IRS Letter Ruling OKs

Surviving Spouse Rollover

BY

In a recent favorable letter ruling, the Internal Revenue Service permitted a surviving spouse to make a rollover of her deceased husbands qualified plan proceeds, even though his estate was the named beneficiary.

The ability of a surviving spouse to make such a rollover has been questioned by some commentators since the Treasury Departments issuance of final regulations in 2002 under Section 401(a)(9). This private ruling seems to confirm the trend of earlier letter rulings to be lenient on this issue.

The deceased taxpayer (lets call him Bob) was only 49 when he executed a will in October 2002, and then died just a month later. His will named his wife, Alice, as his executrix and sole beneficiary of his estate. Three months later, the plan distributed Bobs preretirement death benefit to Alice as executrix, withholding 10% as federal income tax. Within less than 60 days, Alice contributed the amount of the distribution, plus an amount equal to the withheld tax into an IRA in her own name. The letter ruling requested that Alice be treated as having received the plan distribution from Bob, not from the estate, and that her IRA contribution would qualify for rollover treatment and would not be includable in Alices gross income.

Numerous private rulings have made these determinations in the past, on similar facts. Even where plan or IRA proceeds went through a trust before reaching the surviving spouse, a rollover usually was permitted so long as the trustee had no discretion as to the disposition of the trust proceeds.

However, when final regulations governing required minimum distributions were issued in 2002, this result was called into question. The regulations included language suggesting that if a trust were named as beneficiary of an IRA, the surviving spouse would not have the ability to treat the account as her own, even if she were the sole beneficiary of the trust.

Further language stated that generally, if a decedents qualified plan assets pass through a third party, such as an estate or a trust, the surviving spouse would be treated as having acquired them from the third party and not from the decedent. She would thus be unable to roll them over.

Notwithstanding this language, the Service ruled favorably on all 3 of Alices requests, noting that since Alice was the sole beneficiary and sole executrix of the estate, she would not be treated as having received the plan proceeds from a third party. Consequently, Alice was able to roll over the proceeds and had accomplished all the requirements for doing so.

This decision is consistent with many earlier (pre-2002) private rulings, but its issuance with an eye toward the final regulations signals a continued trend many estate planners will find comforting. (The number of this ruling is Let. Rul. 200344024.)

, J.D., CLU, ChFC, is managing editor of Tax Facts and ASRS, publications of the National Underwriter Company. She can be reached via e-mail at acaudill@nuco.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, March 25, 2004. Copyright 2004 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.