IRS lets a surviving spouse roll a trust-inherited IRA into her own IRA because she fully controls the trust

Plain-English summary

When a spouse dies and leaves an IRA to a trust rather than directly to the surviving spouse, the survivor usually cannot roll that IRA into her own IRA, because the money is treated as passing through a third party (the trust). This taxpayer's late husband named their revocable trust as the beneficiary of his two IRAs, which were then combined into a beneficiary IRA for the trust. The wife asked the IRS whether she could still roll that IRA into an IRA in her own name. The IRS said yes. Under the trust's terms she is the sole beneficiary, can remove and replace the trustees at will, and can direct the entire IRA to be distributed to herself, so no third party can stop her from taking the money. That control makes her effectively the person for whom the IRA is maintained, and as the surviving spouse the "inherited IRA" no-rollover rule does not apply. She can roll the proceeds over within 60 days and owes no income tax on the amount rolled over (except for any required minimum distribution or a Roth conversion).

Ruling snapshot

• Question: May a surviving spouse roll IRA proceeds that passed through her fully controlled trust into an IRA in her own name?
• Outcome: Approved (rollover permitted within 60 days; amount rolled over excluded from income)
• Key authorities: IRC § 408(d)(3)(A), (C); Treas. Reg. § 1.408-8, Q&A-5

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202227005                                             Third Party Communication: None
 Release Date: 7/8/2022                                        Date of Communication: Not Applicable
 Index Number: 408.03-00
                                                               Person To Contact:
 -------------------------                                     --------------ID. No.
 -------------------------                                     Telephone Number:
 --------------------------------                              --------------------
                                                               Refer Reply To:
 In Re: Private Letter Ruling Request                          CC:EEE:EB:QP3
                                                               PLR-122508-21
                                                               Date:
                                                               April 14, 2022



 Taxpayer         =    -------------------------
 Decedent         =    -----------------------
 Daughter         =    ---------------------
 Son-in-Law       =    -----------------
 IRA X            =    ---------------------------------------------------
 IRA Y            =    ---------------------------------------------------
 IRA Z            =    ---------------------------------------------------
 Trust            =    ---------------------------------------------------------------------------
 Date 1           =    ----------------------
 Date 2           =    ------------------
 Date 3           =    ---------------------
 Date 4           =    --------------------------


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

This is in response to a request for a letter ruling under section 408(d)(3) of the Internal
Revenue Code (Code), submitted on behalf of Taxpayer by Taxpayer’s authorized
representatives in correspondence dated October 14, 2021, as amended by
correspondence dated March 11, 2022.

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

Taxpayer was married to Decedent until Decedent’s death on Date 1. During their joint
lives, Taxpayer and Decedent executed Trust on Date 2, naming themselves as
trustees of Trust. Taxpayer and Decedent restated Trust on Date 3. Taxpayer and
Decedent appointed Daughter and Son-in Law as co-trustees of Trust on Date 4. Under
-------------------- of Trust’s terms, after Decedent’s death, Taxpayer remained the trustee
of Trust and all trusts created under Trust.

At the time of Decedent’s death, Decedent was the owner of two Individual Retirement
Accounts (IRAs), IRA X and IRA Y and had commenced taking required minimum
distributions from these IRAs. IRA X and IRA Y were traditional IRAs. Decedent named
Trust as the primary beneficiary of Decedent’s IRAs. Following Decedent’s death, the
assets of IRA X and IRA Y were transferred, via a trustee-to-trustee transfer, to IRA Z, a
beneficiary IRA established solely to receive a transfer from another IRA after the death
of the IRA owner. IRA Z is a traditional IRA established for the benefit of Trust as
beneficiary of Decedent.

Under ----------- of Trust’s terms, upon the death of Decedent and the disposition of
Decedent’s personal property, the remainder of Trust’s property, including Decedent’s
IRAs, was allocated to the Survivor’s Trust.

------------------of Trust provides that Taxpayer may serve as the sole trustee of the
Survivor’s Trust and may remove and replace the trustee of Survivor’s Trust at any time,
with or without cause. ------------------of Trust provides that Taxpayer has the absolute
right to amend Survivor’s Trust. This right may only be exercised by Taxpayer.

------------------of Trust provides that to the extent any of Decedent’s retirement plans
(including IRAs) are allocated to Survivor’s Trust, the trustee shall hold this property in a
separate share of Survivor’s Trust during Taxpayer’s lifetime. The trustee is directed to
administer the separate share in accordance with all the relevant Trust provisions.
Taxpayer may not amend the terms of the separate share, and the provisions pertaining
to distributions during Taxpayer’s incapacity do not apply to the separate share. The
Trust directs the trustee of Trust to distribute as much of the principal and accumulated
income of the separate share to the main share of the Survivor’s Trust as Taxpayer
directs in writing. This right may be exercised only by Taxpayer.

Under ---------------------- of Trust, with respect to a retirement plan (including an IRA) that
is allocated to the Survivor’s Trust, Taxpayer has the right to distribute the plan or any
part of the plan to Taxpayer.

Taxpayer, as trustee and sole beneficiary of Trust, and pursuant to Taxpayer’s powers
under Trust’s terms, wishes to roll over the proceeds of IRA Z into one or more IRAs in
Taxpayer’s own name.

Rulings Requested

Based on the facts and representations, the following rulings were requested:

       1) Taxpayer is eligible to roll over the Decedent’s IRAs/the Inherited IRA
       distribution to one or more IRAs established and maintained in Taxpayer’s own
       name pursuant to section 408(d)(3)(A)(i) of the Code, provided that the rollover
       occurs no later than the 60th day following the day the proceeds of Decedent’s
       IRAs are distributed.

       2) Taxpayer will not be required to include in Taxpayer’s gross income for federal
       income tax purposes for the calendar year in which the distribution and rollover
       occur, the amount distributed from Decedent’s IRAs/the Inherited IRA and timely
       rolled over into the IRA(s) established and maintained in Taxpayer’s name.

Law

Section 408(d)(1) of the Code 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 in the manner provided under section 72.

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 the payment or distribution is received; 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) 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.

Section 408(d)(3)(D) permits rollovers of amounts less than the entire amount in an IRA
account.

Section 408(d)(3)(E) provides that amounts distributed as required minimum
distributions are not permitted to be rolled over pursuant to section 408(d)(3).

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.


Section 408A(d)(3) of the Code contains a special rule that applies for a rollover to a
Roth IRA from a non-Roth IRA, which provides in part that, notwithstanding
section 408(d)(3), there shall be included in gross income any amount which would be
includible were it not part of a qualified rollover contribution.

Analysis

Generally, if a decedent’s IRA proceeds pass through a third party, for example, a trust,
and then are distributed to the decedent’s surviving spouse, the surviving spouse will be
treated as having received the IRA proceeds from the third party and not from the
decedent’s IRA, and such surviving spouse will not be eligible to roll over the IRA
proceeds into the spouse’s own IRA.

However, the general rule will not apply if no third party can prevent the surviving
spouse from receiving the proceeds of the IRA and from rolling over the proceeds into
the surviving spouse’s own IRA. In this case, Taxpayer is the sole beneficiary of Trust
and, under Trust’s terms Taxpayer can remove and replace the trustees of Survivor’s
Trust at any time and for any reason. In addition, Taxpayer can direct the distribution of
the entire separate share to Taxpayer, including IRA Z. Therefore, Taxpayer is
effectively the individual for whose benefit IRA Z is maintained.

Because Taxpayer is the surviving spouse of Decedent, the inherited IRA rules of
section 408(d)(3)(C) do not prevent a rollover.

With respect to your first ruling request, Taxpayer is permitted to roll over the IRA Z
proceeds received by Taxpayer to an IRA set up and maintained in Taxpayer’s name
pursuant to section 408(d)(3)(A)(i), provided the rollover occurs no later than the 60th
day from the day the proceeds are paid from IRA Z.

With respect to your second ruling request, as set forth in the preceding paragraph,
Taxpayer is permitted to roll over a distribution from IRA Z to an IRA set up and
maintained in Taxpayer’s name. Therefore, except in the case of a rollover to a Roth
IRA, Taxpayer will not be required to include in Taxpayer’s gross income any portion of
the IRA Z proceeds timely rolled over to an IRA set up and maintained in Taxpayer’s
name.

Rulings

Thus, with respect to your rulings requested, we conclude as follows:

    1. Except with respect to any portion of a distribution that is a required minimum
      distribution, Taxpayer is eligible to roll over the proceeds of IRA Z to an IRA set
      up and maintained in Taxpayer’s 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 IRA Z are distributed.


    2. Except in the case of a rollover to a Roth IRA, Taxpayer will not be required to
       include in gross income any portion of the proceeds distributed from IRA Z that
       are timely rolled over to an IRA set up and maintained in Taxpayer’s name.

This letter assumes that IRA X, IRA Y, and IRA Z satisfy the requirements of
section 408 at all relevant times.

The rulings contained in this letter are based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement, as specified
in Rev. Proc. 2022-1, 2022-1 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 upon 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 continuing action or series of actions, the controlling facts change
during the course of the transaction. See Rev. Proc. 2022-1, § 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,

                                       /s/ Neil Sandhu

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




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