IRS allows an estate-owned IRA to be divided into inherited IRAs for trust beneficiaries

Plain-English summary

An unmarried IRA owner died after her required beginning date and named her estate as the IRA beneficiary. Her will passed the residuary estate, including the IRA, to a trust that divided the assets equally among her children. The IRS allowed the personal representative to transfer each child's interest directly into a separately titled inherited IRA. The transfers would not be taxable distributions or rollovers, and the new accounts would qualify as inherited IRAs. Because the estate was not an individual designated beneficiary and the decedent had already begun required distributions, each child had to continue distributions over the decedent's remaining life expectancy. The accounts could be separately held for payment purposes, but they were not separate accounts under the required-minimum-distribution regulation because the separate interests did not exist on the date of death.

Ruling snapshot

• Question: Could an estate-owned IRA pass by direct transfer into inherited IRAs for the residuary trust beneficiaries without current tax, and how would required distributions be calculated?
• Outcome: approved (direct inherited-IRA transfers, with distributions over the decedent's remaining life expectancy)
• Key authorities: IRC §§ 401(a)(9), 408(a)(6), 408(d); Treas. Reg. §§ 1.401(a)(9)-4, -5, -8, -9, 1.408-8; Rev. Rul. 78-406

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202031007 Third Party Communication: None
Release Date: 7/31/2020 Date of Communication: Not Applicable
Index Number: 401.06-00, 408.06-00
Person To Contact:
---------------------------------- ------------------, ID No. -----------------
------------------------------------------------------------ Telephone Number:
-------------------------- --------------------
-------------------------------- Refer Reply To:
CC:EEE:EB:QP4
PLR-126605-19
Date:
May 20, 2020

Legend

Decedent = ---------------------
Estate A = ----------------------------------
Personal Representative B = --------------------
IRA X = ---------------------------
Trust Y = -----------------------------------------------------------
---------------------------
Beneficiaries = ----------------------------------------------
Date N = -------------------
Date O = ------------------
County P = ----------------------
State Q = --------

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

This is in response to your letter dated October 22, 2019, and additional
correspondence dated May 18, 2020, submitted on your behalf by your authorized
representative, in which you request rulings under §§ 401(a)(9) and 408 of the Internal
Revenue Code.

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

Decedent maintained an Individual Retirement Account (IRA), IRA X. Decedent died on
Date N, at age ---, after her required beginning date, as defined in § 401(a)(9).
Decedent was unmarried at the time of her death. Decedent was survived by her

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children (Beneficiaries). Estate A was the sole beneficiary of IRA X. Personal
Representative B is the personal representative of Estate A.

Decedent’s Last Will and Testament, executed on Date O, was duly admitted to probate
in County P, of State Q. Pursuant to Item 3 of Decedent’s Last Will and Testament, the
Decedent’s residuary, including IRA X, passed to Trust Y. Article II.A.5 of Trust Y
provides that the residual trust assets, including IRA X, are to be divided and distributed
equally to the Beneficiaries. Personal Representative B is the trustee of Trust Y. You
represent that Trust Y is a valid trust under the laws of State Q.

Personal Representative B proposes to transfer, by means of a trustee-to-trustee
transfer, each of the Beneficiaries’ respective interests in Decedent’s IRA into an
inherited IRA for the benefit of such Beneficiary. Each inherited IRA will be titled
“Decedent (Deceased) IRA f/b/o Beneficiary as beneficiary of Decedent’s estate.”

Based on the foregoing facts and representations, you have requested the following
rulings:

1. That, as the beneficiaries of Decedent’s interest in the IRA, the Beneficiaries’
   respective interests of the IRA can be segregated and held in separate IRAs for
   purposes of determining each of the Beneficiaries’ required minimum distributions under
   § 401(a)(9);

2. That the IRAs created by means of a trustee-to-trustee transfer, which will be titled
   “Decedent (Deceased) IRA f/b/o Beneficiary as beneficiary of Decedent’s estate” with
   respect to each Beneficiary constitute inherited IRAs under § 408(d)(3)(C);

3. That the Beneficiaries may each receive distributions required under § 401(a)(9)
   from the specific beneficiary IRA set up in the name of Decedent for the benefit of each
   Beneficiary as a beneficiary of the Decedent’s estate over the Decedent’s remaining life
   expectancy using the age of the Decedent as of the Decedent’s birthday in the calendar
   year of the Decedent’s death reduced by one for each calendar year pursuant to
   § 1.401(a)(9)-5, Q&A-5(a)(2) of the Income Tax Regulations; and

4. That the transfer of each Beneficiary’s respective interest in the Estate’s interest in
   the IRA to each of the above-described beneficiary IRAs will not constitute a taxable
   distribution within the meaning of § 408(d)(1) to the Beneficiary and does not constitute
   a rollover as that term is used in § 408(d)(3).

Law

Under § 408(a)(6) and the regulations thereunder, rules similar to the rules of
§ 401(a)(9) and the incidental death benefit requirements of § 401(a) apply to the
distribution of the entire interest of an individual for whose benefit an IRA is maintained.

PLR-126605-19 3

Section 1.408-8, Q&A-1(a), provides that an IRA is subject to the required minimum
distribution rules under § 401(a)(9). In order to satisfy § 401(a)(9), the rules of
§ 1.401(a)(9)-1 through 1.401(a)(9)-9 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 § 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)(B)(i) provides, in general, that if an employee/IRA holder dies after
distribution of his interest has begun in accordance with § 401(a)(9)(A)(ii) (after his
required beginning date), the remaining portion of his interest must be distributed at
least as rapidly as under the method of distribution being used as of the date of his
death.

Section 401(a)(9)(C) provides, in relevant part and for the relevant time period, 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 70½.

Section 401(a)(9)(E) provides that for purposes of § 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-3, states that only individuals may be designated
beneficiaries for purposes of § 401(a)(9). A person that is not an individual, such as the
employee's/IRA holder's estate, may not be a designated beneficiary.

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.
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).

Section 1.401(a)(9)-5, Q&A-5(a)(2) provides, in summary, that if an employee/IRA
holder dies on or after his required beginning date without having designated a
beneficiary, then post-death distributions must be made over the remaining life

PLR-126605-19 4

expectancy of the employee/IRA holder determined in accordance with § 1.401(a)(9)-5,
Q&A-5(c)(3).

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

Under § 1.401(a)(9)-8, Q&A-2, in general and relevant part, if an account/IRA is divided
into separate accounts/IRAs for the benefit of different beneficiaries, for years
subsequent to the year the separate accounts/IRAs are established or the date of death
if later, then the rules of § 401(a)(9) are applied separately to each of the respective
accounts/IRAs.

Section 1.401(a)(9)-8, Q&A-3, provides that, for purposes of § 401(a)(9), separate
accounts in an employee's/IRA holder's account are separate portions of an
employee's/IRA holder's benefit reflecting the separate interests of the employee's/IRA
holder's beneficiaries under the plan as of the date of the employee's/IRA holder's death
for which separate accounting is maintained. The separate accounting must allocate all
post-death investment gains and losses, contributions, and forfeitures, for the period
prior to the establishment of the separate accounts on a pro rata basis in a reasonable
and consistent manner among the separate accounts. However, once the separate
accounts are actually established, the separate accounting can provide for separate
investments for each separate account under which gains and losses from the
investment of the account are only allocated to that account, or investment gain or
losses can continue to be allocated among the separate accounts/IRAs on a pro rata
basis. A separate accounting must allocate any post-death distribution to the separate
account/IRA of the beneficiary receiving that distribution.

The relevant Single Life Table determining life expectancy is provided in 1.401(a)(9)-9,
Q&A-1.

Section 408(d)(1) provides that, except as otherwise provided in § 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 § 72.

Section 408(d)(3)(A) provides that § 408(d)(1) does not apply to any amount paid or
distributed out of an IRA to the individual for whose benefit the IRA 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 the
individual receives the payment or distribution, or (ii) the entire amount received

PLR-126605-19 5

(including money and any other property) is paid into an eligible retirement plan (other
than an IRA) 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 § 408(d)(3)).

Section 408(d)(3)(C) provides, generally, that amounts from an “inherited” IRA cannot
be rolled over into another IRA. In general, an “inherited” IRA is an IRA maintained by
an individual who acquired the IRA by reason of the death of another individual if the
acquiring individual is not the surviving spouse of the other individual.

Revenue Ruling 78-406, 1978-2 C.B. 157, provides that the direct transfer of funds from
one IRA trustee to another IRA trustee, even if at the behest of the IRA holder, does not
constitute a payment or distribution to a participant, payee or distribute, as those terms
are used in § 408(d). Furthermore, such a transfer does not constitute a rollover
distribution. Revenue Ruling 78-406 specifically applies in the case of a transfer by the
original IRA owner from one IRA titled in the IRA owner’s name to another IRA titled in
the same manner.

The rules discussed above will apply to your ruling requests as follows:

1. As the beneficiaries of Decedent’s interest in IRA X, the beneficiaries’ respective
   interests of the IRA can be segregated and held in separate IRAs for purposes of
   paying the beneficiaries’ required minimum distributions; however, the IRAs are not
   separate accounts within the meaning of § 1.401(a)(9)-8, Q&A-3, because they did not
   represent separate interests in IRA X as of the date of the Decedent’s death.

2. Because the Beneficiaries will acquire the IRAs as a result of the death of Decedent,
   and neither Beneficiary was Decedent’s spouse, the IRAs created by means of a
   trustee-to-trustee transfer, which will be titled in the Decedent’s name for the benefit of
   each Beneficiary as a beneficiary of the Decedent’s estate constitute inherited IRAs
   under § 408(d)(3)(C).

3. Because the Decedent had already been receiving distributions over her life
   expectancy, the Beneficiaries may each receive distributions required under § 401(a)(9)
   from the specific beneficiary IRA set up in the name of Decedent for the benefit of each
   Beneficiary as a beneficiary of the Decedent’s estate over the Decedent’s remaining life
   expectancy using the age of the Decedent as of the Decedent’s birthday in the calendar
   year of the Decedent’s death reduced by one for each calendar year pursuant to
   § 1.401(a)(9)-5, Q&A-5(a)(2); and

4. Consistent with the principles of Rev. Rul. 78-406, because each of the transferee
   IRAs is set up and maintained in the name of the deceased IRA owner for the benefit of
   each Beneficiary, the transfer of each Beneficiary’s respective interest in the Estate’s
   interest in the IRA to each of the above-described IRAs will not constitute a taxable

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distribution within the meaning of § 408(d)(1) to the Beneficiaries and does not
constitute a rollover as that term is used in § 408(d)(3).

This letter assumes that IRA X satisfies the requirements of § 408 at all relevant times.
It also assumes that the transferee IRAs to be set up by the Beneficiaries will also meet
the requirements of § 408 at all relevant times.

The rulings contained in this letter are based upon information and representations
submitted by Trust T and accompanied by a penalties of perjury statement executed by
an appropriate party, as specified in Rev. Proc. 2020-1, 2020-1 I.R.B. 1, § 7.01(16)(b).
This office has not verified any of the material submitted in support of the request for
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. 2020-
1, § 11.05.

Except as expressly provided above, no opinion is expressed or implied concerning the
federal income tax consequences of any other aspects of any transaction or item of
income described in this letter ruling.

This letter 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 is
being sent to your authorized representative.

                                       Sincerely,




                                       Laura B. Warshawsky
                                       Branch Chief
                                       Qualified Plans Branch 1
                                       Office of Associate Chief Counsel
                                       (Employee Benefits, Exempt Organizations,
                                       and Employment Taxes)

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