Estate may divide IRA into inherited IRAs for two children

Plain-English summary

A decedent named the estate as beneficiary of an IRA, while the estate passed through a trust in equal shares to two children. The estate wanted to divide the IRA in kind through trustee-to-trustee transfers into separate accounts for each child's interest. The IRS ruled that the transfers would not be taxable IRA distributions or rollovers because each portion remained titled for the decedent, the estate, and the relevant child with no substantive title change. Each new account qualified as an inherited IRA because the child acquired it by reason of the decedent's death and was not the surviving spouse. The ruling assumed that the original and receiving IRAs satisfied section 408.

Ruling snapshot

• Question: Could an estate divide a decedent's IRA by trustee-to-trustee transfers into separate inherited IRAs for two children without creating taxable distributions or rollovers?
• Outcome: Approved; the transfers were neither distributions nor rollovers, and the resulting accounts were inherited IRAs.
• Key authorities: IRC §§ 408(d)(1) and 408(d)(3)(C); Treas. Reg. § 1.408-2(b)(8); Rev. Rul. 78-406

Full text (IRS public release)

                                                             Department of the Treasury
                                                             Washington, DC 20224
Internal Revenue Service
Number: 201927009                                            Third Party Communication: None
Release Date: 7/5/2019                                       Date of Communication: Not Applicable
Index Number: 408.00-00, 408.03-00
                                                             Person To Contact:
----------------------------------------                     -----------------, ID No. ------------------
-------------------------------------                        Telephone Number:
-----------------------------------------                    ----------------------
-----------------------------------                          Refer Reply To:
                                                             CC:EEE:EB:QP1
                                                             PLR-128213-18
                                                             Date:
                                                             April 08, 2019


Decedent             = ---------------------
Spouse               = ------------------------
Child 1              = -------------------
Child 2              = --------------------
Date 1               = ---------------------------
Date 2               = --------------------------
Date 3               = -----------------
Date 4               = ------------------------
Trust                = --------------------------------------------------------------------------------
Estate               = ------------------------------------------------------------------------------------------
                       ------------------------------------------------------------------------------------------
                       -----------------------------------------
Will                 = ----------------------------------------------------------
Company A            = ----------------------------------------------
IRA X                = ---------------------------

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

This letter is in response to a request for a letter ruling under section 408 of the Internal
Revenue Code, submitted on behalf of Estate by its authorized representative in
correspondence dated September 4, 2018, as supplemented by correspondence dated
March 7, 2019.

The following facts and representations have been submitted under penalty of perjury in
support of the ruling requested.

Decedent was born on Date 1. Decedent died on Date 2, which is after his “required
beginning date,” as that term is defined in section 401(a)(9)(C). Decedent was
predeceased by his spouse, Spouse, and was survived by two children, Child 1 and
Child 2. On Date 3, Decedent executed Will and also, together with Spouse, Trust.
Pursuant to Will, Estate is payable to Trust.
PLR-128213-18                                2


Pursuant to section 3.5 of Trust, upon the death of Decedent, Trust assets are to be
distributed in accordance with the terms of “Family Trust,” under Article IV. Pursuant to
section 5.2 of Trust, upon the death of Decedent, the Family Trust assets (except
personal property) are divided in equal shares for Child 1 and Child 2. Such shares are
not held further in trust and are instead to be distributed to Child 1 and Child 2.
Pursuant to section 9.7 of Trust, the trustee has the power to make any distribution in-
kind.

Decedent was owner of an individual retirement account (IRA), IRA X, which is
maintained by Company A. On Date 4, Decedent named Estate as the beneficiary of
IRA X. IRA X is currently titled IRA of Decedent FBO Estate. Estate now wishes to
divide IRA X, by means of trustee-to-trustee transfer, into two separate inherited IRAs
for the benefit of Child 1 and Child 2, respectively.

Based on the facts and representations, you request the following rulings:

1. Estate can transfer, via trustee-to-trustee transfer, IRA X in-kind to inherited IRAs
FBO Estate FBO Child 1 and Child 2, respectively (using Child 1 and Child 2’s social
security numbers) and such in-kind transfers do not constitute taxable distributions
within the meaning of section 408(d)(1) or constitute a rollover as that term is used in
section 408(d)(3).

2. The inherited IRAs created by means of trustee-to-trustee transfers which will be
maintained in the name of Decedent FBO Estate FBO Child 1 and Child 2, respectively,
(using each Child’s social security number for their respective IRA) will constitute
inherited IRAs as such term is defined in section 408(d)(3)(C).

Law

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.

Section 408(d)(3) provides an exception to income inclusion under section 408(d)(1) for
certain distributions from an IRA to the individual for whose benefit the IRA is
maintained that are rolled over within 60 days to another IRA for the benefit of that
individual.

Section 408(d)(3)(C) provides that amounts from an inherited IRA cannot be rolled over
into another IRA. Under section 408(d)(3)(C)(ii), an IRA is treated as an inherited IRA if
the individual for whose benefit the IRA is maintained acquired the IRA by reason of the
death of another individual, and such individual is not the surviving spouse of the other
individual.
PLR-128213-18                                 3


Section 1.408-2(b)(8) provides that the term beneficiaries on whose behalf an IRA is
established includes (except where the context indicates otherwise) the estate of the
individual, dependents of the individual, and any person designated by the individual to
share in the benefits after the death of the individual.

Revenue Ruling 78-406, 1978-2 C.B. 157, provides that the trustee-to-trustee transfer of
funds from one IRA maintained by an individual to another IRA maintained by the same
individual, even at the direction of that individual, does not constitute a payment or
distribution includible in gross income.

Analysis

With respect to your first ruling request, Estate intends to execute trustee-to-trustee
transfers to separate each beneficiary’s interest in IRA X. Such transfers will be into
two separate IRAs established and maintained in the name of Decedent (deceased) for
the benefit of Estate for the benefit of a beneficiary.

In this case, consistent with Rev. Rul. 78-406, the portion of IRA X that is, in effect,
maintained in the name of Decedent (deceased) for the benefit of Estate for the benefit
of a beneficiary is being separated from the portion maintained for other beneficiaries
and is being transferred to another IRA maintained in the name of Decedent (deceased)
for the benefit of Estate for the benefit of that beneficiary, with no other change in title
from the transferor IRA to the transferee IRA.

With respect to your second ruling request, each IRA created by means of a trustee-to-
trustee transfer from IRA X will be titled in the name of “Decedent (deceased) FBO
Estate FBO [name of beneficiary].” In addition, each beneficiary will have acquired such
IRA by reason of the death of Decedent and is not the surviving spouse of Decedent.
Thus, each of these IRAs constitutes an inherited IRA under section 408(d)(3)(C)(ii).

Rulings

Thus, with respect to your ruling requests, we conclude as follows:

1. Estate can transfer, via trustee-to-trustee transfer, amounts from IRA X (which is
currently titled in the name of Decedent FBO Estate) to one inherited IRA in the name of
Decedent (deceased) FBO Estate FBO Child 1 and another inherited IRA in the name
of Decedent (deceased) FBO Estate FBO Child 2 to separate the interests of Child 1
and Child 2 in IRA X, and such transfers do not result in distributions under section
408(d)(1) or rollovers under section 408(d)(3).

2. The inherited IRAs created by means of trustee-to-trustee transfers, which will be
maintained in the name of Decedent (deceased) FBO Estate FBO Child 1 and Child 2,
PLR-128213-18                                  4

respectively (using each child’s social security number for their respective IRA), will
constitute inherited IRAs as such term is defined in section 408(d)(3)(C).

This letter assumes that IRA X satisfies the requirements of section 408 at all times
relevant thereto. It also assumes that the transferee IRAs to be set up for the benefit of
Child 1 and Child 2 will also meet the requirements of section 408 at all times relevant
thereto.

The rulings contained in this letter ruling are based upon information and
representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party, as specified in Rev. Proc. 2019-1, 2019-1
I.R.B. 1, § 7.01(16)(b). This office has not verified any of the material submitted in
support of the request for a letter ruling, 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. 2019-1, § 11.05.

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 ruling.

This letter ruling 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
ruling is being sent to your authorized representative.

                                        Sincerely,



                                        Neil Sandhu
                                        Senior Technician Reviewer
                                        Qualified Plans, Branch 1
                                        (Employee Benefits, Exempt Organizations, and
                                        Employment Taxes)



cc: