iRetirement accounts are a significant financial asset for many individuals. The integration of the account benefits into an estate plan must be approached with care because of the income tax consequences of receipt of the account benefits. Ideally, the beneficiary designation for an account, and the account holder's estate plan, will give the account recipient the option to defer taking distributions and recognizing the income.
For a married account holder, the most flexible option often is to name his or her spouse as beneficiary of the account. A surviving spouse has the options of taking distributions immediately, deferring the commencement of distributions until the decedent would have reached age 70-1/2, or rolling over part or all of the account balance to his or her own individual retirement account (IRA). This last option is often the best.
A rollover is available to a spouse who acquired the account "by reason of the owner's death." In general, if a decedent's retirement account or IRA passes to his or her estate or a trust and then to the surviving spouse, the entity is considered to acquire the account, and the spouse cannot roll over the account to his or her own IRA.
Two recent private rulings confirm, however, that a spousal rollover often can be salvaged even when the decedent did not properly designate the spouse as beneficiary. The IRS will still allow a rollover if the spouse can dictate all the actions necessary to cause the account to be paid to him or her. For example, in Letter Ruling 201523019 (June 5, 2015), the decedent's beneficiary designation was 50% to the surviving spouse and 50% to the couple's joint trust, of which the surviving spouse was trustee. The spouse proposed to allocate the trust's 50% to a Marital Trust under the terms of the joint trust, and then exercise her right of withdrawal to take the proceeds and roll them over to her own IRA. Because the spouse, as trustee and beneficiary, had complete control as to the disposition of the account proceeds, the IRS ruled she would be treated as receiving the proceeds directly from the decedent's retirement account and eligible to roll over the amounts to her own IRA.
The Service reached the same conclusion in Letter Ruling 201507040 (Feb. 13, 2015) on almost identical facts. It also allowed a spousal rollover in Letter Ruling 200603036, even though the spouse had to exercise her authority as trustee to make a discretionary distribution to herself to acquire the retirement account proceeds. While these private letter rulings protect only the taxpayer who requested them, they are indicative of a consistent IRS policy to liberally allow spousal rollovers.
The lesson is that advisers should not give up on the rollover option if the designated beneficiary of a retirement account or IRA is the estate or trust. It may be possible to preserve the tax benefits of a spousal rollover.
