Surviving spouse could roll over an IRA allocated through a community-property trust

Plain-English summary

A married couple's revocable trust was the beneficiary of the deceased spouse's IRA, which was community property. After the death, the surviving spouse became sole trustee and could allocate trust assets between subtrusts under the trust agreement and state law. She planned to allocate the entire IRA to a share for which she was the sole beneficiary, had unrestricted access to principal and income, and held a general power of appointment. The IRS ruled that the allocation was not a taxable sale or disposition and that the account remained an IRA. It treated the surviving spouse as receiving the IRA assets directly from the IRA, allowing her to roll eligible proceeds into IRAs in her own name within 60 days without current income inclusion.

Ruling snapshot

• Question: Can a surviving spouse roll an inherited IRA into her own IRA after allocating it to her unrestricted share of a community-property trust?
• Outcome: approved, except for required distributions and subject to the one-rollover-per-year rule
• Key authorities: IRC §§ 408(a), 408(d)(3), 1001; Treas. Reg. § 1.1001-1(a)

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201944003                                            Third Party Communication: None
Release Date: 11/1/2019                                      Date of Communication: Not Applicable
Index Number: 408.03-00
                                                             Person To Contact:
------------------------------                               -------------------------, ID No. -----------------
----------------------------                                 ----------------------------------------------------
-------------------------------                              Telephone Number:
                                                             --------------------
                                                             Refer Reply To:
                                                             CC:EEE:EB:QP3
                                                             PLR-101372-19
                                                             Date:
                                                             August 05, 2019


Taxpayer                      = -------------------------
Decedent                      = ---------------
Trust T                       = ---------------------------------
Subtrust S                    = --------------------
Subtrust D                    = ----------------------
Date 1                        = -------------------
Date 2                        = -------------------
Date 3                        = ----------------------------
Date 4                        = ---------------------
State S                       = --------

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

This is in response to your letter dated January 31, 2019, and your supplemental letter
dated July 25, 2019, submitted on your behalf by your authorized representative, in
which you request a series of rulings under sections 408(d) and 1001 of the Internal
Revenue Code (Code).

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

Trust T was established by Decedent and Taxpayer on Date 1 and amended on Date 2.
Taxpayer and Decedent were the Founders, Trustees, and beneficiaries of Trust T.
While the Decedent and the Taxpayer were both alive, either Decedent or Taxpayer
could revoke Trust T. Upon the death of either, Trust T became irrevocable. Decedent
and Taxpayer live in State S which is a community property state.

The Decedent and Taxpayer delivered certain property to Trust T. Trust T provides that
any contributions of separate property to Trust T by, or for the benefit of, either Founder
shall remain separate property of such Founder. As to the separate property, Trust T
provides that each founder may withdraw, remove, sell, or otherwise deal with their

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respective separate property interests without restrictions. If Trust T is revoked, all
separate property must be transferred, assigned, or conveyed back to the owning
Founder as his or her respective property.

Trust T also provides that all community property, as well as the income from and
proceeds of such community property, shall retain its community property
characterization under the law unless the Founders change such characterization by
virtue of a duly executed marital partition agreement.

All community property withdrawn or removed from Trust T retains its community
property characterization. If Trust T was revoked by the Founders, all community
property transferred to Trust T must be transferred back to the Founders as community
property.

On Date 3, Decedent opened an individual retirement account (IRA). Trust T was
named sole beneficiary of the IRA. It is represented that the IRA is community property
under the laws of State S and was not Decedent’s separate property.

Decedent was married to Taxpayer until his death on Date 4. Upon Decedent’s death,
Taxpayer became the surviving Founder and sole Trustee of Trust T. In addition, after
Decedent’s death, the assets of the IRA were transferred to an IRA for the benefit of
Trust T.

The terms of Trust T state that upon the first of Taxpayer or Decedent to die, the assets
of Trust T are to be divided into Subtrust S and Subtrust D. The terms of Trust T also
allow the Trustee to make a non pro rata allocation of assets in cash or its equivalent, in
kind, or in undivided interests between Subtrust S and Subtrust D. Taxpayer, as
Trustee, has the power of allocation between the subtrusts.

Subtrust S consists of multiple shares. The terms of Trust T state, “Our Trustee shall
allocate all of the surviving Founder’s separate portion of the trust property and all of the
surviving Founder’s community portion of the trust property, if any, to [Subtrust S’s]
Share One.” Taxpayer, who is also the Trustee, represents that under the community
property laws of State S, the Trustee is authorized to allocate particular community
assets disproportionately between the deceased Founder’s community portion of Trust
T property and the surviving Founder’s community portion of Trust T property provided
that the value of the assets allocated to each share are equal. Taxpayer further
represents that treating Decedent’s entire IRA as part of the surviving Founder’s
community portion of Trust T property is permitted under State S law. Accordingly,
Taxpayer represents that it is appropriate to treat the entire IRA as property of Share
One under State S law and the terms of Trust T.

The terms of Trust T provide that the Trustee shall pay to or apply for the surviving
Founder’s benefit, at least monthly during the surviving grantor’s lifetime, all of the net

PLR-101372-19                                3

income from Share One of Subtrust S. The terms also provide that the Trustee shall
pay to or apply for the surviving Founder’s benefit such amounts from the principal of
Share One of Subtrust S as the surviving Founder may at any time request in writing,
and that no limitation shall be placed on the surviving Founder as to either the amount
of or reason for such invasion of principal. In addition, the surviving Founder holds an
unlimited and unrestricted general power of appointment over the principal and
undistributed net income of Subtrust S that may be exercised by a last will and
testament, a living trust agreement, or a written exercise of the power of appointment.

Pursuant to the powers granted her with respect to Share One, Taxpayer represents
that she intends to distribute the assets of the IRA to herself. Taxpayer then intends to
roll over the distribution into one or more IRAs in her own name.

Based on the preceding facts, Taxpayer requests the following rulings:

    1. The allocation of the IRA to Share One of Subtrust S will not be deemed a sale or
      other disposition of property under section 1001.
    2. After the allocation of the IRA to Share One of Subtrust S, the IRA will continue
      to be an IRA within the meaning of section 408(a).
    3. Taxpayer, as Decedent’s spouse, will be treated as having acquired the IRA
      directly from Decedent, and not from Trust T.
    4. Taxpayer is eligible to roll over the IRA distribution to one or more IRAs
      established and maintained in her own name pursuant to section 408(d)(3)(A)(i),
      provided that the rollover occurs no later than the sixtieth day following the day
      the proceeds of the IRA are received.
    5. Taxpayer will not be required to include in gross income for federal tax purposes,
      for the year in which the distribution from the IRA is made, any portion of the
      proceeds distributed from the IRA which are timely rolled over to one or more
      IRAs set up and maintained in Taxpayer’s name.

With respect to your ruling requests, section 61(a)(3) provides that gross income
includes gains derived from dealings in property and section 61(a)(14) provides that
gross income includes income from an interest in a trust.

Section 1001(a) provides that the gain from the sale or other disposition of property
shall be the excess of the amount realized therefrom over the adjusted basis provided in
section 1011 for determining gain, and the loss shall be the excess of the adjusted basis
provided in section 1011 for determining loss over the amount realized.

Section 1001(b) states that the amount realized from the sale or other disposition of
property shall be the sum of any money received plus the fair market value of the
property (other than money) received. Under section 1001(c), except as otherwise
provided in subtitle A, the entire amount of gain or loss, determined under section 1001,
on the sale or exchange of property shall be recognized.

PLR-101372-19                                  4

Section 1.1001-1(a) of the Income Tax Regulations provides that the gain or loss
realized from the conversion of property into cash, or from the exchange of property for
other property differing materially either in kind or in extent, is treated as income or loss
sustained.

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 that section 408(d)(1) does not apply to a rollover
contribution if such contribution satisfies the requirements of sections 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 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.

Under the preceding facts, Decedent’s IRA passed to Trust T upon Decedent’s death.
Because the IRA is allocated to Share One of Subtrust S, and Taxpayer is the Trustee

PLR-101372-19                                5

and sole beneficiary of Share One and is entitled to all income and the entire corpus of
Share One, for purposes of applying section 408(d)(3)(A) to the IRA, Taxpayer is
effectively the individual for whose benefit the account is maintained. Accordingly, if
Taxpayer receives a distribution of the proceeds of the IRA, she may roll over the
distribution (other than amounts required to have been distributed or to be distributed in
accordance with section 401(a)(9)) into one or more IRAs established and maintained in
her name. The allocation of the IRA to Share One of Subtrust S was made by the
authority granted to the Taxpayer under the terms of Trust T and the laws of State S.
The Taxpayer does not acquire her interest in the IRA as a result of the allocation to
Share One of Subtrust S, but instead by reason of the exercise of the Taxpayer’s
existing authority under the terms of Trust T and the laws of State S.

Therefore, with respect to your ruling requests, we conclude:

    1. The allocation of the IRA to Share One of Subtrust S by the authority granted to
      the Taxpayer under the terms of Trust T and the laws of State S will not be
      deemed a sale or other disposition and will not result in a realization of gain or
      loss under section 61 or 1001.
    2. After the allocation of the IRA to Subtrust S, the IRA will continue to be an IRA
      within the meaning of section 408(a).
    3. Taxpayer, as Decedent’s surviving spouse, will be treated as having received the
      IRA assets directly from the IRA and not from Trust T, as well as being the
      individual for whose benefit the IRA is maintained.
    4. Taxpayer is eligible to roll over the IRA distribution to one or more IRAs
      established and maintained in her own name pursuant to section 408(d)(3)(A)(i),
      provided that the rollover occurs no later than the sixtieth day following the day
      the proceeds of the IRA are received.
    5. Taxpayer will not be required to include in gross income for federal tax purposes,
      for the year in which the distribution from the IRA is made, any portion of the
      proceeds distributed from the IRA which are timely rolled over to one or more
      IRAs set up and maintained in Taxpayer’s name.

This ruling does not authorize the rollover of amounts that are required to be distributed
under section 401(a)(9) and is subject to the limitation in section 408(d)(3)(B).

This letter ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

Except as specifically set forth above, no opinion is expressed or implied concerning the
federal tax consequences of the proposed transaction under any other provision of the
Code or regulations.

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, as specified in Rev. Proc. 2019-1, § 7.01(16)(b). This office

PLR-101372-19                                  6

has not verified any of the material submitted in support of the request for 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.
The controlling facts on which these rulings are based include, but are not limited to,
Taxpayer’s express and unequivocal representations that: under the community
property laws of State S, Taxpayer, who is also the Trustee, is authorized to allocate
particular community assets disproportionately between the deceased Founder’s
community portion of Trust T property and the surviving Founder’s community portion of
Trust T property provided that the value of the assets allocated to each share are equal;
treating Decedent’s entire IRA as part of the surviving Founder’s community portion of
Trust T property is permitted under State S law; and, accordingly, it is appropriate to
treat the entire IRA as property of Share One under State S law and the terms of
Trust T.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.



                                       Sincerely,



                                       John T. Ricotta
                                       Branch Chief
                                       Qualified Plans Branch 3
                                       (Employee Benefits, Exempt Organizations, and
                                       Employment Taxes)