Payable to Testamentary Trust
A spousal rollover of Individual Retirement Account assets is only allowed when the spouse is named as beneficiary of the IRA (and the other rules of Internal Revenue Code § 408 are met). A spousal rollover allows the surviving spouse to transfer the deceased spouse’s IRA into an account in the surviving spouse’s name and continue to defer distributions until the surviving spouse attains age 70 ½. Upon achieving age 70 ½ , the surviving spouse would have to start taking required minimum distributions based of the IRS’ Uniform Table, which is based on the life of the individual and a theoretical spouse 10 years younger. This is much more advantageous than the IRS’ Single Life Expectancy Table used to calculate required minimum distributions from an Inherited IRA. (Since a spousal rollover of an IRA is only available to spouses in certain circumstances, all other beneficiaries of an IRA from a deceased person would be subject to the Inherited IRA rules). For instance, a 60 year old beneficiary of an Inherited IRA would be required to distribute all the assets from the Inherited IRA by no later than age 85, rather than up to age 115 with the Uniform Table.
The Treasury Regulations at section 1.408-8 provide that a spousal rollover is only available if the spouse is the sole beneficiary of the IRA and she has an unlimited right to withdraw the assets from the IRA. The Regulations go on to say that the sole beneficiary rule is NOT satisfied if the beneficiary is a trust, even if the sole beneficiary of the trust is the surviving spouse.
There are numerous written and unwritten exceptions that make estate planning for retirement assets so difficult. In Private Letter Ruling 201511036, the deceased spouse named his estate as the beneficiary of IRAs E – N. The deceased spouse’s will further provided that the estate was to be payable to a trust for his surviving spouse. The surviving spouse was named as the sole beneficiary of her trust and she was also to serve as the trustee of the testamentary trust.
The surviving spouse desired to have the IRAs E – N paid to the estate, then to her testamentary trust, and then distributed outright to her. Once she received the funds, she proposed to place the assets in a spousal rollover IRA no later than sixty days from the date the distributions were made by the custodians of IRAs E – N. Internal Revenue Code § 408(d)(3)(A) provides that distributions that are reinvested in an IRA within sixty days of the receipt of the funds are not taxed, pursuant to its rules. The IRS was asked in the PLR to rule on three points:
- IRAs E – N would not be treated as Inherited IRAs.
- The surviving spouse is eligible to take advantage of the sixty-day rule to transfer the funds received into a spousal rollover retirement account.
- The transfer of the funds by the executor, then the trustee, and finally the surviving spouse within the sixty-day time frame would not be considered taxable distributions as long as they all occurred within the sixty-day time limit.
The IRS first examined the transfer of the retirement assets, first to the estate, then to the testamentary trust for the spouse, and then to the spouse. The IRS reiterated the rule that transfers to a trust, even if the trust is for the benefit of the spouse, are not eligible for rollover treatment. It further detailed that the surviving spouse was the trustee of her trust and that her trust provided for her to receive all income, and upon written demand, all principal from her trust. The IRS further states that the surviving spouse has made a written demand for all income and principal (attributable to IRAs E – N) and that she intends to transfer the retirement fund distributions from her trust to one or more spousal rollover IRAs maintained in her own name.
The IRS further goes on to state the unwritten rule:
“Generally, if the proceeds of a decedent’s IRA are payable to a trust, and are paid to the trustee of the trust, who then pays them to the decedent’s surviving spouse as the beneficiary of the trust, the surviving spouse is treated as having received the IRA proceeds from the trust and not from the decedent. Accordingly, such surviving spouse, in general, is not eligible to roll over the distributed IRA proceeds into her own IRA.
However, the general rule will not apply where the surviving spouse is the sole trustee of the decedent’s trust and has the sole authority and discretion under the trust language to pay the IRA proceeds to herself. The surviving spouse may then receive the IRA proceeds and roll over the amounts into an IRA set up and maintained in her name.”
The IRS further goes on to state that the proposed distribution would not be treated as an Inherited IRA and, as long as the proceeds from the trust are transferred to the IRA within the sixty-day time frame, the funds distributed from IRAs E – N would not be treated as taxable distributions.
Our office is familiar with the various planning options for retirement assets, especially large IRA accounts. We can provide your clients with all the options, including obtaining spousal rollover treatment for the surviving spouse and “stretch-IRA” status for the remainder beneficiaries. This type of advanced estate planning is always in flux, so you must consult an attorney who keeps up with all the changes. As a member of the American Academy of Estate Planning Attorneys, our firm is kept up-to-date with information about recent developments and new estate planning strategies and planning for retirement assets. You can get more information about scheduling a complimentary estate planning or elder law appointment and the services offered by our firm by calling our office.