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.
Retirement Benefits Planning Editor: Harvey B. Wallace II, Joslyn Keydel & Wallace, 211 West Fort St., Suite 2211, Detroit, MI 48226-3270.
Postdeath IRA Transfers
After death, the beneficiary of a deceased account owner may want to transfer an Individual Retirement Account to a different trustee or custodian or to divide that IRA into two or more separate IRAs. A transfer may be made to obtain the investment expertise of a new trustee. In the case of a surviving spouse designated as
a beneficiary, a division of a single account may permit each of several children to become the spouse's successor beneficiary of a separate account. Planning for the division of an IRA account into GST exempt and GST nonexempt accounts may be indicated. If an account has multiple beneficiaries who have incompatible investment philosophies, are geographically disbursed and wish to have local IRA custodians or trustees, or have differing cash flow requirements, separate IRAs may be the path to family harmony.
If an IRA account owner's spouse is the designated beneficiary of an IRA account, the surviving spouse has the power to roll the account balance over to one or more new IRAs following the account owner's death. Such a rollover into separate accounts, even after the deceased IRA account owner's required beginning date has occurred, has frequently been approved in published private letter rulings (for example, PLRs 9450042 and 9005071). If a child is named beneficiary of the rollover account, such a rollover allows the minimum distributions required from the account during the spouse's remaining lifetime to be based on the joint life expectancy incidental benefit rule table in the Prop. Treas. Reg. §1.409(a)(9)-2, Q&A 4. Thus, payments made during the spouse's survival period are based on the joint life expectancy of the spouse and an individual 10 years younger, often producing a lengthier payout period than would have applied under the deceased account owner's account had there been no rollover. Moreover, on the spouse's death, any remaining account balance is distributable to the surviving child over the balance of the child's lifetime (reduced by one for each year that has passed since the rollover).
Inherited IRA Transfers-
the Wrong Way
In the case of any nonspouse beneficiary, the decedent's IRA account is deemed to be an "inherited" IRA and no rollover is permitted. An IRA for multiple nonspouse beneficiaries can nonetheless be transferred to a new trustee or custodian (or divided into separate accounts). Care must be taken that the transfer or division is not treated as a transfer of the inherited IRA to a beneficiary's IRA because such a transfer is not excluded from the beneficiary's gross income. In PLR 9014071, the transfer of a decedent's IRA account balance to an IRA established in the name of his daughter (the designated beneficiary of the decedent's account) resulted in the inclusion of the transferred account balance in the daughter's taxable income for the year of transfer.
Inherited IRA Transfers-
the Right Way
Fortunately, there is clear authority for an alternative method by which a designated beneficiary may transfer an IRA to a new trustee or custodian. In Rev. Rul. 78-406, 1978- 2 C.B. 157, an IRA account owner wished to transfer the balance of an IRA from one IRA trustee to a second IRA trustee but did not want to make a rollover of the funds. The IRS concluded:
In the absence of payment or distribution, the transfer would not be a rollover contribution described in 408(d)(3)(A) because such funds are not within the direct control and use of the participant. This conclusion would apply whether the bank trustee initiates or the IRA participant directs the transfer of funds.
In PLR 8716058, the son of a deceased IRA account owner who was the designated beneficiary of an IRA arranged to have a new IRA account established in his deceased mother's name with an eligible IRA trustee and proposed to have a trustee-to-trustee transfer of the account balance made. After summarizing the conclusion of Rev. Rul. 78-406, the ruling noted that, even though the designated beneficiary (rather than either the IRA participant or the bank trustee) wished to initiate the transfer, the transfer was not a prohibited rollover because the IRA would be maintained in the name of the deceased IRA participant. In PLR 9826042, a similar transfer by the deceased account owner's daughter was approved when the transferred funds were maintained in an IRA in the daughter's name as beneficiary of the deceased account owner.
Splitting an IRA
In PLRs 9623037 through 9623040, four daughters of a deceased account owner, as designated beneficiaries, proposed to have the existing IRA trustee divide the IRA into four equal shares. Each share was then to be transferred to a new IRA trustee (in a trustee-to-trustee transfer), with the recipient IRA remaining in the name of the deceased account owner, as owner. Each ruling approves the transfer to an account to be maintained in the name of the deceased account owner with the particular daughter requesting the ruling as the sole designated beneficiary of the IRA. PLR 9106045 reached the same conclusion on an equal division (and transfer) of an IRA account by its two designated beneficiaries.
In the case of an account owner whose death occurs after the required beginning date, required minimum distributions from either a continuing multiple beneficiary IRA or each of several split IRAs will be determined in the same manner as under the deceased account owner's IRA. By contrast, minimum required distributions from a multiple beneficiary IRA or separate new IRAs may be made over the life expectancy of the oldest designated beneficiary of the undivided account if the account owner dies before the required beginning date and a timely election is made by the beneficiaries to have payments commence on or before the end of the calendar year following the calendar year in which the deceased account owner dies.
If the IRA beneficiary designation contemplates the creation of separate shares (or accounts) from and after the date of death within the meaning of Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A H-2A, the postdeath required minimum distributions for each of the new separate IRAs may be determined based on the life expectancy of the designated beneficiary of the particular new separate IRA involved.
Assuming that the IRS does not change its ruling position in the future, the transfer or splitting of an IRA after the deceased account owner's death can likely be accomplished if care is taken to avoid a prohibited rollover. To achieve separate minimum required distribution periods for separate IRAs or to establish separate GST classification for the resulting accounts, however, predeath planning is needed.
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