Entrust Learning Center > Keyword: self-directed IRA > Rollover from Decedent's IRA to IRA Owned by Surviving Spouse: Beneficiary IRA

Rollover from Decedent's IRA to IRA Owned by Surviving Spouse: Beneficiary IRA

Rollover from decedent's IRA to IRA owned by surviving spouse can be made tax-free under 408(d)(3) (P.L.R. 200011062).

When A died, he had attained age 70 1/2 but his surviving spouse (B) had not. At his death, A owned an individual retirement account (IRA) called IRA C. Prior to his death, A had designated a trust (Trust D) as the beneficiary of IRA C. A and his surviving spouse (B) had created Trust D.

Trust D is required to distribute all of its net income to the survivor of A and B commencing on the death of the first of them to die, at least as often as quarterly. Trust D's trustee must distribute any portion or all of the principal of Trust D as the surviving spouse demands from time to time during the survivor's lifetime and competency. As long as the surviving spouse is competent, the surviving spouse can demand any amount of principal for any reason. The surviving spouse also has a testamentary general power of appointment over Trust D.

B, in her capacity as trustee of Trust D, intends to cause IRA C to distribute its account balance to Trust D. Then B, as the beneficiary of Trust D, will direct the trustee of Trust D to pay the IRA C assets to her. Finally, B will roll over the entire IRA C distribution into an IRA in her own name, by means of a direct transfer by the trustees of IRA C to the trustee of B's own IRA.

The IRS reasoned that, since B is A's surviving spouse, if she were the direct beneficiary of IRA C, it would not be an inherited IRA for purposes of the §408(d)(3)(C)bar on tax-free rollover's of inherited IRAs. As a general rule, the IRS explained, when assets in a decedent's IRA pass to a third party, such as a trust, and then are distributed to the surviving spouse, the spouse is treated as receiving the IRA assets from the third party and not the decedent and the spouse will be denied a tax-free rollover under §408(d)(3) pursuant to §408(d)(3)(C)(ii). Since, however, B has complete dominion and control over Trust D and over the disposition of Trust D's assets, the general rule does not apply, the IRS said.

The IRS ruled, accordingly, that IRA C is not an inherited IRA within the meaning of §408(d)(3)(C) with respect to B. Further, B may be treated as the distributee or payee of IRA C Finally, B is eligible to roll over the proceeds of IRA C into an IRA established in her own name, tax-free pursuant to §408(d)(3), to the extent that the assets of IRA C are transferred directly to one or more IRAs maintained in B's name. B will not be required to include in income for the year of the rollover the assets transferred from IRA C to B's own IRA.

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