Trust as Beneficiary: Spousal Rollover

[Guest reg_h2b]

Most of the new MRD prop. regs. have obviously been good news for IRA holders. However, the ability to do a spousal rollover looks to have been eliminated for some taxpayers. The added restrictions are:

1. The spouse must be the sole bene of the IRA

2. A trust may not be the beneficiary even if the spouse is the sole bene of the trust.

Source: new prop. regs 408-8 A-5

These are new conditions to 408-8. These new conditions fly in the face of PLR logic that routinely allowed spousal rollovers from a trust (assuming the spouses access to the allocation and the withdrawal of funds could not be blocked).

Some tax attorneys have told me that since A-5 only effects the "deemed election" you can still do a spousal rollover if trust is the bene. I don't think so: see 408-8 A-7 which speaks to the rollover issue and refers back to A-5.

I know for 2001 we have a choice between old/new pregs. but the Trust as bene issue to my knowledge is only addressed in PLR's with respect to rollovers.

Interested if anyone has any further information. Am I missing something??

[BPickerCPA]

PLR's have no precedential value, so a regulation can be issued that will contradict previous PLR's.

There are two possibilities here. I'm not sure which one applies, and we may have to wait for the final regs to find out.

One is that the IRS was tired of the letter ruling requests and they just set a hard and fast rule, i.e. if you want a spousal rollover, name your spouse, and don't bother us with your trusts and estate beneficiaries.

The second is that the period between death and the following year end is the time to correct anything. If you can get the IRA money to the spouse in that time, she/he can do a rollover into their own IRA, and that's it. But if you miss the deadline, forget it.

Of course, there could be a third possibility that I've missed altogether.

Barry

[Guest reg_h2b]

"PLR's have no precedential value"... That's what concerns me.

What is the status of "non-sole bene" spousal rollovers or bene trust rollovers that have already occured? Of course if you've got a PLR that should be fine. But what if you don't?

Is the Service going to take these new pregs. and apply them in the past where there was no governing reg. (ie trust as bene/rollover)?

As I see it the choices are go to the service now to get a PLR (after the fact) or do nothing.

I've got a phone call into the service to get clarification on this issue. I'll post when I get new info.

[BPickerCPA]

While you cannot legally cite the PLR, you can always cite the argument IN the PLR that the IRS used in granting the PLR. The regs won't be applied retroactively, so that shouldn't be a concern.

Barry

[Guest reg_h2b]

I agree the only operating guidance at the time was from PLR's. Now we have new pregs which seems to directly contradict the logic in the past PLR's.

The new pregs. say the effective date is "effective for distributions for calendar years beginning on or after 1/1/2002. For distributions for the 2001 calendar year IRA owners are permitted, but not required to follow these proposed regulations in operation..."

Basic question Barry:

The earliest the new pregs. can apply is for calendar 2001 distributions. But to determine what those 2001 distributions should be you look back (before 2001 if applicable) to determine your facts and circumstance (ie who the d.bene is, etc.). Is that right?

For example, if someone pre-RBD had multiple dbene's at DOD (in 1999) but by the end-of-the year-following-death (2000) the accounts were seperated into individual bene accounts would the new pregs. say that even though the designated bene under the old pregs. was determined at DOD the new pregs. would "look back" using the new definition of d.bene and say that since each bene account was seperated by the new deadline each bene can use their exp lifetime for each of their accounts. So to that extent the new pregs are applied retroactively?

[BPickerCPA]

There was a PLR a few weeks ago that permitted each bene to use their own LE when the accounts were split after death. So that logic means that you don't have to go to the "new rule" to get that result. There are a few open areas of question, and we may have to wait for the final regs to get the answers.

[Guest reg_h2b]

The only PLR I've seen that allowed seperate accounting post-death, pre-RBD named individuals on the bene form.

If a qualified trust is on the bene form it was my understanding (from another PLR, I think) that seperate accounting could not be used. It defaulted to the dbene w/ the shortest LE.

Which brings up an interesting issue:

Assume Trust A was on the bene form. At DOD the terms of Trust A create subtrust B (for spouse: eldest bene) and subtrust C (for children). Before the end of the next year following the DOD of the IRA owner, the trustee allocates a percentage of IRA X to to each subtrust. Which LE do you use when the children take out their MRD's.

Under old regs someone could make the arguement that you use the LE of the sps for both trusts B and C since designated bene's are determined at DOD.

But under the new regs couldn't you make the agruement that you have seperate accounts (subtrust B and C) at end of year following when the dbene is determined so it would be the eldest child's LE for MRD for trust C.

Agree?

[Guest Jeffrey Gottlieb]

While the new regs are certainly not clear on the spousal trust rollover issue, I think it can still be done. The regs say that spouse cannot rollover if trust is DB. But, DB is not established until 12/31 yr following death. So, if spouse is beneficiary of a marital deduction trust and has a right to withdraw the entire trust, then as long as he/she withdraws the IRA from the MD trust by 12/31 yr following, then the spouse him/herself is treated as the DB. This is analagous to a charity "cashing out" as described elsewhere in the regs.

I certainly wish, however, that the IRS would make this more clear and sincerely hope they do so in the Final Regulations. As this is an impotant consideration in naming trusts as beneficiary, I would be interested in hearing other ideas on this topic.

[Guest reg_h2b]

Jeffrey, I agree with you. We may have to wait for the final regs.

However, I think we can establish given the old proposed regs, the new proposed regs and past PLR's what is true, what is false, and what we just simply don't know--yet. Let's see how much we can deduce... Here's my two cents:

Background on Trust/Sps Rollover:

If a trust (qualified or not) or an estate is on the bene form then in general the Service has ruled that no sps rollover is allowed because it would be judged to be coming from the trust and not the decedent. However if the sps has total control over the withdrawal and allocation of IRA proceeds then the service has ruled that the proceeds came from the decedent and not the trust/estate and allows a sps rollover. To my knowledge, whether the sps is a "d.bene" or not is not relevant. It's a question of the sps control over IRA proceeds in the trust/estate.

Fast Forward:

New Pregs. 408-8 Q&A-5 (deemed sps election) and Q&A-7 (sps rollover which points to A-5) read together rely on the phrase "sole beneficary" and specifically say that "if a trust is named as bene" then the requirement is not satisfied.

I read this as saying if either:

a) Trust is named on the IRA bene form at death

or

b) multiple designated bene's.

Then the sps can not deem the decendent's IRA as the spouse's IRA. Additionally, you cannot rollover decedent's IRA proceeds into sps' IRA. (Note old prop regs 408-8 A-4(B) said "bene's entire interest in..." the IRA. That's gone from new pregs. I think that's significant. See preamble para. 41 "consistent with the premise the surviving sps could have received a dist. of the entire" decedent IRA)

I think the pre-12/31 rollover issue is irrelevant since the trust would still be the named bene on the IRA's bene form.

I agree with Barry in that it seems as though the service wants to get out of the PLR business with respect to Trust and Rollovers in general. If the pre-12/31 rollover would work they would-presumably- still have to issue PLR's w/ regard to sps control issues. In other words the IRA could still be deemed from coming from the trust and thus no rollover allowed.

Why the service did not explicitly name "estates" when they are banning "trust" is a mystery to me. Maybe estates are implicitly banned with the phrase "sps must be sole bene"??

I anticipate having more information on this subject within the next couple of weeks.

[Guest John L. Olsen, CLU, ChFC]

I believe that the assertion that a spouse who is beneficiary of a trust which is beneficiary of an IRA cannot make a "spousal rollover" are confusing a "deemed election" by spouse to treat decedent's plan as her own with a "rollover". They're NOT the same! The former is occasioned by (1) spouse's contributing to the plan and/or (2) spouse's not taking an RMD from the plan.

A spouse's affirmative election to "roll" her entire interest in the plan to her own IRA is neither, but it IS a "spousal rollover". If Trust distributes spouse's share of decedent's IRA to spouse BEFORE 12/31 of the year following death, spouse should, I believe, be able to do an "affirmative rollover". She just can't do a "deemed election" because she isn't the sole beneficiary of the plan.

John Olsen

[BPickerCPA]

John,

I agree in part and disagree in part.

What I heard from the people in Washington is that the old rules still apply. That means you can get your PLR to do a spousal rollover if the spouse had "complete dominion and control". But that is not the same as a trustee making a distribution to the spouse. I do not recall any PLRs where an independent trustee made a distribution through the trust to the spouse and the spouse was permitted a rollover.

The regs do refer to the election to treat an inherited IRA as one's own. That's what is confusing people.

[Guest reg_h2b]

Here's what I learned talking to Washington:

1. New regs. were not meant to block sps rollover from trust(despite what I thought 408-8 Q&A-7 may imply). Only effects sps' DEEMED election. Apparently there was some admin. confusion with this deemed election in the past in regards to multiple bene's and trust's as bene's.

2. They do not know yet whether a sps rollover before 12/31 "year following death" will be deemed a "cashout" for D.B. purposes.

3. They also do not know whether the new reg.s will "look back" to the facts and circumstances pre-2001 in order to determine the D.B. applicable to an IRA for MRD's in 2001 and into the future. The LE can certainly change for a given DB but it's uncertain if the DB can change.

[Guest John L. Olsen, CLU, ChFC]

So.... H's IRA is payable to H's Revocable Living Trust, of which S, surviving spouse, is sole Trustee. Trust bifurcates into an A and a B Trust at death, with a fractional formula for the latter. S allocates H's IRA to the A Trust and elects, as sole beneficiary of same, to roll over that money to S's own IRA.

Do it fly?

[BPickerCPA]

After the expense of a PLR, probably.

[Guest dmichelle]

Okay...I'm not really educated in some of these things you all are talking about. But, I have a question. If a husband has an IRA Annuity and he passes away can you do a spousal rollover without incurring any taxes? Sorry if this is a stupid question.