What New IRS Rules Say On Spousal IRA Rollovers
In April of this year, the Treasury Department and the Internal Revenue Service issued new regulations addressing, in part, the treatment of the surviving spouse of a deceased owner of an individual retirement arrangement, i.e., an IRA annuity or IRA account.
The IRS recently referred to these new regulations in a private letter ruling, PLR 200236052 (June 18, 2002). The ruling covers permitting a surviving spouse to roll over, tax-free, a certain distribution from a deceased owners IRA.
It appears from this ruling that the IRS position regarding such tax-free rollovers has not changed as much as the new regulations might suggest.
In particular, section 408(d)(3)(C)(ii) of the Internal Revenue Code generally provides that if a surviving spouse acquires IRA proceeds from and by reason of the death of a spouse, the surviving spouse may elect to treat those IRA proceeds as his or her own. Hence, they can roll over the proceeds tax-free into his or her own IRA within 60 days.
The IRS has taken the position that, as a general rule, if proceeds from a decedents IRA are payable to a trust or estate, and are then distributed to the decedents surviving spouse as beneficiary of the trust or estate, the surviving spouse will be treated differently. Specifically, the survivor will be treated as acquiring the proceeds from the trust or estate, and not from the decedents IRA.
The result is that the surviving spouse will not be permitted to roll over the proceeds to his or her own IRA.
The IRS has made exceptions to this general rule, however. In certain cases involving a trust or estate that is named as the beneficiary of a decedents IRA, the IRS has treated the surviving spouse as the “distributee” of IRA proceeds. This is where the surviving spouse is a beneficiary and sole trustee of the trust, or is a beneficiary and sole executrix of the decedents estate; thus, the survivor has authority to allocate assets to the beneficiaries of the trust or estate, respectively.
In such cases, the surviving spouse has been permitted to roll over the IRA proceeds to his or her own IRA.
It is unclear from the new regulations whether the IRS might have broadened its position.