In a recent private letter ruling, the Internal Revenue Service permitted a widow to make a rollover from her deceased husbands IRA, even though the decedents ex-wife was the named beneficiary. The words “flexible” and “IRS” might not seem to belong in the same sentence, but flexibility on the part of the Service is really the only explanation for a ruling like this.

In the ruling, the decedent, who we will call Andy, died in 2001, at age 70, but before reaching age 70 1/2. Andys second wife, who we will call Bette, survived him and acted as his executrix. Andys estate included an IRA, of which Andys first wife was named as beneficiary, but she had predeceased him. Andys IRA was treated under the IRA agreement as though he had no beneficiary (i.e., Andy was treated as having named his estate as beneficiary).

Andy died without a will. Since Andy also had no lineal descendants, Bette inherited his entire estate under the applicable state laws, including all of his IRA. The most important issue on which a ruling was requested was that Bette would be permitted to roll over the IRA proceeds into an account in her own name, and the distribution rolled over would not be included in her gross income.

The Service cited the preamble of the final regs as containing the most pertinent law for this ruling. The preamble states that if a surviving spouse of an IRA owner “actually receives a distribution from the IRA, the spouse is permitted to roll that distribution over within 60 days into an IRA in the spouses own name to the extent that the distribution is not a required distribution, regardless of whether or not the spouse is the sole beneficiary of the IRA owner.” In other words, if the IRA had provided for the distribution to go directly to Bette, she would have had no problem rolling it over.

The Service also noted that as a general rule, “if the proceeds of a decedents IRA are payable to a decedents estate, and are paid to the personal representative of the estate who then pays them to the decedents surviving spouse as intestate beneficiary,” the surviving spouse will ordinarily be treated as having received the proceeds from the estate, not from the decedent. As a result, the surviving spouse would not be eligible for a rollover of the proceeds.

However, the IRS made a distinction where, as here, “the surviving spouse is the sole personal representative and the sole intestate beneficiary of the estate” of the IRA owner. The Service declared that the general rule does not apply to a surviving spouse “who must pay the decedents IRA to herself as sole intestate beneficiary of the estate” (emphasis added).

While the Service did not cite its support for this particular distinction, it seems analogous to longstanding rules for trusts named as IRA beneficiaries. The IRS position generally has been that if a trustee has discretion to make payments (or not do so), the spouse would be treated as acquiring the proceeds from the trust. In the absence of such trustee discretion, the spouse would be treated as acquiring the proceeds from the decedent (thus, making a rollover possible). It appears that the “absence of discretion” rule applied to Bette since she had no other choice for the IRA proceeds but to distribute them to herself.

Is any part of this IRA rollover a required minimum distribution (i.e., thus ineligible for rollover)? The IRS said “No.” The Service pointed out that since Andy had no designated beneficiary, the five-year rule applied to his IRA. In other words, any distribution prior to the fifth year after his death (i.e., 2006) will not be considered in satisfaction of the RMD rules. As a result, the entire amount is eligible for rollover.

Since the ruling treated the distribution as being eligible for a rollover, Bette is subject to the 60-day rule for setting up an IRA in her own name and completing the transaction. While the full progression of the Services logic was less than clear, the outcome was taxpayer-friendly. (The number of this ruling is Let. Rul. 200324059.)

April Caudill, J.D., CLU, ChFC, is managing editor of Tax Facts and ASRS, publications of the National Underwriter Company.


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 4, 2003. Copyright 2003 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.