transferor’s
probable intention” in order to achieve a transferor’s tax objectives.

Based on the foregoing facts and representations and conditional on the entry of

State D’s court order approving the change of beneficiary designation on IRA C from the
trust to herself under the authority in State D Revised Statutes, you have requested the
following rulings:

1. That, with respect to Taxpayer B, Decedent’s IRA C will not be an inherited IRA

as that term is defined in section 408(d)(3)(C)(ii) of the Code;

2. That Taxpayer B may be treated as the distributee or payee of Decedent’s IRA C

for purposes of section 408(d)(3) of the Code; and

3. That Taxpayer B, the surviving spouse of Decedent, may roll over the IRA

distribution which she will receive. Furthermore, as long as the rollover is timely, the
IRA C distribution will not be included in Taxpayer B’s gross income, pursuant to section
408(d)(1) of the Code, with respect to calendar year 2016, the year in which the
distribution will occur.

Under section 408(a)(6) and the regulations thereunder, rules similar to the rules of

section 401(a)(9) and the incidental death benefit requirements of section 401(a) apply
to the distribution of the entire interest of an individual for whose benefit the IRA is
maintained.

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.
PLR-115567-16 3

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
408(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 any time
during the 1-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 is not includible in
his gross income because of the application of section 408(d)(3).

Section 408(d)(3)(C)(i) provides 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 408(d)(3)(E) provides that the rollover provisions of section 408(d) do not
apply to any amount required to be distributed under section 408(a)(6).

Section 1.408-8, Q&A-1(a) of the Income Tax Regulations (Regulations) provides

that an IRA is subject to the required minimum distribution rules under section
401(a)(9). In order to satisfy section 401(a)(9), the rules of section 1.401(a)(9)-1
through 1.401(a)(9)-9 of the Regulations must be applied, except as otherwise provided.

Section 1.408-8, Q&A-1(b) provides that for purposes of applying the required
minimum distribution rules in section 1.401(a)(9)-1 through 1.401(a)(9)-9, the IRA
PLR-115567-16 4

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 ½.

Section 401(a)(9)(B)(ii) provides that a trust shall not constitute a qualified trust

under this section unless the plan provides that, if an employee dies before the
distribution of the employee’s interest has begun in accordance with 401(a)(9)(A)(ii), the
entire interest of the employee will be distributed within 5 years after the death of such
employee.

Section 1.401(a)(9)-3, Q&A-2, of the Regulations provides that in order to satisfy the

5-year rule in section 401(a)(9)(B)(ii), the employee’s entire interest must be distributed
by the end of the calendar year which contains the fifth anniversary of the date of the
employee’s death.

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

Section 1.401(a)(9)-4, Q&A-4, of the Regulations 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. Generally, an employee’s designated beneficiary for purposes
of determining the distribution period for required minimum distributions after the
employee’s death will be determined based on the beneficiaries designated as of the
date of death who remain beneficiaries as of September 30 of the calendar year
following the calendar year of the date of death (that is, have not received their entire
interest before that September 30).
PLR-115567-16 5

Following the entry of State D’s court order approving the change of beneficiary
designation on IRA C from the trust to herself under the authority in State D Revised
Statutes, the rules discussed above will apply to your ruling requests as follows:

1. Taxpayer B, the surviving spouse of Decedent, is the individual for whose
   benefit the account is maintained. Taxpayer B acquired IRA C by reason of
   Decedent’s death. Accordingly, Decedent’s IRA C is not an inherited IRA for
   purposes of section 408(d)(3) with respect to Taxpayer B.

2. The court order cannot create a “designated beneficiary” for purposes of section
   401(a)(9) because Taxpayer B was not the designated beneficiary of IRA C as of the
   date of Decedent’s death. Accordingly, there is no “designated beneficiary” of IRA C for
   purposes of section 401(a)(9).

   3. Decedent died before the required beginning date and without a “designated
      beneficiary.” Accordingly, the entire interest in IRA C must be distributed using the 5-
      year rule described in section 401(a)(9)(B)(ii). Under this rule, any amounts payable
      from IRA C to Taxpayer B in years 1 – 4 following the year in which decedent died are
      not required minimum distributions and are eligible for rollover by Taxpayer B at a time
      that Taxpayer B is the beneficiary under IRA C, provided the distribution meets the
      other rollover requirements under section 408(d), and, pursuant to section 408(d), if
      rolled over, the amounts distributed from IRA C will not be included in Taxpayer B’s
      gross income, with respect to the year in which the distribution occurs. On or after
      January 1 of the fifth year following the year in which Decedent died, any amount
      payable from IRA C to Taxpayer B is not eligible for rollover because it is a required
      minimum distribution and will be included in Taxpayer B’s gross income with respect to
      the year in which the distribution occurs.

   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.
PLR-115567-16 6

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,


                                 Cathy V. Pastor
                                 Senior Counsel
                                 Qualified Plans Branch 4
                                 Office of Associate Chief Counsel
                                 (Tax Exempt & Government Entities)