Advanced Underwriting Consultants

Ask the Experts – January 20

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: A client’s husband passed away naming an irrevocable trust as the beneficiary to his IRA. His surviving spouse is the sole beneficiary of the trust. Can she roll over her deceased husband’s IRA into her own IRA?

Answer: Possibly, but it will depend on how the trust is set up.

A surviving spouse who directly acquires a decedent’s IRA will be able to roll over the decedent’s IRA into the surviving spouse’s own account—even if the spouse is not the sole beneficiary of the IRA.

If the IRA beneficiary is a trust or estate, the answer becomes less definitive since the IRS has not yet addressed this specific issue outside of numerous Private Letter Rulings (PLRs). While PLRs cannot be relied upon for precedence, they can provide insight on how the IRS might view the issue in the future.

In PLR 201125047, the IRS stated the general rule that if the proceeds of a decedent’s IRA are paid to a trustee who then pays the proceeds to the surviving spouse as beneficiary of the trust, the surviving spouse will be treated as having received the proceeds from the trust—not the IRA itself. Therefore, under the general rule, the surviving spouse could not rollover the proceeds.

However, the IRS noted an exception. If the surviving spouse has the sole authority and discretion under the trust language to pay the IRA proceeds to herself, she may roll over such proceeds from the trust into her own IRA. But if someone other than the surviving spouse—e.g., a trustee—decides who receives the IRA funds, according to PLR 201125047, the surviving spouse would not be able to roll over the funds as they are distributed.

What happens if the trust document itself dictates that all or a certain ascertainable portion of the IRA goes to the surviving spouse? Does she have the “sole authority and discretion” under the trust language to distribute the proceeds to herself? If she has the complete right of withdrawal of the assets, then she should be allowed rollover treatment. PLR 201225020.  However, if there are substantial limitations on when the proceeds may be distributed, she might not meet the threshold of authority.

Another problem a surviving spouse might encounter is that the IRA custodian might not allow a direct trustee-to-trustee transfer to the surviving spouse’s own IRA. Under such situations, she would only be able to do a 60-day rollover.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.