Spouse inheriting IRA where estate is the beneficiary under new propos

[KJohnson]

What is the feeling regarding the new 401(a)(9) regs where IRA beneficiary is the estate and the surviving spouse is the estate's sole executor and a residuary beneficiary with the power to allocate estate assets. Do the proposed regs change PLR 200032044 with regard to the spouse "inheriting" the IRA.

1) Proposed regs only specifically mention trusts rather than estates, but the regs do say that the spouse must be the "sole beneficiary" of the IRA. Does the trust rule apply to estates as well?

2) If the proposed regs apply to an estate as beneficiary as well, what do you think the risk is of a spouse inheriting" an IRA through an estate in 2001 given facts identical to prior PLRS? Since the only thing out there previously were PLRs with no precedential value, and since the proposed regs are the first formal "guidance" in this area, do you think there is a risk associated with such a trnasaction in 2001 even though the new proposed regs provide that distributions in 2001 can be under the old proposed regs?

[BPickerCPA]

According to the people I spoke to in Washington, the old rules for estates and trusts and spousal rollovers still apply. Which still means plenty of work for us to get PLRs for people who for reasons that boggle the mind leave IRAs to trusts and estates instead of directly to the spouse.

[Mary Kay Foss]

I don't have any sources in Washington but I'm wondering if the IRA were "assigned" to the spouse as beneficiary by the spouse as executor before Dec 31 of the year after death if you would achieve the same result.

If a charity can be paid out early, can a nonqualifying beneficary like an estate be closed out early?

[BPickerCPA]

Mary,

I have to say that the answer is no. You cannot get a designated beneficiary by assigning an interest from an estate. If the spouse is an estate beneficiary, you might get a favorable ruling that the IRA can be paid to the estate, then paid to the spouse, and then the spouse can do a spousal rollover. This is a facts and circumstances question, and I would never advise doing this without a ruling from the IRS.

Keep in mind that the new regs allow the IRA to be paid out over the remaining years in the decedent's life expectancy (if death is after the RBD), so if you pay it out without the ruling, and the IRS says no to the rollover, you've prematurely killed the IRA.

[Bruce Steiner]

There are actually quite a number of PLRs dealing with spousal rollovers where the spouse is not the named beneficiary, some favorable and some not. I analyzed these PLRs in my article on this subject in the October 1997 issue of Estate Planning. I don't see anything in the new proposed regulations indicating a change in the IRS' view of spousal rollovers where the spouse is not the named beneficiary.

[KJohnson]

Bruce you don't see the following statement is 1.408-8 Q&A 5 as a change in the IRS's position on a spouse treating an IRA as his or her own in the situation where a trust is a named beneficiary?

In order to make this election, the spouse must be the sole beneficiary of the IRA and have an unlimited right to withdrawal rights from the IRA. This requirement is not satisfied if a trust is an named beneficiary of the IRA even if the spouse is the sole beneficiary of the trust."

[Bruce Steiner]

It's not clear that this was intended to override treating IRAs as if they passed directly to the spouse (rather than through an estate or trust) in those situations in which the IRS would have issued a favorable ruling prior to the new proposed regulations.

From a planning standpoint, if you want to leave your IRA to your spouse, it's much simpler to name your spouse as the beneficiary. I never understood why some IRA owners set up such complicated estate plans and beneficiary designations when they could have simply named the spouse as beneficiary.

If the IRA owner has already died, if there is any uncertainty, you might want to apply for your own PLR.

[BPickerCPA]

The election that KJohnson is referring to is the election to treat the decedent's IRA as his/her own. That is different than a rollover when the spouse moves the assets of the decedent's IRA into his or her own. The end result is the same, the mechanism.

Even if you cannot make the election, you can do a rollover, for example an IRA left 50% to a spouse and 50% to a child.

[KJohnson]

I understand the distinction that is being made between a "rollover" and "inheriting" an IRA (or a spouse electing to treat an IRA as his or her own). If it were not for the language in the proposed regs, this would seem to be a "distinction without a difference" in many instances. In fact the PLRs seem to treat the process of a rollover as one of the ways a spouse can treat an IRA as his or her own.

Is there a difference if the distribution is from a qualified plan? 1.408-8 Q&A 7 seems to indicate that a distribution from a qualified plan is analyzed as a rollover to an IRA followed by the spouse then treating the IRA as his or her own? If an estate is the sole beneficiary for a participant in a qualified plan and the spouse is the sole beneficiary of the estate (and executrix of the estate) can the spouse still roll over the amount from the Plan?

Finally, I have a much more basic question. Assuming that a rollover is still possible by the spouse, who receives the 1099? My reading of the PLRs is that it appears that the IRS is treating the spouse as having "acquired" the IRA from the decedent rather than the estate and so the 1099 should go to the spouse. This would seem to avoid any questions regarding the assets of the estate for fiduciary tax purposes. Does anyone have experience with this?