Retirement Benefits Planning Update

Vol. 26 No. 1

Retirement Benefits Planning Update: Harvey B. Wallace II, Berry Moorman PC, The Buhl Building, 535 Griswold, Suite 1900, Detroit, MI 48226-3679,

Retirement Benefits Planning Update provides information on developments in the field of retirement benefits law. The editors of Probate & Property welcome information and suggestions from readers.

The Best Laid Plans

Because qualified plan and IRA benefits have come to represent a substantial portion of the assets of many estate planning clients, estate planners, for the most part, appreciate the need to understand and plan for the disposition of benefits at death by preparing a carefully crafted beneficiary designation. One of the keys to maximizing the period over which qualified plan and IRA benefits can be distributed under the IRC § 401(a)(9) required minimum distribution (RMD) rules to maximize the “stretch out” is to plan properly for the designated beneficiary (or designated beneficiaries) over whose life expectancy payments will be made. By minimizing the annual RMDs, the stretch-out distribution strategy permits the tax-exempt investment fund to grow to the greatest extent possible to produce the maximum total distributions. Even with planning, the rules for determining designated beneficiaries are inordinately complex and, because of the use of terms like “contingent beneficiary” that have a different meaning in an estate planning context than in the Treasury Regulations, are often counterintuitive. Although the Treasury Regulations covering the IRC § 401(a)(9) required minimum distribution rules have been finalized for almost a decade, many estate planners have yet to master the rules so that beneficiary designations may not always produce the results intended.

Even a carefully planned beneficiary designation may be sabotaged by an errant beneficiary designation form. Three recent examples encountered during the past year illustrate how beneficiary designations can go astray. In the first instance, the for-fee investment manager of the client’s IRA had recommended and arranged for a transfer of the account balance (the client’s largest asset) to a new IRA provider. As part of a recent estate plan update, it was discovered that no beneficiary designation had been filed with the new IRA provider, the client thinking that the prior designation would carry over to the transferred account. In the second instance, an estate plan update uncovered the fact that a qualified plan sponsor, a major domestic corporation, had no record of the previously filed beneficiary designation, a copy of which was in the estate plan file from the last estate plan update. In the third instance, involving an “inherited client,” it was only after the death of the client that it was discovered that the client had failed to file the beneficiary designation with the IRA provider as instructed by the client’s previous lawyer and that no copy of the proposed designation was in the file. In each of the three instances, the failure to have a beneficiary designation in place resulted (or would have resulted if not caught in time) in the account owner’s estate becoming the beneficiary under the provisions of the plan or IRA involved. In addition to these three unanticipated but not unusual situations, the failure to revise a beneficiary designation when an account owner’s circumstances change (a divorce occurs or a spouse dies, for example) often will produce unintended results. The negative effect of failing to effectively designate a beneficiary and the tools that may be available to limit that effect are discussed below.

Beneficiary Designation Repair Kit

Following the death of a qualified plan participant or IRA account owner (hereafter referred to as account owner because the minimum distribution rules that apply are, under the Treasury Regulations, the same for qualified plans and IRAs), four principal actions, depending on the circumstances, can be taken to change beneficiaries when determining whether there is a designated beneficiary and, if so, the identity of the designated beneficiary whose life expectancy will measure the distribution period for minimum benefit payments beginning in the year after the decedent’s death:

  1. a distribution of benefits to one or more beneficiaries before September 30 of the year following the account owner’s death and/or the segregation of separate shares in the benefit into separate IRAs or IRA subaccounts by the end of that year,
  2. a reformation of the beneficiary designation or a reformation of a trust named as beneficiary,
  3. a disclaimer by a beneficiary of entitlement to benefits under the account owner’s beneficiary designation or under a trust named as the beneficiary, and
  4. a spousal rollover when a trust or estate is named as the beneficiary.

These tools may not apply and do not always repair a beneficiary designation if they do apply. In the case of an attempted reformation or a spousal rollover when a trust or estate is named as beneficiary, a private letter ruling will likely have to be obtained before implementing the plan. These post-death actions are obviously no substitute for having a well-conceived beneficiary designation in place at the time of the account owner’s death.

Required Minimum Distributions If No Designated Beneficiary

Under the IRC § 401(a)(9) Treasury Regulations, a designated beneficiary is an individual who is designated as beneficiary under the plan or IRA, either by the terms of the plan or by an affirmative election by the account owner, as of the date of the IRA account owner’s death and who remains a beneficiary as of September 30 of the calendar year following the year of the account owner’s death (the “determination date”). Treas. Reg. § 1.401(a)(9)-4, Q&A 1 and 4. A nonindividual beneficiary, such as an estate or a charitable organization, cannot qualify as a designated beneficiary. Unlike the beneficiaries of a qualified trust described below, the regulations do not provide for see-through rules for estates that would permit the individual beneficiaries of an estate to be considered to be the designated beneficiaries of the benefits. If there is considered to be no designated beneficiary, distributions must be made:

  1. on or before the end of the fifth calendar year following the calendar year of the account owner’s death if the account owner, at death, has not reached the required beginning date (generally April 1 of the year following the year in which age 70½ is attained) or
  2. over the deceased account owner’s fixed life expectancy if the account owner has reached the required beginning date before death. Treas. Reg. §§ 1.401(a)(9)-3, A-4(a)(2) and 1.401(a)(9)-5, A-5(a)(2).

Note that, in the case of a qualified plan account, the plan agreement should be reviewed to confirm that the plan has not adopted a provision that the five-year rule will apply in all events, even if the participant has a designated beneficiary. Payment over the account owner’s fixed life expectancy means that, for the calendar year after death, the distribution is determined by dividing the prior year-end account balance (the account balance at the end of the calendar year of death) by the years of life expectancy shown in the Single Life Table in Treas. Reg. § 1.401(a)(9)-9, A-1 for the age that the account owner attained (or would have attained) in the year of death reduced by one year. The factor is further reduced by one full year to determine each subsequent year’s RMD. Treas. Reg. § 1.401(a)(9)-5, A-5(c).

In the case of a substantial account, the compressed income taxation caused by the application of the five-year rule is a tax disaster unless financial circumstances would have required an accelerated withdrawal of the account in any event. Payment over the fixed life expectancy of the account owner may not be disadvantageous if the only potential beneficiaries are individuals (other than the account owner’s spouse) who are older than the account owner. If, for example, an account owner who dies after the required beginning date has an older sibling as a designated beneficiary, the Treasury Regulations apply the longer life expectancy of the deceased account owner. Treas. Reg. § 1.401(a)(9)-5, A-5(a)(1). If there are potential beneficiaries, however, who could have been designated, such as younger generation individuals whose fixed payment period would be determined by a much longer initial life expectancy on the Single Life Table or a surviving spouse (even an older surviving spouse) who could roll over the benefit to the spouse’s own IRA to take advantage of the much more generous Uniform Lifetime Table (based on the life expectancy of the spouse and an individual 10 years younger than the spouse and recalculated for each distribution calendar year), a much longer distribution period would be available.

Post-death Arm Twisting and Beneficiary Designation Reformation

Best estate planning practices dictate that a copy of each beneficiary designation filed (preferably with an acknowledgment from the plan administrator or IRA provider that the designation was received) be retained in the estate planner’s file. If the filed beneficiary designation is lost by the plan administrator or IRA provider, a persuasive case can be made that the retained copy should be honored. Even having evidence of the filing does not completely eliminate the need to periodically review the operative status of beneficiary designations. For example, the Kodak Corporation, by the adoption of a plan amendment (presumably intended to update and streamline plan administration), dictated that only beneficiary designations filed after May 15, 2009, with the plan’s designated third-party administrator would be recognized as effective, causing all previously filed beneficiary designations to sunset.

One would hope that investment advisors such as the one initiating the IRA transfer to a new provider described above would be aware of the importance of the beneficiary designation and, at a minimum, alert the estate planner or suggest to the client that the client do so when a new IRA is established. Does an IRA provider or account representative have a duty to review an account owner’s accounts periodically, even for the beneficiaries named, to ensure that all remain consistent with changes that might occur in the account owner’s life circumstances? This question was asked in an arbitration conducted by FINRA (the Financial Industry Regulatory Authority), the leading nongovernmental regulator for securities firms doing business in the United States. The alleged oversight related to a beneficiary designation naming the deceased client’s former spouse as beneficiary that was not changed at the time of the divorce or at the later time at which a substantial rollover to the account was made from the client’s employer plan. As a result, the account balance was paid to the account owner’s ex-spouse rather than the account owner’s surviving spouse. Acknowledging that the failure to question the beneficiary designation might be a violation of the provider’s duty to know its customer in some situations, the arbitration panel held that, in this case, the client was an attorney who had little contact with the provider’s representative and took responsibility for his own affairs. As such, the provider was not the account owner’s agent and cannot be faulted for not realizing the need for a new beneficiary designation when the account owner did not, himself, realize it. In the Matter of the FINRA Arbitration Between Succession of Newman Trowbridge, Jr. through its Executrix, Lee Trowbridge, Claimant v. Capital One Investment Services, LLC, and Rick E. Schenck, Sr., Respondents, FINRA Arb. 10-02435 (May 9, 2011).

An incomplete beneficiary designation (omitting contingent beneficiaries) that resulted from a transfer from one IRA to a new IRA was reformed by court order after the account owner’s death and approved by PLRs 200616039, 200616040, and 200616041. After the reformation, the contingent beneficiaries were stated on the beneficiary designation so that the desired beneficiaries were beneficiaries as of the date of death of the deceased account owner and remained beneficiaries as of the September 30 determination date. In these 2006 rulings, the potential primary beneficiary, the decedent’s spouse, died shortly after the decedent and the spouse’s personal representative disclaimed the spouse’s interest in the benefits allowing the provisions of the reformed beneficiary designation to apply. The transfer of the IRA from one custodian to a second custodian was made with the express understanding (with the account owner) that the beneficiary designation in effect with the first custodian would stay the same. The second custodian failed, however, to reflect the contingent beneficiaries on its beneficiary designation form. The IRS held that the failure to name the contingent beneficiaries on the date of the account owner’s death was a mistake that could be corrected by a court-ordered reformation of the beneficiary designation. By contrast, a court-ordered change to a beneficiary designation to add contingent beneficiaries two years after the account owner’s death (based on a representative’s assertion that the revised beneficiary designation was “in the works” at the date of death) was rejected by the IRS in PLR 200742026. In that ruling, the IRS ruled that, because the beneficiary was not designated as of the date of death, the reformation of the beneficiary designation was ineffective to add the beneficiary retroactively.

Post-death Beneficiary Changes—In General

As noted above, if multiple beneficiaries are named, unless each nonindividual beneficiary is the beneficiary of a separate share of the benefit and that benefit is either distributed by the determination date or segregated into a separate subaccount or IRA by the end of the calendar year following the account owner’s death, the existence of a nonindividual beneficiary will cause the account owner to be considered to have no designated beneficiary even though individual beneficiaries also are named. Treas. Reg. § 1.401(a)(9)-4, A-3(a). If there are multiple individual beneficiaries (and no nonindividual beneficiaries), the individual having the shortest life expectancy (the oldest individual) will generally be the designated beneficiary for purposes of determining the applicable distribution period for distributions to all beneficiaries that begin in the year after the account owner’s death. Treas. Reg. § 1.401(a)(9)-5, A-7(a). If, however, the interest of each of the beneficiaries in a group of multiple beneficiaries that has been designated to receive the same benefit is identifiable (for example, equal shares, percentages, and so on) as of the determination date, separate shares or accounts may be created by the end of the calendar year following the year of the account owner’s death, in which case the applicable distribution period for each share or account will be determined separately as if the beneficiary of that share were the account owner’s sole designated beneficiary. Treas. Reg. § 1.401(a)(9)-8, A-2 and A-3. For the purposes of these determinations, each beneficiary whose entitlement to benefits is contingent on an event other than the death of a predecessor beneficiary before the entire benefit has been distributed by the plan or IRA to that predecessor beneficiary (that is, any beneficiary who is not solely a “mere successor beneficiary”) is taken into account. Treas. Reg. § 1.401(a)(9)-5, A-7(b) and A-7(c)(1). If a named beneficiary disclaims the entitlement to benefits or receives a distribution of the entire benefit to which the person is entitled before the determination date, that named beneficiary is disregarded for purposes of identifying the oldest designated beneficiary (or determining whether or not the account owner has a designated beneficiary) to determine the applicable distribution period. Treas. Reg. § 1.401(a)(9)-4, A-4(a). In the event that one of a group of multiple beneficiaries who have survived the account owner dies during the window period, that deceased beneficiary will continue to be taken into account unless the benefit is disclaimed. Treas. Reg. § 1.401(a)(9)-4, A-4(c).

Except for the key differences noted below, the foregoing multiple beneficiary rules generally apply to determine the look-through designated beneficiaries to be taken into account for a trust named as beneficiary that qualifies for the see-through rules. A trust must satisfy four threshold requirements to qualify for see-through treatment: (1) the trust must be valid under state law; (2) the trust beneficiaries entitled to benefits must be identifiable; (3) the trust must be irrevocable as of the account owner’s death; and (4) a copy of the trust agreement (or a comprehensive list of trust beneficiaries and their conditions of entitlement) must be provided to the plan administrator or IRA custodian by October 31 of the year following the account owner’s death. Treas. Reg. § 1.401(a)(9)-4, A-5. Unless a see-through trust (1) requires all plan and IRA benefits received by the trustee to be distributed to a beneficiary in the year received as does a conduit trust described in Treas. Reg. § 1.401(a)(9)-5, A-7(c), ex. 2, or (2) all of the beneficiaries who will receive benefits on a foreseeable trust termination date can be determined by taking a snapshot on the determination date (see PLR 200438044), all of the potential beneficiaries of a trust must be taken into account to determine the designated beneficiary no matter how remote the beneficial interest might be. This is the case because, if the benefits distributed from the plan or IRA may be accumulated in the trust, the benefits could ultimately be distributed to any one or more of the contingent beneficiaries. Moreover, the separate share rule does not apply to separately identifiable interests of beneficiaries in a trust (for example, to multiple individual beneficiaries or to separate trusts or subtrusts established as of the date of the account owner’s death under a trust agreement) but only applies at the plan or IRA beneficiary designation level. Treas. Reg. § 1.401(a)(9)-4, A-5(c). As a consequence, unless an account owner’s beneficiary designation names a separate trust or trusts designed to qualify as a conduit trust or as a younger-individuals-only trust (a trust with provisions that limit the trust beneficiaries that can be taken into account as designated beneficiaries to assure that only a primary individual beneficiary and younger individuals will benefit), all of the trust beneficiaries of all trusts created under the trust agreement are taken into account and actions may need to be taken during the window period to produce the targeted designated beneficiary.

Postmortem Trust Reformations Restricted

In PLR 201021038, the account owner was the second to die settlor of a joint revocable trust that was created by two spouses. On the second death, after the payment of specific bequests and the payment to a fund created for two grandchildren (which was immediately terminated and distributed), the trust agreement provided for the creation of two separate “protective trusts,” one for each child of the settlors. The trust agreement provided for distributions of income and principal from each protective trust to its beneficiary in accordance with an ascertainable standard and that, if a special independent trustee is appointed by the primary beneficiary, that trustee can direct distributions to the primary beneficiary’s descendants. After attaining a stated age, the primary beneficiary can exercise a power of appointment, effective on the beneficiary’s death, in favor of persons and entities, including charities. If the power is unexercised at the time of the beneficiary’s death, the trust assets are to be divided among persons listed on an attached schedule. Finally, the trust agreement stated that the settlors of the trust desired that the trustee should seek to obtain the maximum stretch-out payment of any IRA or 401(k) benefit and that, “[f]or purposes of qualifying as a Designated Beneficiary under IRC and applicable regulations, each Beneficiary may amend the terms of the trust which govern the distribution of his or her trust at death in the absence of a complete and effective exercise of any applicable power of appointment.”

Following the second settlor’s death, the beneficiaries obtained a local court order modifying the provisions of the protective trusts, effective as of the second settlor’s death, (1) to convert each trust to a conduit trust, requiring the pass-through of IRA benefits to the primary beneficiary, and (2) to attempt to circumscribe the potential trust beneficiaries and the potential appointees under the power of appointment by limiting them to those individuals who are younger than the eldest of the two children. It is not clear why the trust amendment took this belt and suspenders approach. If the conduit provision applied, all subsequent beneficiaries would be successor beneficiaries (that is, the subsequent beneficiaries would receive benefits only if the primary beneficiary failed to live out her life expectancy). As a consequence, there would be no need to limit the successor beneficiaries to individuals who are younger than the primary beneficiary. In any event, the IRS refused to recognize the modified trust provisions, stating that generally the reformation of a trust instrument is not effective to change the tax consequences of a completed transaction. The ruling cites Estate of La Meres v. Commissioner, 98 T.C. 294 (1992), in which the court held the reformation of a trust instrument solely for the purpose of qualifying a bequest for the estate tax charitable deduction was not effective for federal tax purposes. The private letter ruling, based on the terms of the trusts as they existed on the account owner’s date of death, determined that the account owner had no identifiable designated beneficiary because the powers of appointment held by the protective trusts’ beneficiaries could benefit charities. The ruling concluded that, while potential beneficiaries may be eliminated during the window period, they may not be added and that recognizing the postmortem judicial modification would have the effect of creating a designated beneficiary after the death of the account owner and would not be given effect for purposes of IRC § 401(a)(9).

In two previous private letter rulings, the IRS recognized post-death modifications to a trust agreement made during the window period under the trust agreement’s terms as being effective for purposes of determining the designated beneficiary. In PLR 200537044, a “trust protector” exercised a power to convert a conduit trust named as beneficiary to an accumulation trust (and in that event to activate a trust provision that no accumulated income or principal could be paid to a person older than the current beneficiary), and in PLR 200607031, the trustee was given a power to amend the trust to qualify it as a designated beneficiary, and the power was exercised by making the trust a conduit trust. Setting aside the reasoning (or lack of reasoning) for accepting the post-death modifications in these rulings, it would appear that the trusts in each of these rulings would have qualified as see-through trusts before the modification and that the look-through oldest designated beneficiary would have been the same in each case whether or not the trust agreement amendment had occurred. In other words, the trust modification converted a conduit trust for the oldest designated beneficiary to a younger-individuals-only trust (that could only benefit that beneficiary and individuals younger) in the initial private letter ruling, and a younger-individuals-only trust was converted to a conduit trust for the oldest designated beneficiary in the second ruling. By contrast, the trust modification in PLR 201021038 discussed above attempted to modify a trust with no designated beneficiary to one that would have a designated beneficiary. Perhaps the modifications made to the trust agreements in the above two private letter rulings, while clearly made with the objective of qualifying for a particular tax treatment, were not made solely to obtain that objective because the benefit of having a particular look-through designated beneficiary for purposes of measuring the stretch-out payments was already attained.

Trust reformations that result from a reasonable construction of an ambiguity, the correction of a scrivener’s error, or the settlement of a bona fide dispute (all seen as a basis for recognizing the resulting tax consequences in the transfer tax area) may well be respected in the required minimum distribution area even if there is an accompanying component of obtaining favorable tax treatment. For example, in PLR 200707158, an IRA beneficiary designation was reformed under the settlement of litigation between two brothers regarding their father’s estate. The beneficiary designation originally filed named the first brother’s children as beneficiaries and was changed to name the second brother as beneficiary. The first brother requested a ruling that he would not be subject to gift tax as a result of the change. The settlement was made to place the second brother in a position of being an equal beneficiary of his father’s assets, which had all been inherited by the first brother (and his children) because of changes made to the title of the father’s assets during his lifetime by the first brother acting under a power of attorney. Although the ruling does not discuss the tax treatment of the distributions to the second brother under the revised IRA beneficiary designation, it does confirm that the first brother will not be subject to income tax on IRA distributions.

Disclaimers to the Rescue

As explained above, a qualified disclaimer of entitlement to benefits under IRC § 2518 eliminates a disclaiming beneficiary if made before the determination date. For federal transfer tax purposes, the effect of a qualified disclaimer under IRC § 2518(a) is that the disclaimed interest is treated as if it had never been transferred to the person making the qualified disclaimer and, instead, had passed directly from the transferor of the property (that is, the deceased testator, trust settlor, or account owner) to the person entitled to receive the property as a result of the disclaimer. A “qualified disclaimer” means an irrevocable and unqualified refusal by a person to accept an interest in the property, but only if

  1. the refusal is in writing;
  2. the writing is received by the transferor of the interest or the holder of the legal title to the property to which the interest relates not later than nine months after the later of the day on which the transfer creating the interest in such person is made or the day on which such person attains age 21;
  3. such person has not accepted the interest or any of its benefits; and
  4. as a result of such refusal, the interest passes without any direction on the part of the person making the disclaimer and passes to (a) the spouse of the decedent or (b) to a person other than the person making the disclaimer. IRC § 2518(b).

The entitlement to disclaimed benefits can be disclaimed, in turn, by the successor beneficiary in the same manner (that is, within nine months of the original disclaimer creating the successor beneficiary’s interest in the benefits). Rev. Rul. 2005-36, 2005-26 I.R.B. 1368, concludes that a designated primary beneficiary that has received an RMD payment following an account owner’s death may nonetheless disclaim the balance of the benefit. To qualify as a disclaimer, no income or other benefit of the disclaimed amount may inure to the disclaimant. Treas. Reg. § 25.2518-3(e). Under the revenue ruling, the amount, received as an RMD, is treated as a distribution from corpus of a pecuniary amount and the receipt is considered to be the acceptance of a proportionate amount of the account’s income, determined by formula under the qualified disclaimer regulations. The RMD amount is divided by the total balance of the account at the time of its transfer to the beneficiary (the account owner’s death), and the resulting percentage is multiplied by the income earned from the date of the transfer to the date of the disclaimer. The formula amount of income must be distributed to the disclaimant on or before the determination date. The revenue ruling also illustrates fact situations, one in which the RMD recipient disclaims a pecuniary amount and a second in which the recipient disclaims a fractional (percentage) share of the total benefit, provided, in either case, that the income attributable to the disclaimed portion is also disclaimed.

In PLR 200837046, an account owner named her spouse as primary beneficiary of her IRA and one of her two sons as the contingent beneficiary. The account owner was subsequently divorced from her husband and, under her post-divorce estate plan, was directed by her attorney to file a revised beneficiary designation naming a testamentary trust for her two sons as beneficiary. Following the account owner’s death, which occurred before her required beginning date, it was discovered that the revised beneficiary designation had never been filed. Under the law of the state of the account owner’s residence, her ex-husband was prohibited from benefiting from the account so that one of her two sons was the sole beneficiary of the account. After the account owner’s death, the son that was the beneficiary of the IRA delivered a disclaimer to the executor of his mother’s estate by which he disclaimed any and all interest in one-half of the IRA, including any interest in the IRA that passes to the trust established by the account owner under her will and any right to inherit the disclaimed property by reason of gift over, successive gift over, or by intestate succession. The ruling recognizes the disclaimer as a qualified disclaimer—no amounts had been distributed to the beneficiary so that no income needed to be apportioned. The ruling also confirmed that the one-half of the IRA retained by the disclaimant could be distributed over his fixed single life expectancy. The ruling does not address the RMD aspects of the disclaimed one-half of the IRA. The trust to which that one-half and the balance of the account owner’s property was transferred was to be a single trust until both sons attained age 18 (at which time the single trust was to divide into two trusts, one for each son, and each separate trust was to continue until the beneficiary son attained age 35). Because the attainment of age 35 is required before it can be said that the IRA benefits will be distributed to the son who is the beneficiary of the trust holding the disclaimed one-half of the IRA account, all of the contingent beneficiaries of the trust (with the exception of the disclaimant) must be taken into account in determining the designated beneficiary. The ruling does not provide sufficient facts to determine whether the five-year rule or the single fixed life expectancy of the beneficiary of the trust will apply to determine distributions. In any event, the disclaimer successfully divided the benefits between the sons as the revised beneficiary designation that was never filed would have done.

In PLR 201125009, an account owner who had reached his required beginning date was survived by his wife and three children. The beneficiary designations that were filed for three IRC § 403(b) retirement accounts and an IRA all named the wife as primary beneficiary and provided that, if the wife survived the account owner and disclaimed her interest in the retirement accounts, the accounts were to go to a disclaimer trust. The trust agreement, by contrast, provided that the disclaimer trust was to benefit the wife only if she survived the account owner and the trust was named as beneficiary by the account owner. If the wife failed to survive the account owner, the trust agreement provided that any retirement account assets were to be distributed outright to the children, per stirpes. The apparent disconnect between the beneficiary designation and the trust agreement presumably existed because the possibility of a disclaimer occurring after the wife’s death was not contemplated. The account owner’s daughter, as administratrix of the wife’s estate, disclaimed both the wife’s interest in the retirement accounts and the wife’s interest in the disclaimer trust. Before the disclaimer, RMD amounts had been automatically deposited in the bank account of the deceased wife, some during her lifetime and some after her death before the disclaimer. The ruling held that, subject to the distribution of the proportionate income attributable to the pre-disclaimer RMDs, the wife had not accepted the benefits and the balance of the benefits could be properly disclaimed. Although not stated in the ruling, the disclaimer would have resulted in the distribution of the retirement accounts in per stirpes shares to the children and permitted each child to use his or her own single life expectancy (rather than the wife’s single life expectancy) to measure RMDs if the separate accounts were established by the end of the year following the account owner’s death.

Spousal Rollovers When Estate or Trust Named Beneficiary

Under IRC § 402(c) in the case of a decedent’s interest in a qualified plan and IRC § 408(d)(3)(A) in the case of a deceased IRA account owner, distributions to a surviving spouse that are eligible distributions (those that are not RMDs or, in the case of a plan, hardship distributions or a part of a series of substantially equal distributions over the participant’s life expectancy or a period of years) and are paid into an IRA for the benefit of the decedent’s surviving spouse within 60 days of the distribution date (a spousal rollover) are not subject to tax under IRC § 72. A spousal rollover allows the surviving spouse to receive RMDs over the spouse’s life expectancy, redetermined annually using the generous Uniform Table, and permits the spouse to name the spouse’s own beneficiary who can take benefits over that beneficiary’s single life expectancy. Although no statute, regulation, or court case supports the result, the IRS has issued numerous private letter rulings over the past 15 years in which the surviving spouse was allowed to roll over the decedent’s plan or IRA interest even though the beneficiary of the decedent’s interest was the decedent’s estate or trust. See, for example, PLR 200324059, PLR 200634085, PLR 200637033, and PLR 200905040. In each of these private letter rulings, the rollover was approved because the surviving spouse was either the executor or trustee of the decedent’s estate or trust, was in control, and was the sole person who could make the decision to distribute the decedent’s interest in the plan or IRA to the surviving spouse. Under these circumstances, the decedent’s interest is not treated as having passed through a third-party estate or trust but, instead, as having been received by the surviving spouse directly from the decedent. In some cases, the surviving spouse’s power of direction resulted from trustee resignations and the appointment of the surviving spouse as trustee after the death of the account owner. PLR 200615032. In PLR 200807025, in which the surviving spouse was a co-trustee, the trustees allocated the decedent account owner’s IRA to the marital trust, transferred the IRA by a trustee-to-trustee transfer to an IRA in the decedent’s name, and then rolled the IRA over to an IRA in the spouse’s own name. The ruling states that the preamble to the final IRC § 401(a)(9) Treasury Regulations provides that

a surviving spouse who actually receives a distribution from a deceased spouse’s IRA is permitted to roll that distribution over into his/her own IRA even if the spouse is not the sole beneficiary of the decedent’s IRA as long as the rollover is accomplished within the requisite 60-day period. A rollover may be accomplished even if IRA assets pass through a trust.

It is not clear whether this ruling’s exception to the requirement stated in prior private letter rulings that the surviving spouse be the sole trustee of a trust named as beneficiary will be followed in the future.

If the surviving spouse’s powers are restricted (for example, in the case of a trust in which distributions are subject to an ascertainable standard), the spousal rollover is not allowed. PLR 200944059. If a spousal rollover of benefits payable to an account owner’s estate can be implemented, the accelerated distribution otherwise required because there is no designated beneficiary can be avoided in favor of the extended distribution period available to the spouse’s own IRA. In the case of benefits payable to a trust, the spousal rollover avoids the payment of benefits over the fixed life expectancy of the spouse if the spouse is the oldest designated beneficiary of a see-through trust that has a designated beneficiary or avoids the accelerated distribution period if there is no designated beneficiary of the see-through trust. Because the only authority for a spousal rollover when an estate or trust is named as beneficiary rests on the ruling policy expressed in private letter rulings (albeit a large number of rulings over an extended period of time), many plan sponsors and IRA providers refuse to implement a spousal rollover for benefits payable to a trust or estate unless the surviving spouse first obtains a private letter ruling based on the facts of the particular situation.

Distributions of IRAs from Estates and Trusts

In the event that the decedent’s estate becomes the beneficiary of an IRA other than by virtue of a third-party mistake that might support a reformation of the beneficiary designation and the distribution period (the five-year rule or the decedent’s fixed life expectancy) applies, separate IRAs for the estate beneficiaries can still be established in the name of the decedent for the benefit of each beneficiary by the estate’s personal representative. Although such an IRA division and distribution cannot change the minimum distribution period applicable to the estate, establishing separate IRA accounts permits each beneficiary to control post-transfer distributions in excess of RMDs and to manage the investments of the separate account. It further permits the account owner’s estate to terminate before the end of the minimum distribution period. Under Rev. Rul. 78-406, 1978-2 C.B. 157, a direct transfer of funds by an account owner from one IRA trustee to another IRA trustee does not constitute a payment or distribution to a distributee or a rollover under IRC § 408(d). The IRS has ruled privately that the ruling also applies if the trustee-to-trustee transfer is directed by the beneficiary of an IRA after the death of the account owner as long as the transferee IRA is set up and maintained in the name of the deceased account owner for the benefit of the beneficiary. PLR 200850058, PLR 200343030, and PLR 201128036. In each case, separate IRA accounts were established for the children of the deceased account owner (in the first ruling, after the account owner’s surviving spouse had disclaimed any interest as an estate beneficiary in the IRA).

In the case of an IRA payable to a trust, separate IRA accounts can be created for each of several trust beneficiaries that share an interest in benefits by transferring each beneficiary’s interest to an IRA in the name of the deceased account owner who created the trust for the benefit of the beneficiary. This may occur if the trustee has the power under the trust agreement to make in-kind distributions even if the trust continues in existence for other non-IRA assets. PLR 200109051, PLR 200329048, and PLR 201038019. It also may occur on the termination of a trust. PLR 200131033 and PLR 200809042. As in the case of a spousal rollover when benefits are payable to a trust or estate, IRA providers may resist requests for distributions from IRA accounts payable to estates and trusts to several IRAs in the deceased account owner’s name because private letter rulings cannot be cited as authority. Because other IRA providers will permit such transfers, it may be necessary to transfer the IRA (by a trustee-to-trustee transfer) to a cooperative IRA provider to accomplish the distributions.


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(Last Updated January 2014 - PDF)

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Reprint Permission Policies

The Section's Executive Committee approved these updated policies in November 2011.