Trust as Beneficary: Spousal Rollover

[Guest reg_h2b]

Assume a trust is the beneficary of three seperate IRA's. The trust is "qualified" such that the ben. of the trust are the desg. ben. of the IRA's. Spouse is one of the ben's of the trust. Assume IRA owner dies.

Q1:

Other than various PLR's, does anyone have any citations as to under what circumstances a spouse would qualify for a spousal rollover? (Having read various PLR's on this topic they tend to use the same language in describing the terms the spouse needs to satisfy).

Q2:

Does it make a diffence, in general, if a spousal rollover goes into a new IRA account or it is rolled over into a pre-existing IRA account of the surviving spouse. If there is a difference, what is it?

Thanks

[Mary Kay Foss]

I'm only replying to question 2. It often makes a difference when the IRA is rolled over into the spouse's existing account. This is because if the spouse has passed the Required Beginning Date the new funds would have the same beneficiary as before the rollover.

A new IRA allows the survivor to name new (younger) beneficiaries. If the spouse's named each other as primary beneficiaries (either directly or as trust beneficiaries) as of the Required Beginning Date, you will have a relatively short time period for distributions.

If the survivor has not reached the Required Beginning Date, you can change beneficiaries for the existing IRA and the new funds up until April 1 after survivor reaches age 70.5.

[Guest reg_h2b]

Thanks Mary Kay, you're absolutely right. In my case, its pre-RBD, but the new IRA does take care of the post-RBD scenario.

[Bruce Steiner]

As to question 1, see my article on this subject in the October 1997 issue of Estate Planning.

[Guest reg_h2b]

As my collection of Estate Planning only goes back to 1999... Here is the issue in a nutshell.

Individual A has three IRA's. "A" dies before his RBD. The ben's of all the IRAs was a qualified trust "X". At DOD trust X splits into 2 trusts: a Maritial Trust and a Family Trust(unified credit shelter). The desg.ben. of the Maritial Trust is A's sps "B". The desg.ben's of the Family Trust are A's children.

The Trustee of trust X is A's son. The only assets in Trust X are the IRA's. The sps B has the sole power to withdraw the principal and income from the Maritial Trust at anytime for whatever reason she sees fit.

Can the sps B do a sps rollover of the amount in the Maritial Trust?

Analysis:

Many PLRs have been written on this subject(eg PLR9416045). The key points seem to be these PLR words:

"Generally, if a decedent's IRA proceeds pass through a third party e.g. a trust, and then are distributed to the decedent's surviving spouse, said spouse will be treated as acquiring them from the third party and not from the decedent. Thus, the spouse will not be able to roll over the IRA into her own IRA."

"However, if the Trustee of a trust which distributes IRA proceeds to a surviving spouse HAS NO DISCRETION with respect to EITHER the allocation of the IRA proceeds to a trust or subtrust with the trust OR to the payment of the IRA proceeds to the surviving spouse then ... the Service will treat the surviving spouse as receiving the IRA proceeds from the decedent and not the trust and thus will allow a spousal rollover of such proceeds."

As applied to this example, the only assets in the trust are the three IRA's. The size of the family trust is limited to the size of the unified credit; the remainder of the IRA assets will go into the maritial trust.

Thus it would seem that the Trustee (1) has NO discretion to change the amount of IRA assets put into the maritial trust and (2) once the IRA assets are in the maritial trust the Trustee has NO discretion to limit the sps's ability to withdraw all the maritial trusts IRA assets.

The only question remaining seems to be if the ability of the Trustee to put different %'s of IRA's 1,2,or 3 into the Marital Trust. The size of the trusts are fixed; the specific %'s of the IRAs in the trust are not fixed. But should that matter? The Trustee cannot effect the amount of total IRA assets the spouse can receive; but he can change the % amounts of individual IRAs the spouse can receive. But is that relevant?

Does the Trustee's discretion involve only the total IRA assets the spouse can receive?

[Bruce Steiner]

If you can't get a copy of my article from the law firm you were at before 1999, or some other law firm in your area with a tax/estates practice, let me know and I'll send you a copy.

The second part of the problem is the easier part. Since the spouse has the power to withdraw all of the assets of the marital trust, the marital trust is essentially disregarded.

The first part of the problem is often the harder part. But if in fact the decedent had no other assets other than the IRAs, then you don't have to deal with the issue of whether some nonretirement assets could have gone to the marital share.

If the amount involved is significant, or if the IRA trustee/custodian won't let you do what you want without a ruling, then you may want to obtain your own ruling.

In doing the research for my article, I was amazed at how often this fact pattern occurred. It seemed like one would have to make a great effort to create such a fact pattern.

I don't understand why anyone would create a marital trust in which the spouse has the power to withdraw all of the trust assets. It would seem that one would leave the marital share either outright or in a QTIP trust, but not in this type of trust.

I also don't understand why anyone would go through all this complexity instead of simply leaving the IRA to the spouse, with the credit shelter trust as the contingent beneficiary; or, alternatively, leaving to the credit shelter trust the share of the IRA benefits necessary to fully fund the credit shelter trust, and the balance of the IRA benefits to the spouse.

[Guest reg_h2b]

Thanks Bruce:

1. As to complexity:

Many things about this case could have been simplified pre-DOD (different estate attorney). (Some of my work has become a salvage operation.)

2. Trustee discretion:

You seem to agree with my point that the important part of the discretion is the control over "total IRA assets" going into the marital trust as opposed to which "% of each individual IRA" goes into the marital trust. That makes sense to me too. Although after looking at 11 PLR's on this issue I could not find the same multiple IRA circumstance. Do you know of such a case?

3. IRS Guidance:

BTW, in your research did you find any other IRS guidance on this issue other than the language I quoted above from the PLR?

4. Our PLR:

Unfortunately since the individual died in 1999 the ben's RBD is 12/31/2000. Thus the family trust must be funded with 650K (plus trust appreciation) of IRA assets so the children can inherit the family trust IRA's and take out their MRD by 12/31/2000 (using sps exp life).

Under this case the residual IRA assets will go to the marital trust. If the spouse does not choose to take out her MRD by 12/31/2000 it will be assumed to be a spousal rollover (so if she doesn't qualify for a spousal rollover she could be in trouble!)

Under these circumstances, a PLR would not be timely in order to make these decisions. It would seem that the Service would have codified their guidance on this issue into something more substantial than just PLR's. No?

[Bruce Steiner]

2. I am not aware of any PLRs in which the existence of multiple IRAs was relevant.

3. Where there are some assets other than IRAs, some of the PLRs require that other assets go to the marital share to the extent possible, and some don't. But you say you don't have any non-IRA assets.

4. I don't know of anything other than the PLRs. But by now there are enough PLRs that you can get a sense of the IRS' thinking, even though PLRs are not binding except as to the taxpayers to whom they were issued.

At the risk of sounding critical, if the decedent died in 1999, and actions must be taken by 12/31/00, these issues might have been raised sooner.

If the credit shelter is pecuniary, you may want to consider whether you think that funding the credit shelter amount with the right to receive IRA benefits will accelerate the income tax.

The beneficiaries of the credit shelter trust might have considered disclaiming their interests in the credit shelter trust, so as to permit the spouse to roll over the entire IRA, thus obtaining greater income tax deferral, at the cost of giving up the credit shelter. Whether you think the funding of a pecuniary credit shelter with the right to receive IRA benefits accelerates the income may affect your thinking on this issue. However, since more than 9 months have passed since the decedent's death, this option is no longer available.

[Guest reg_h2b]

All of the assets in the trust are currently IRA's (3 IRA's in total).

However, there is one IRA that may complicate this matter somewhat: one of the IRA's is a Roth IRA (1998 conversion) that needs to be recharacterized back to a traditional IRA. The election to recharacterized was made by the executor and communicated to the custodian before the 12/31/99 deadline. However the custodian never transferred the assets by the 12/31/99 deadline. It is currently still a Roth IRA. We have sent in a ruling request to the IRS to grant us the time to recharacterize. We believe we have a strong case.

One of the reasons why we have delayed this funding is that we expected to hear back from the Service as to the ruling. We now have been told that ALL the requests on this issue have gone to the IRS's general counsel's office for guidance

and we will not here back before 12/31/2000.

There are only two options: either the IRA is allowed to go back to being a traditional IRA or it is deemed to be a failed recharacterization and the assets are deemed to be cash.

Obviously, the trustee has no discretion as to the result of the ruling. As of the time of the funding there is one Roth and two traditional IRA's. I suppose if the recharacterization is denied and the account is deemed to be cash then looking back after the funding has occurred the Service could make the argument that to the extent the trustee funded the marital with this "Roth" then the trustee will have "denied" the spouse rollover benefits. But that seems to be a stretch.

In addition, the Trust has an IRD (income w/ respect to the descendent) clause that says the IRD assets must be put in the family trust as much as possible. Thus under this clause, the trust further confines the trustee to fund the marital with the "Roth" under the possibility that it may be deemed to be cash.

Thus if our request is granted there are just IRA's. If it is denied then the Trust gives the trustee no discretion as to the fact that the maximum amount of the cash account must be put into the marital trust. (But that is just speculation since the funding must occur before 12/31/2000 for the ben's of the family trust to get their MRD's). So it would seem that the "safe harbor" position is to fund the marital with the "Roth" to the max. extent possible. Do you have the PLR number that says when given a choice you fund marital w/ non-IRA assets?

As to the disclaimer the spouse's RBD will be 4/1/2002, so while I hear you on the increased possiblity of deferral due to a spouse rollover (using joint lifetimes and/or future Roth conversions) it's not obvious-at least to me- that that would result in a greater net estate.