Non-Designated Spouse Beneficiary

[Guest Patrick Foley]

A married person living in a community property state designates an IRA beneficiary other than his/her spouse, and then dies. The spouse asserts a right to a portion of the IRA based on community property law. What options does the spouse have in dealing with his/her interest in the IRA?

He/she doesn't appear to be a "designated beneficiary" under 401(a)(9) and the regulations, so his/her options there should be the same as those of an estate -- continuing the decedent's distribution if death was after the required beginning date, or payout within 5 years if death was before the required beginning date.

Can he/she roll over to his/her own IRA? That doesn't depend on "designated beneficiary" status under 408(d)(3). Assuming ownership of the account under Treas. Reg. 1.408-8, on the other hand, appears to require designated beneficiary status.

I would appreciate any thoughts or comments.

[Appleby]

The spouse is in fact a “designated beneficiary” by default and has the same options as a spouse who was a named ‘designated beneficiary’.

Because the spouse beneficiary is not the sole primary beneficiary, he/she cannot treat the inherited IRA assets as his/her ‘own’. The options are …

1.Transfer his/her portion to an inherited IRA

2.Distribute and roll his/her portion to his/her own IRA

[Bruce Steiner]

See PLRs 9427035 and 8927042. Also see my article on this in the October 1997 issue of Estate Planning at page 369.

[Appleby]

See PLRs 9427035 and 8927042. Also see my article on this in the October 1997 issue of Estate Planning at page 369.

Bruce,

From what I read in these PLRs , they address the spouse being allowed a spousal rollover, despite the fact that a trust was the beneficiary, not the spouse. The allowance was made because the spouse was the beneficiary of the trust.

I do not have access to your article, but this appears to be a different issue. Further, an article written in 1997 is unlikely to explain the allowable options for the question asked by Foley, as the Final RMD regulations, issued April 17, 2002, changed some of the rules under the proposed RMD regulation

[Bruce Steiner]

My article covers various situations in which the spouse was permitted to do a rollover even though he/she was not named as beneficiary. In doing the research for the article, I found two PLRs involving community property. I was not suggesting that they are determinative. (PLRs are not binding on the IRS in any event except with respect to the taxpayers to whom they are issued.) But I think these PLRs and my article may assist Mr. Foley in his research, and in deciding whether he thinks it is worth his effort to apply for a ruling in his case.

I don't think the Service's view on this issue (spousal rollovers where the spouse is not named as beneficiary) will change by reason of the final regulations.

If you don't subscribe to Estate Planning, you should be able to get a copy of the article from the lawyer who handles your estate planning, or from any law firm with a tax/estates practice with which you have a relationship.

[mbozek]

I dont think the designation of the spouse as a beneficiary is requred for a rollover. What will be required is that the spouse be paid as the beneficiary from the IRA custodian. You need to review the custodial agreement and the beneficary designation form. Some IRA custodians require spousal consent to designate another person as beneficiary of more than 50% of the IRA. Others state that the custodian will pay the designated beneficiry regardless of CP laws.

[Appleby]

I dont think the designation of the spouse as a beneficiary is requred for a rollover. What will be required is that the spouse be paid as the beneficiary from the IRA custodian. You need to review the custodial agreement and the beneficary designation form. Some IRA custodians require spousal consent to designate another person as beneficiary of more than 50% of the IRA.

Right on the money mbozek... the beneficiary options are the same , whether the spouse is the beneficiary by default of the plan document or state laws, or by being named as a beneficiary of the IRA.