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.

Specifically, the preamble to the new regulations states that if a surviving spouse “actually receives” a distribution from a decedents IRA, the spouse is permitted to roll that distribution over into the spouses own IRA.

On its face, this statement suggests that proceeds of a decedents IRA that pass through a trust or estate may be rolled over to the surviving spouses own IRA so long as the surviving spouse “actually receives” the proceeds.

Stated differently, the preamble can be read as providing that a surviving spouses ability to roll over IRA proceeds paid to a trust or estate is not limited to situations where the surviving spouse is sole trustee or sole executrix.

It appears from PLR 200236052, however, that the IRS is not applying this broader interpretation. Rather, it is continuing to apply the general rule and exceptions as mentioned above.

PLR 200236052 involved a decedents IRA, the beneficiary of which was the decedents estate. Pursuant to the decedents will, the surviving spouse–the mans wife–was “sole residuary beneficiary” and “sole executrix” of his estate. The IRS ruled generally that the surviving spouse is eligible to roll over the IRA proceeds she received into an IRA set up and maintained in her own name.

In so ruling, the IRS referred to the new regulations. It said the regulations do not preclude the surviving spouse from rolling amounts distributed from a decedents IRA into an IRA in her own name–”if the surviving spouse is the distributee of said amounts.” This statement is consistent with a broad interpretation of the preamble to the new regulations.

However, the IRS did not adopt this interpretation. Rather, the IRS went on to recite the general rule noted above.

The IRS concluded that this general rule would not apply and that the surviving spouse could roll over the proceeds to her own IRA. The IRS reasoned that the spouse was a distributee of the IRA proceeds. This is because the spouse was the sole residuary beneficiary of the estate and sole executrix of the estate with authority to allocate estate assets to the beneficiaries.

In sum, notwithstanding the broad language in the preamble to the new regulations, it appears that the IRS has not changed its ruling position with respect to a surviving spouses ability to roll over proceeds from a decedents IRA into the surviving spouses own IRA.

Mark E. Griffin, Esq., is a partner with the Washington, D.C. law firm of Davis & Harman. He can be e-mailed at megriffin@davis-harman.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 7, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.