In Private Letter Ruling 201423043, (“PLRs” only apply to the taxpayer involved but are often used as “guidance”, and not “precedent”, by taxpayers and the IRS.) the IRS ruled that a surviving spouse could roll over her deceased husband’s Roth IRA payable to a trust into her own Roth IRA. Consequently, she would be able, under current roll over rules, to avoid having to take required minimum distributions from the IRA and could name beneficiaries for the roll over to her own Roth IRA.
The decedent maintained two Roth individual retirement accounts; Roth IRA X and Roth IRA Y (the “Roth IRAs”). He designated a trust, Trust C, as the beneficiary of both. Trust C provided that upon the decedent’s death, his spouse became the sole trustee of the Trust. Furthermore, Trust C provided that it divided into two sub-trusts, the Marital Trust and the Family Trust.
The surviving spouse’s decision as to the property to be allocated to the Marital Trust would be final and conclusive and binding upon all beneficiaries, with certain exceptions not relevant to the PLR. The surviving spouse wished to allocate Roth IRA X and Roth IRA Y to the Marital Trust.
Under the terms of Trust C, the surviving spouse, as Trustee, is to pay all net income of the Marital Trust to herself. In addition, she may distribute to herself, or use for her benefit, any portion or all of the principal of the Marital Trust (in cash or in kind) as she deems desirable for her support, comfort, and welfare, in her accustomed manner of living, or “for any other purpose [she] believes to be for [her] best interests.” The provision further states that the decedent’s primary concern is for his spouse’s well-being and happiness and she need not consider the interest of any other beneficiary in making distributions to her or for her benefit.
As sole trustee of Trust C, the surviving spouse proposed to make a distribution of the Roth IRAs to herself as beneficiary of the Marital Trust under her power to do so “for any purpose” because to do so is in her “best interest.” She advised the IRS of her intention to roll over the distribution into one or more Roth IRAs created and maintained in her own name.
Under Reg. § 1.408-8, Q&A 5, a surviving spouse of an IRA owner may elect to treat the spouse’s entire interest as a beneficiary in an individual’s IRA as the spouse’s own IRA, but only if the spouse is the sole beneficiary of the IRA and has an unlimited right to withdraw amounts from the IRA. If a trust is named as beneficiary of the IRA, this requirement is not satisfied even if the spouse is the sole beneficiary of the trust.
The PLR stated that:
“Generally, if the proceeds of a decedent’s IRA are payable to a trust, and are paid to the trustee of the trust, who then pays them to the decedent’s surviving spouse as the beneficiary of the trust, the surviving spouse is treated as having received the IRA proceeds from the trust and not from the decedent. Accordingly, such surviving spouse, in general, is not eligible to roll over the distributed IRA proceeds into her own IRA.
However, the general rule will not apply where the surviving spouse is the sole trustee of the decedent’s trust and has the sole authority and discretion under trust language to pay the IRA proceeds to herself. The surviving spouse may then receive the IRA proceeds and roll over the amounts into an IRA set up and maintained in her name.”
The PLR recited the following conclusions by the IRS:
The Roth IRAs will not be treated as inherited IRAs respect to the surviving spouse.
The surviving spouse is eligible to roll over or have transferred, by means of a trustee to trustee transfer, a distribution of the proceeds of the Roth IRAs into a Roth IRA created and maintained in her own name, as long as the rollover of such distribution occurs no later than the 60th day from the date said distribution is made from the IRA.
In sum, the IRS concluded that the facts set out above satisfied the requirements of Reg. § 1.408-8, Q&A 5, set forth above. Since the surviving spouse met those requirements she fell under the exception for the creation of a roll over Roth IRA in her own name.
The rules regarding pension and IRA estate planning and distributions are complex.